Land of Smiles

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For example: health-care reform. Germany's 123-year-old health-insurance system is hemorrhaging cash, and the two ruling parties are miles apart on how to fix the problem. (The cdu would prefer a flat contribution unrelated to income; the spd wants everyone to pay in, including some groups, such as the self-employed, who have thus far been exempt.) Merkel's government has set itself a deadline of the summer recess in July to come up with a draft compromise. The Chancellor must find a way to balance the egalitarian impulse of the spd, which could impose a heavier burden on employers and increase the cost of labor, against the free-market instincts of her own party, which may not find a way to raise enough cash. But the government also has on its agenda reforms of the tax system and the way in which laws are approved at the federal and state levels. And eventually it has to tackle labor-market restrictions that can make hiring in Germany prohibitively expensive, but which the spd and unions still support. "The coalition will be a success if we get two good years in which they deal with federalism, tax reform, health-care reform and pensions," says Michael Burda, an economist at Humboldt University in Berlin. "But things will get tough once they start talking about labor-market reform."

The question of how to lower the cost of labor speaks to major differences between the two partners in the coalition. Laurenz Meyer, a former secretary-general of the cdu and current economics expert in the Bundestag, says that since last year's elections, the spd has been looking "to align [itself] with the unions" even more strongly than before. It's not been a winning strategy. According to the latest Forsa poll, backing for the party is down to 28%, from 39% six months ago (Merkel's cdu stands at 38%). The spd is also suffering fallout from the tarnished image of former Chancellor Gerhard Schröder, who took a €250,000 job with a subsidiary of the Russian giant Gazprom shortly after leaving office, raising questions about his judgement; and because its ministers have been associated with unpopular government pronouncements. Wolfgang Thierse, a veteran spd deputy and vice president of the Bundestag, says his party recognizes that "the fat years are over and things won't improve without a big sacrifice." But he adds that the cdu needs to shoulder more of the burden of introducing controversial policies. One reason the spd has been losing support, he says, is that Merkel has kept her distance from such measures, leaving them to spd Cabinet members instead. "The Chancellor should put her foot down for painful reforms," says Thierse.

Maybe, but judging by her performance so far, that's just not her style. Merkel appears to prefer working behind the scenes to basking in the limelight. She has brought a collegial atmosphere to the Chancellery that is proving wildly popular. "Suddenly a woman in black enters the stage without any pomp or circumstance and talks in a quite straightforward manner — analytically," says Gerd Langguth, a political scientist at Bonn University. "People like that." Cabinet meetings are more open and less hierarchical than they were in Schröder's day, though Merkel can be ruthless with long-winded colleagues. "When I met her alone it was like meeting a leading business figure," SAP's Kagermann tells Time. "She is very effective at managing discussion."

Merkel also likes to keep her channels of communication open. She often abandons the desk in her vast Chancellery office and works instead from an oval conference table that puts her on a par with colleagues. She prefers visiting staff to summoning them to her office. And while she can be stilted in media interviews, she is hooked on text messaging, requiring even the most tech-reluctant older members of her Cabinet to master the art. Staffers are expected to make bullet presentations to her via sms: short and to the point. "It's the best, sometimes the only, way to reach her," says an aide. So what text messages should her colleagues, coalition partners and electorate be sending? "Well done," for a start. But, also, maybe: "Get a move on." Unless the Merkel Factor translates into tangible economic improvements, the next batch of sms might not make for such pleasant reading.