German Jobs the Focus of Tight Poll Race

On an industrial estate on the edge of Berlin, factory owner Thomas Dreusicke reflected on what had gone wrong with Germany's economy. "After the war, Germans were all very hard-working," he said. "They earned money and got wealthy. But then they turned around and really went lazy. Suddenly we find ourselves in this crisis."

For decades, Germans had grown used to economic success, a phenomenon that became known as the Wirtschaftswunder , or economic miracle. But in recent years, Europe's biggest economy has found itself in trouble. Unemployment has risen to nearly five million, growth has remained stagnant, and firms like Mr Dreusicke's have seen profits fall.

With just over a week until the general election, voters are faced with an uncomfortable choice: a Social Democrat-led government that seems incapable of cutting unemployment, or a conservative administration that promises deep cuts to Germany's much-loved social state.

Yesterday Mr Dreusicke, 49, was sceptical that any German leader could solve the country's economic problems quickly. His plastic parts firm, India-Dreusicke, is a classic example of what is known as the Mittelstand , the medium-sized, family-run businesses that make up Germany's middle-class backbone.

The biggest problem facing his firm and others, he says, is high wage costs. "German workers are among the most expensive in the world. Only Norwegians cost more."

Mr Dreusicke's 55 employees earn €8 (£5.40) an hour. "But the problem is that I have to pay an additional €2.50 for their social security costs. They have to pay €2.50 as well."

It is these additional wage costs that have acquired an unlikely starring role in Germany's election campaign. The conservative leader, Angela Merkel, has promised to reduce the costs by raising VAT from 16% to 18%. Germany's chancellor, Gerhard Schröder, argues that this would kill off domestic consumer spending.

Ms Merkel, meanwhile, is also planning to reduce, though not abolish, a strict protection law that prevents medium-sized or large German firms from dismissing workers.

"This is the biggest job killer in Germany," Mr Dreusicke said, as his staff assembled plastic components on a humid factory floor. "If a customer suddenly cancels an order it affects three or four people. What am I supposed to do with them? I have to keep on paying wages, even though I can't afford it. It makes you very very cautious before giving people work."

Though such changes to Germany's labour market may seem technical, they go to the heart of this election. With 4.8 million Germans on the dole and unemployment at 11%, the crucial question is: which leader is likely to bring down unemployment?

Paradoxically, most voters appear to prefer Mr Schröder. But they are also preparing to vote him out of office because they think that Ms Merkel is more likely to create jobs.

The debate is a bitter one, not least because Germany's altruistic social-state model has worked successfully for so long. It has become part of what it means to be German.

"Germans are pretty reluctant to accept changes to the social state," said Benjamin Scharnagel, of the Institute of German Economics in Cologne. "The problem is we can't afford it any more."

According to Dr Scharnagel, Germany's current economic difficulties go back to the 1980s. While Britain, Denmark and Holland were carrying out difficult structural reforms, Germany was busy with reunification. "It meant we didn't react to globalisation like other countries did."

Like many German manufacturers, Mr Dreusicke is now contemplating moving part of his firm somewhere cheaper, such as the Czech republic. In the months before the election Franz Müntefering, the Social Democrats' chairman, dubbed German business owners who exported jobs abroad "locusts".

Yesterday, however, Mr Dreusicke shrugged off the suggestion that he was unpatriotic. "We recently lost a big order to China. We would like to stay here, but we have to be realistic," he said.

Not surprisingly, the economy dominated last weekend's live TV debate between Mr Schröder and Ms Merkel, watched by 21 million Germans. The chancellor accused his rival of deliberately rubbishing Germany's economy for her own advantage, pointing out that Germany is the world's leading exporter.

Mr Schröder's problem is that his modest reforms of the welfare state, introduced earlier this year, were deeply unpopular. The chancellor has also been unable to convince his own party that the reforms are the right thing to do - the reason he was forced to call a general election a year early.

Mr Dreusicke is undecided. "I was thinking of voting for Ms Merkel," he said. "But I'm sceptical that she is brave enough to do the structural things she has to do. I'm not sure she's a Thatcher. And you can never write Schröder off."