... went as expected, and now the guessing game starts on what it means for economic policy (at least in the short run). From the Wall Street Journal (subscription required):
German Chancellor Gerhard Schroeder plans to hold a parliamentary confidence vote by the beginning of July, the chairman of his Social Democratic Party said Monday, a move that would mean new elections must be held by Sept. 18 if Mr. Schroeder loses.
Mr. Schroeder on Sunday called for early national elections after his party suffered a stinging defeat in a state vote in a traditional stronghold...
Although Mr. Schroeder trails in opinion polls, the move took the wind out of the Christian Democrats' sails. Analysts say it is likely to force the opposition to nominate its relatively unpopular leader, Angela Merkel, to run against Mr. Schroeder. Had elections been held next year, the opposition might have found a different candidate.
It looks like the analysts are right. From the Financial Times:
Angela Merkel, leader of the opposition Christian Democratic Union, on Monday secured support from party leaders to stand against Mr Schröder. If confirmed as the candidate, she will be in a strong position to become Germany's first woman chancellor.
Why this has happened is pretty clear, what it means less so. Again from the WSJ article:
But the chancellor's party has yet to spell out whether it will run on a pro-business ticket, sticking with the market-oriented overhauls of the welfare state and labor market it has pursued for the past two years -- or on a business-bashing platform, blaming corporations and foreign investors for high unemployment...
Realizing he could no longer preside over a declining economy and survive politically, Mr. Schroeder launched a program of structural overhauls in March 2003 known as "Agenda 2010." The package included efforts to rein in the costs of Germany's generous health, pension and welfare systems and a number of changes to its rigid labor-market laws, aimed at encouraging more hiring of workers. Most controversially, the government slashed long-term unemployment benefits.
But the changes deepened the split between Mr. Schroeder and the Social Democrats' left wing.
Meanwhile, the economy hasn't managed sustained growth, and unemployment has risen to more than five million, or around 12% of the labor force – the highest levels since the Great Depression.
Nonetheless, these developments are being viewed in a positive light. From the Journal piece...
Elisabeth Noelle-Neumann, a leading German political scientist, said Mr. Schroeder has taken a brave but necessary step. "We need relatively quickly to know where we stand," she said. "A stalemate is in no way good for our country."
... and from the FT article:
"This is good news for the reform process," said Dirk Schumacher, economist at Goldman Sachs. "The alternative . . . would have been a lame duck government for the next 16 months."
Stay tuned.
UPDATE: More insightful commentary at a Fistful of Euros: here and here.