TIME EUROPE
August 28, 2000, Vol. 156 No. 9
Architect of Reform
Hans Eichel's success in rewriting the tax code will have far-reaching impact on the German economy
By CHARLES P. WALLACE Berlin
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.
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August 28, 2000
Super Hans Speaks
TIME talks with German Finance Minister Hans Eichel
COVER STORY
Death Watch
A collision or explosion sank the Kursk, but the real cause of the tragedy was the rapid deterioration of Russia's rusting and underfunded armed forces
Failed Ambitions
Putin's dream falls short of reality
Why Did Our Boys Have to Die
At the Kursk's home port, and across Russia, grieving families ask some awkward questions
Death in the Silent Service
Some major accidents aboard nuclear-powered submarines
Divided They Fall
The U.S. and Russia must learn to communicate
MIDDLE EAST
Reform Overruled
Iran's Supreme Leader quashes efforts to lift press constraints, angering those working for progress
AFRICA
Law in Search of Order
Northern Nigeria's Christian community is nervous as a strict Islamic judicial system is reintroduced
The Legacy That Won't Die
Racism remains a thorny issue in South Africa, and bitter exchanges between politicians are adding to the problem
BUSINESS
Architect of Reform
Hans Eichel's success in rewriting the tax code will have far-reaching impact on the German economy
Theme Park Debacle
World-class exhibitions are failing this year on a world-class scale. What do the folks at VW know?
SOCIETY
Face Lift in a Jar?
More effective than makeup but not as powerful as drugs, cosmeceuticals promise to turn back the clock on aging skin
More Bark Than Bite
Moscow's Night Wolves say they have turned from biker rebels into civic-minded employers
ARTS
The Great Divide
Shocked by the radical changes in her homeland after the 1979 revolution, Iranian-born Shirin Neshat tries to understand and explain Islam through her art
Going to Hell? Tickets, Please
An exhibition in Scotland looks at the various ways people celebrate death and the afterlife
The Battle for Truth
A new history of the Battle of Britain sets out to dispel some enduring myths about an epic struggle
DEPARTMENTS
World Watch
WHAT DO YOU THINK?
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