Quotes of the Day

What's the most powerful political institution in Germany right now? It's not Chancellor Gerhard Schröder's Social Democratic Party (SPD), which was humiliated in state elections last week in Hesse and Lower Saxony (Schröder's home state). And it's not the rival Christian Democratic Union (CDU), which despite its gains hasn't yet come up with a coherent plan for economic reform. No, the organization with the most clout these days is an obscure legislative group called the Mediation Committee. Meeting in a soundproof Berlin conference room with no natural light — it's referred to as the Dark Room by pundits — this secretive political council hammers out agreements on legislation that has been adopted by the lower house of parliament, the Bundestag, but rejected by the upper house, the Bundesrat.

While the SPD won control of the Bundestag in September, last week's elections gave the CDU increased power over the Bundesrat. That means almost every new piece of legislation must be negotiated by the Mediation Committee — whose 32 members, drawn from both houses of parliament, are now evenly divided between the SPD and the CDU — before it becomes law. The new reality of legislative logjam means the two leading parties will have to cooperate, at least informally, or nothing will be accomplished. "There will be a de facto grand coalition constituted in the Mediation Committee," says Peter Lösche, a political scientist at the University of Göttingen.

Grand coalitions are extremely rare in German politics, and both the SPD and the CDU explicitly ruled out such an arrangement after last September's parliamentary elections. But the stakes are too high to reject cooperation now. Unless Germany reforms its economy, the country risks falling into a Japanese-style slump of little or no growth and a downward spiral of deflation.

An early casualty of this forced coalition will be Schröder's proposed new taxes — including increased levies on company cars and dog food — designed to help close an j18 billion budget deficit. "Most of these taxes are now dead," says Holger Schmieding, European economist at the Bank of America, since the CDU campaigned hard on its opposition to Schröder's tax plans. Although the lack of new taxes will make it harder for Germany to keep its deficit under the 3% of GDP limit allowed by the E.U., scrapping the new levies could boost the economy by leaving more money in the hands of consumers.

But the Mediation Committee won't be all bad news for Schröder. While it stymies his tax plans, it may also give him political cover and an excuse to push ahead with reforms — of the labor market, health-care provision and the creaky state pension system — that his own left wing has been blocking. Changes in these areas "are going to go ahead even more aggressively than they did in the past," says Lösche, because the CDU, which favors more sweeping measures than Schröder's party does, will be able to use its legislative veto to bargain for deeper reforms.

That kind of progress will be scant comfort for Schröder. "The SPD has experienced one of the bitterest defeats that I have seen in my political life," the stunned Chancellor told a press conference. "I have to carry this responsibility." Schröder said his big mistake was not adequately explaining his reform ideas. But his bigger mistake was breaking his promise of no new taxes in the election campaign; when he went back on his word, voters punished him.

Schröder still faces heavy criticism from his party's left wing, led by Oskar Lafontaine, who resigned as Finance Minister during Schröder's first term due to — you guessed it — disagreement over the need for reforms. Lafontaine argues that the SPD was defeated because it was not socialist enough. "It's called neoliberalism wrapped in red cotton wool," Lafontaine wrote in the Bild tabloid. "The reason for the disaster of my party is the policy it has pursued since 1999." The left wing's position has been greatly weakened since the election, though, because the need to appease the CDU will force the SPD to adopt more conservative policies.

The election aftermath has done nothing to improve Schröder's image with voters. A Forsa poll last week showed that 69% of those surveyed had little confidence Schröder could steer the country in the right direction. The only point he and his public seem to agree on these days is their mutual opposition to a U.S.-led war in Iraq. That's one position that Germany's new political reality isn't about to change. Just about everything else these days seems up for grabs — and in the hands of the Mediation Committee.

• CHARLES P. WALLACE/Berlin
• Schröder's state election debacle forces a coalition