Land of Smiles

There's something different about Angela Merkel. Germans remain spellbound by the novelty of a female Chancellor, but it's her down-to-earth manner that really sets her apart. There isn't a politician in Europe today who would not be giddy with delight if they racked up the approval ratings Merkel has been scoring — 80% in February, the highest for any German Chancellor since World War II. But the former physics lecturer is not one to get carried away with fripperies like opinion polls. A participant at a recent meeting with business leaders in Berlin tells how she batted away praise. "This won't last forever," she told her audience. "The real test is yet to come. The proof of the pudding is in domestic policies."

Sober — and accurate. Merkel heads up a grand coalition with her former adversaries, the Social Democratic Party (spd), and must find consensus on ways to revitalize the economy, repair the health system and boost employment. Victories in three state elections on March 26 gave her coalition a lift, but now, for the first time since it won power four months ago, the German government is set to grasp the nettle of domestic policy. Reforms to reduce joblessness and find new money for health care are due as early as June. As her supporters celebrated their election gains, Merkel cautioned that "tough working weeks lie ahead of us."

It will take more than such warnings, though, to puncture the bubble of good humor enveloping many of her compatriots. Germany was dubbed the land of smiles on the cover of a recent issue of German newsweekly Der Spiegel. Some 85% of respondents in a poll for the magazine anticipated that 2006 would be a "good year." The number of Germans who feel their government can improve their lives has risen fourfold in the past six months, consumer confidence is at its highest in four years, and the business climate index — a measure of how optimistic businesses are about the future — last week reached its highest level since German reunification. The reason for all this good cheer? Columnists call it the Merkel Factor. It was even given solid form on floats at the annual Carnival parade in Cologne. Last year, a vast, papier-mâché Merkel bent over to kiss the bottom of a George W. Bush figure; this year she had undergone a makeover into a motherly barkeeper, huge breasts enveloping her coalition partner, apparently loving him — and Germany — to death.

From figure of fun to Mother Germany, from electoral liability to the pride of her party and country — what has the Chancellor done to effect this transformation? To be sure, after an election campaign in which she blew a 20-point lead, there was nowhere to go but up. The same goes for the grand coalition which, at its inception, inspired more skepticism than confidence. Nor is there much of an opposition in Berlin to highlight a government's shortcomings: the Greens, liberal Free Democrats and post-communist Left Party between them fill just 27% of the seats in the Bundestag.

But Merkel is more than just fortunate: she has made her luck. Meetings with world leaders from President Bush to Vladimir Putin have won praise for a nicely calibrated blend of multilateral fence mending and principled criticism. At home, she toned down the free-market rhetoric that made voters uneasy in last year's poll. And she has won the admiration of party members and rivals alike for her consensual management style and grasp of detail. "I'm convinced that she is really the right person for Germany," Henning Kagermann, ceo of SAP, the software giant, tells Time. "She's very pragmatic, she can listen, and she is not always talking about these grand visions but about small executable steps. We are very comfortable with her style."

But are small steps enough to tackle Germany's underlying economic woes? Merkel has spent her first four months tending to Germany's role in global affairs. Now she will take up a series of reforms to health care, tax, pensions and, most importantly, labor markets that will really test the solidity of her grand coalition and her own popularity. "She has accumulated a heap of political capital," Reinhard Bütikofer, chairman of the opposition Green party, tells Time. "One of these days she is going to have to spend it."

And, despite the burgeoning confidence of business and consumers, Germany's underlying economic problems are still there. The pension system is going bust, state spending on social programs is out of control, and seasonally adjusted unemployment is rising, last month topping 11.4%. Public sector strikes, the first in 14 years, have sparked demonstrations in 11 of 16 states. Last week, IG Metall, Germany's biggest engineering union, staged its own "warning strike," the first in a series aimed at winning a 5% increase in wages. The walkouts expose a yawning gap between workers' expectations and employers' ability to pay. The Merkel Factor, it seems, won't guarantee endless patience. Gunter Thielen, chairman and ceo of Bertelsmann, tells Time: "The grand coalition under Mrs. Merkel's leadership is off to a good start. But the way I see it, urgent reform projects still remain to be tackled. Courageous steps are called for here."

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