Quotes of the Day

"It actually feels like I'm being blamed for everything at the moment," says Gerhard Schröder with a hearty laugh. He has a point: the German Chancellor is taking the rap for all of his country's ills, from a floundering economy and tense relations with the U.S. to higher taxes and nationwide strikes that closed airports, subways and kindergartens. Just three months ago, he was riding high — hailed as a master politician for fighting his way to a 6,000-vote re-election. After trailing his conservative opponent for months amid a wave of bad economic news, Schröder turned the tide thanks to his deft handling of summer floods and his noisy opposition to a war in Iraq. But his triumph soon turned to ashes — and many Germans think he deserves every bit of the blame.

U.S. Defense Secretary Donald Rumsfeld said Schröder had "poisoned" the German-American alliance. And as the economic news kept getting worse, Schröder's main solution was to raise taxes — after promising during the campaign that he'd do no such thing. No wonder Germans feel betrayed. Schröder just shrugs at his change in fortunes, calling it part of "the package" of being Chancellor. "Despite all the difficulties — and there seem to be quite a few around — it's still much better to tightly win elections than to tightly lose them."

During an interview with Time in his sprawling office in Berlin's futuristic Chancellery, Schröder is feisty and combative. He knows voters are clamoring for decisive action to stop the country's slide into economic malaise — but so far, he hasn't been able to deliver. And he is unapologetic about ditching his no-new-taxes pledge in October, when he unveiled a slew of increased fees and levies, higher social contributions and reduced benefits. Explaining the turnaround, Schröder claims that the scope of the country's financial problems did not become clear until after the elections, but the public isn't buying it. Schröder's popularity has slumped from 38% at the time of the election to around 27% today. No other leader in postwar Germany has seen his support decline so fast and so far after an election.

Schröder rejects the charge that he misled voters, dismissing it as a gambit by his opposition in parliament. He points out that in his first term he cut corporate tax rates from 40% to 25%. And he has one small, happy statistic to boast about: "In a phase of global economic decline, Germany has managed to increase its share of world exports from 9% to 10%," he says. "I see that as a direct consequence of the taxation setup that we arranged for German companies." Still, the big, sad stats are legion — unemployment is near 10%, growth at just .3% — and so are the Chancellor's critics. They claim Schröder can't cope because he is beholden to the unions that are the chief opponents of reform.

Schröder's ruling Social Democratic Party is stocked with union members who have stymied every attempt to loosen up regulations. Schröder says his labor allies ultimately can't block reforms but admits that change may be slow. At least two-thirds of sdp parliamentarians are union members, so "you obviously have to do a lot more convincing to move your folks along," Schröder says. He is adamant that a "fundamental reform" of the labor market will be his top priority, but it's clear that such reforms will have strict limits. He rejects outright American-style rules that allow companies to downsize when the economy goes sour — even though German job protections are often cited as a key cause of unemployment. "Let me be frank, we will not give up all forms of protection for employed persons," Schröder says. "We Europeans, especially Germans, would not understand if this balance were done away with."

Schröder faces problems abroad too, mainly in Germany's troubled relationship with the U.S. After Schröder ruled out German participation in an attack on Iraq — and one of his ministers compared President George W. Bush's policies to those of Hitler — the White House froze him out. Although Rumsfeld recently declared the relationship "unpoisoned," the Bush-Schröder chemistry is still fizzling. Schröder likes to point to Germany's increased support for U.S. forces in Afghanistan and in the country's joint command of the 4,800-strong international security force in Kabul, which starts in March. "We are right there by [America's] side," Schröder declares.

Schröder has been trying to mend fences with Washington by promising to allow American forces to use U.S. bases in Germany for an attack on Iraq. But Angelika Beer, the new co-leader of the Green Party, which rules in coalition with Schröder's Social Democrats, argues that such a deal would be unconstitutional unless it was approved by the United Nations. Schröder brushes those objections aside, but still refuses to allow German troops to take part in any military operations.

Schröder's Iraq policy is one of the few areas in which the Chancellor is still popular. But a big test of Schröder's staying power comes in February, when voters choose new governments in the states of Hesse and Lower Saxony. If Schröder's party loses in Lower Saxony, his home state, it will be a tremendous blow to his prestige and make it harder to get reforms through parliament. And without some upbeat economic news, election triumphs — even tight ones — will elude him.

• CHARLES P. WALLACE / Berlin
• Germany's Chancellor won re-election but has been losing ever since