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When President Bush meets German Chancellor Gerhard Schröder in Mainz this week, it may not be a love fest. Washington was taken aback this month when a Schröder speech stated that NATO "is no longer the primary venue" for discussing transatlantic issues. TIME Berlin bureau chief Charles P. Wallace talked to Schröder about the uneasy alliance

Secretary of State Condoleezza Rice was just in Berlin, and there were many smiles. Relations between the U.S. and Germany seem to have improved. But there's still Iraq. Has anything really changed? You must not underestimate the importance of the atmosphere, and that's certainly improved. We both agree that in Iraq it's important that we make sure stability reigns, that the reconstruction efforts gather momentum, and that the Iraqis begin to build homegrown security forces. The disputes are in the past. That's why Germany is ready to waive [Iraqi] debts. We've also started training Iraqi police and armed forces in the United Arab Emirates. The only thing we will not do is put military boots on the ground in Iraq.

Some in the Bush Administration were offended by your speech about weaknesses in the transatlantic alliance, which said NATO is no longer the primary venue to discuss and coordinate strategy. Unfortunately, the way the speech was transported through various channels has led to my original proposal being somewhat misunderstood. I wanted to establish more common ground in the transatlantic relationship through NATO, the E.U. and other institutions. We are not just ready to discuss the questions of military importance, but to go further into a real strategic dialogue on questions such as climate change, international terrorism, nonproliferation and aid to Africa. The time is right for a new chapter in transatlantic relations.

Do you see the U.S. as being in a weakened state now, needing Europe more than ever before? I do not think I would formulate it any way near the way you have. But I think there is a greater recognition of the fact that we are so entirely interrelated and interdependent today.

In a recent survey, a majority of Germans said the E.U. should be more independent of the U.S. I'm really not a friend of discussions about whether we should see Europe as a separate entity. I am a firm believer that most problems we are grappling with today can and will be solved only through real partnership with the U.S.

What's the best way to handle Iran? Iran has to waive the right to build nuclear weapons. Full stop. What tool is most appropriate to achieve this? Britain, France and Germany think the right way is through diplomacy. The vibes we're getting from within Iran also seem to show some willingness for that type of solution.

Why do you support lifting the arms embargo on China? It was a justified reaction to the massacre at Tiananmen Square. Now there is a new government in China and it has taken modest steps toward modernization and liberalization. For me, that is certainly not enough. But still, first steps have been taken and therefore I think the embargo is ready to be lifted. Germany has no intentions whatsoever of delivering weapons to China.

Germany is seeking a permanent seat on the U.N. Security Council. Why? If you look at what we're doing in Iraq, Afghanistan, the Balkans — we're strongly present there under the umbrella of the U.N. We're taking international security very seriously. If you bear in mind that we're the third largest contributor to the U.N. budget, then to us it's appropriate to express the desire.

Are you too uncritical of what many see as Russian President Vladimir Putin's move toward authoritarianism? We all want a strong, prosperous, democratic Russia. I think President Putin is on the right path to get there. Europe should see Russia as a strategic partner.

Are you worried about neo-Nazism and anti-Semitism making a comeback in Germany? I do not think that racism or anti-Semitism has a chance to come back in Germany. The democratic convictions within the German population are too strong to let such a thing happen. But due to our history we will go in and most strongly fight any such moves.

Your domestic popularity has rebounded. What's your strategy in the near term? We certainly have to continue the reform process. We have strongly reformed the labor market and built a really huge low-wage sector. By reducing long-term unemployment subsidies and benefits, we will have resources that can be invested in education and training. We are no longer going to live with the situation where a lot of unemployed people hover in a market where nobody sees them or does anything for them. We've also carried out the biggest tax reform in modern German history, returning 350 billion to consumers. If you look at the average tax burden in Germany, it's one of the lowest in the E.U. The economic environment is changing faster than ever. I think we have to be constantly on the edge to not fall behind.

• Charles P. Wallace
• TIME Berlin bureau chief Charles P. Wallace talked to Schröder about the uneasy alliance