Architect of Reform

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German Finance Minister Hans Eichel is often called bodenständig — down-to-earth or uncomplicated. In contrast to his boss, Chancellor Gerhard Schröder, who wears Brioni suits, Eichel favors off-the-rack, basic gray models that make him look like the manager of a rural bank branch. While Schröder takes summer vacations in such foreign locales as Italy or on the Spanish island of Mallorca, Eichel sets out every year for the down-home pleasures of Germany's North Sea coast. He may not be flashy, but Eichel has taken center stage as the architect of a series of sweeping economic reforms. No wonder the German media have begun calling him Super Hans.

Eichel's rapid rise has a lot to do with the passage of a far-reaching, $30-billion tax reform plan last month by Germany's upper house of parliament, the Bundesrat. It succeeded despite fierce efforts to defeat it by the opposition Christian Democrats, who have a majority in the upper house. CDU leader Angela Merkel acknowledged having been trumped by Eichel, saying she hopes the party "understands this defeat as a challenge to become better." The sweeping Eichel reform cuts the top income tax rate from 51% to 42% and slashes the tax on corporate earnings from 40% to 25%.

Call it the triumph of experience over youth. Eichel was the premier of the state of Hessen until he was voted out of office in 1999, while Schröder formerly served as premier of Lower Saxony. State governments choose the members of the Bundesrat, so both Schröder and Eichel were more familiar with its byzantine politics than Merkel and Friedrich Merz, the CDU faction chief in parliament.

Eichel recognized early on that CDU demands for huge tax cuts beyond what the government was proposing had alienated a lot of state governments that need the tax revenue to pay their bills. Using these fears as a wedge, Schröder and Eichel began working the phones and cut a backroom deal to funnel more federal funds to the four states where the CDU governs in coalition. The final tally: a stunning upset victory with a healthy margin of 41 of the Bundesrat's 69 votes.

The passage of the tax reform also says a lot about Eichel's symbiotic relationship with Schröder. As the news magazine Stern noted recently, the 58-year-old Eichel "could never become dangerous to his boss. Therefore he is the ideal second man to Schröder." That cannot be said of Defense Minister Rudolf Scharping, who has made no bones about his ambitions to higher office. But Eichel's self-effacing approach contrasts even more sharply with that of Oskar Lafontaine, his predecessor as Finance Minister, who resigned in March 1999 after losing a power struggle with Schröder. Eichel makes sure Schröder gets the lion's share of the credit.

And while Lafontaine was a socialist of the old stripe, believing the government should set the economy moving by stimulating demand, Eichel seems to have little time for ideology. "I don't think Eichel has any firm leanings in one direction or the other," says Thomas Mayer, managing director at Goldman Sachs in Frankfurt. "I think he is just genuinely pragmatic." Eichel is so flexible — some might say opportunistic — that when he was in opposition in the Bundesrat, he managed to block a tax reform proposal put forward by then Chancellor Helmut Kohl in 1997.

This lack of ideology has resulted in the bizarre spectacle of Eichel, whose party is after all socialist, being cheered by Germany's corporate chieftains while academic economists, who tend toward the left end of the political spectrum, are more critical. Deutsche Bank, for example, forecasts that the tax reform will add an additional half of one percentage point of growth next year. "After years of stagnation, Germany now seems to be in a position to resolve many of its urgent reform projects. This will definitely have positive repercussions for business confidence," says Deutsche Bank economist Michael Wolgast. But Franz Wagner, a tax expert at Tübingen University, calls the tax reform a "failure" and says the predictions of higher growth are "nothing but fabricated speculation."

Although Eichel was a firebrand leftwinger when he was mayor of the city of Kassel in the 1970s, he mellowed during his eight years as premier of Hessen. After all, his state house in Wiesbaden was just down the road from Frankfurt, Germany's financial center. "Dealing with Germany's top bankers on a daily basis, he heard a lot about what was needed to make Germany competitive," says a Finance Ministry aide.

Upon taking office as Finance Minister, Eichel's first response to the competitive imperative was to propose slashing the federal budget by almost $15 billion. That provoked outrage among the spd's core constituencies like trade unions and retired people, whose entitlements would be reduced, and the party lost five state and local elections. But Eichel and Schröder held remarkably firm. "We want tax reform which is soundly financed, and this is only possible through expenditure cuts," Eichel says. "We want to reduce the deficit with the aim of achieving a balanced budget by 2006."

That's a daunting challenge, but like any successful politician, Eichel has his share of luck. Just last week he received an unexpectedly large $46 billion windfall from Germany's auction of licenses to build third-generation wireless networks. The money will help him reduce the country's bulging government debt of more than $700 billion. That will mean lower interest payments, which will help cut the budget deficit.

Eichel told Time that his next priority is to reform Germany's pay-as-you-go pension system, which is heading for insolvency as the number of retirees grows while fewer young workers enter the job market. "We are an aging society," says Eichel, "and we cannot leave the next generation with problems in the pension system and at the same time a very high debt level." He says he is certain that the opposition parties will join with the spd to build a consensus on pension reform. Given the political downside of cutting people's future pensions, it's no surprise that Schröder and Eichel want to share the credit on this one. What if the CDU won't play ball? a reporter asks. With a wink, Eichel says he is sure that he can persuade the opposition of the benefits of working with him.

At this point, few Germans would bet against Eichel's super — if bodenständig — powers.
 
German Finance Minister Hans Eichel last week sat down with TIME Berlin bureau chief Charles P. Wallace for a two-hour discussion of the challenges facing his government and the German economy:

TIME: You won a big victory on taxes, a complete reversal of fortune from last year. What's changed since last year?

Eichel: We have prepared this tax reform together with tax experts from business associations as well as experts from the trade unions. Therefore we have tax reform which from the beginning, despite all the criticism regarding aspects of the reform, has found very broad support in our society.

TIME: Some of these tax reforms seem awfully like supply side, something you might expect more from a conservative government. Is there an Eichel philosophy?

Eichel: Our point of departure was that we in Germany are not isolated. We don't stand alone, we have the internal European market, and of course also the global market, and therefore we need to do two things for business: to create an internationally competitive tax system and also competitive tax rates. That's what we have done through this tax reform.

TIME: Is this supply side or Keynesian economics?

Eichel: It's a bit of both because if you put more money in the pocket of the taxpayers, what you leave with business is supply side, while if you give more money to individuals, that's the demand side of it. We've put a special focus on tax cuts, especially on low income earners and families. Our tax reforms with large tax cuts have only been possible after we embarked on fiscal consolidation through expenditure cuts and we foresee further cuts in the future.

TIME: Are you concerned about the level of the euro?

Eichel: No. We have high growth and it continues to pick up, we've got low interest rates, a rather low inflation rate and we've also had a pickup in employment. That means that in the past one-and-a-half years, the economic situation has steadily improved.