CDU backtrack on rent-capping is a classical Merkel compromise

The eastern and southern parts of Germany are under water. Literally. As we write, several regions are threatened with the worst flooding in a century, with crops destroyed, businesses paralysed, widespread evacuations, and the submerging of countless town

centres under three metres of water, with incalculable damage to houses, shops and restaurants. It’ll take a long time to recover from this one.

Years after the last catastrophic flooding in 2002, scars were still visible in the towns and cities along the Elbe and the Danube in the eastern German states, where the most damage had been wrought. The current torrential flooding has awakened nightmare visions among the inhabitants of the worst affected towns, who had seen flood waters rising to above their second-floor windows. They thought they’d never have to face such a calamity again.

Despite the devastation, there was one clear winner from the widespread human misery caused by the flooding in 2002. Gerhard Schröder, the German chancellor, was heading for almost certain defeat in the imminent national parliamentary elections against his Bavarian CSU rival Edmund Stoiber. The German economy was in the doldrums, and seemingly losing ground to its more dynamic European rivals week by week. Unemployment plagued the country, with Germany being heavily criticised for the rigidity of its working practices, its inflexible labour unions, and the cosseted-ness of its cradle-to-grave social safety net.

The socialist Schröder, precariously balancing on a tightrope between the needs of his big business chums and the mighty labour unions, was trying to instigate a series of tax and labour reforms known as Agenda 2010. He desperately needed another term in office to push through the reforms, but it looked as if his goose was cooked. He looked tired and strained, his face etched with the cares of office, with power ebbing tangibly away. The election was only weeks ahead.

Suddenly, with the bursting of the heavens, Schröder was a new man. Striding the punctured dykes and river banks purposefully in his green wellington boots, commandeering troops building fresh walls of sandbags, encouraging the hordes of exhausted volunteers, comforting old ladies who’d been washed out of their homes – this was a real leader, a man who stood by the people in their hour of need, a humane, caring, hands-on man of action.

Most importantly, Schröder was in charge of the finances. Schröder and his finance minister Hans Eichel still had control over writing the cheques. Within days, all planned budgets were overturned to accommodate the massive financial assistance being promised to the flooded regions. The major tax reform programme, the pillar of the SPD political programme at the time, was immediately postponed for a year. A new solidarity tax was discussed, even temporarily raising VAT was mooted as a means of helping distressed flood victims, but the money was going to be forthcoming.

It was enough. Schröder scraped through on election day with his red-green coalition, and consigned Stoiber to an early retirement, forced to cede power to his colleague Angela Merkel. The crucial labour reforms enacted by the Schröder regime have been grudgingly accepted by most parties as having been key to what subsequently proved to be a decisive German strength through the financial crisis.

With these new floodwaters still raging, Angela Merkel is already taking stock of what could prove to be the pivotal issue in the forthcoming parliamentary elections in September. The cost of housing is shaping up to be the emotional battleground on which the coming conflict between the parties will be fought, and she’s determined not to be caught on the back foot on this one.

Having taken a largely hands-off approach to an issue best left to economic forces, Merkel’s CDU shifted tack this weekend on their stance in relation to the capping of permissible residential rent increases. While sympathetic to capping allowable rent increases on existing contracts, the CDU will now intervene to prevent landlords raising rents on NEW tenancy agreements, beyond a certain very modest level. In practice, most landlords have had a free hand in setting a new rent level for a new tenant – frequently well above prevailing rates in a neighbourhood; but with housing demand soaring in the larger cities, it’s been take it or leave it. This now has to stop, say the CDU.

The house-owners’ lobbying association BFW and real estate industry mouthpiece ZIA, among several interest groups, have been quick to denigrate the government’s about-turn on a key issue, accusing it of viewing the real estate industry as the ‘milkcow of the nation’. The real problem is the lack of incentives for new construction, they argue logically, and measures to cap rents simply drive the real problems underground.

This week the ZIA brings together over 1,000 leading players from across all sectors of the real estate industry to its annual gathering in Berlin. At least three serving cabinet ministers, along with chancellorcandidate Peer Steinbrück, will address the real estate captains of industry.

Given their party’s previous acknowledgment that any tightening of the laws regarding rents simply exacerbates the affordable housing shortage, the CDU politicians will have to be at their persuasive best this Wednesday. Further flood-storms, or something even more punitive, may well yet lie in wait.