Last week, something profound happened in Germany. A large number of Germans lost faith – not in their spirited football team, but in their spiritless government. The trigger was a shocking healthcare reform package, which Angela Merkel, the German chancellor, hailed as a big step forward. Some political commentators joked that Jürgen Klinsmann, the national football coach, might make a more effective political leader.

Ms Merkel’s star has tumbled over the past week as the government’s reform agenda has come unstuck. Only seven months ago she enjoyed the highest popularity ratings ever recorded by a postwar chancellor. Today it looks as if the grand coalition of Social Democrats and Christian Democrats is failing to deliver change. Der Spiegel, the influential German news magazine, last week asked whether she might end up as a less successful chancellor than Gerhard Schröder, her not very successful predecessor.

How could the public’s opinion of Ms Merkel and her government change in such a short time? Looking at Germany from the outside, Ms Merkel appears to be a modern, dynamic leader. She has transformed the country’s foreign policy. She managed to mend relations with George W. Bush, US president, with whom she has established a good personal rapport. She was instrumental in the difficult negotiations over the European Union’s budget. Under her leadership, Germany has become a more reliable and effective player in EU politics. After seven years of Mr Schröder’s national corporatism, Ms Merkel seemed like a breath of fresh air. What happened?

The basic problem with Ms Merkel is her evident lack of a coherent domestic policy agenda. She is respected for her intelligence and efficiency. But as chancellor of a grand coalition, she seems to value the fact of a compromise more than its content. When in opposition, she went out of her way to associate herself with radical reform ideas such as a flat income tax. In government, she appears to have made a Faustian pact with the enemies of reform.

Healthcare reform should have been the defining issue for this grand coalition. Ms Merkel said so herself many times. The problem with the German system is not its quality, but how it is financed. Germany has a compulsory insurance scheme, paid for by employers and employees in equal measure. It is not the only country in the world facing rising healthcare costs, but in Germany those costs are linked to wages. Without structural reform, the rise in healthcare costs will lead directly to a loss in competitiveness.

The compromise Ms Merkel tried to sell to the German public last week failed the main test – to break the link between health costs and wages. Nor did it include market-based mechanisms that would put a lid on overall spending on healthcare. Its main element was an increase in user charges. What Ms Merkel calls reforms in reality amount to little more than a hike in insurance rates. The main structural change is a new layer of bureaucracy to shuffle money between patients and the various health insurance companies.

The irony here is that the Christian Democrats and Social Democrats each started out with workable proposals. It is the compromise between the two that does not work. The SPD wanted a tax-based health insurance system with some similarities to Britain’s National Health Service. The CDU favoured a system with greater market freedoms. Both proposals would have led to a gradual delinking of healthcare costs from wages. Both would have restrained total healthcare spending, albeit through different mechanisms. If they had not been stuck in this wretched grand coalition, either party might have delivered a better system on its own.

Until last week, the public and the business community gave Ms Merkel and her coalition the benefit of the doubt. The country had been enjoying a cyclical boom. It seemed the wrong time to spoil the party when the economy appeared to be doing so well. But it was becoming increasingly obvious that this was a fool’s paradise. When the cycle turns down, as it eventually will, the country’s old economic problems will resurface, unless the government implements economic reforms. So far, the government has wasted precious time.

Last week, the critics finally came out from their hiding places. Rarely have German political commentators used such vituperative prose as they did last week. The style of debate is getting rougher even within the grand coalition itself. Its leaders spent the last few days openly trading insults, accusing each other of a breach of trust. After seven months, this is the first genuine coalition bust-up.

Grand coalitions are marriages of convenience. They are not meant to last forever in a modern democracy. The healthcare debacle has shown that this particular marriage is not nearly as convenient as it first appeared. Do not expect any upheavals in the short term. There is at the moment no alternative to this grand coalition. But it is far from certain that it will last the full term.

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