Battered Schr¿der vows economic reform

Gerhard Schr¿der with Tony Blair: Don't blame our Third Way

In the wake crushing Euro-election defeat for the ruling SPD, German Chancellor Gerhard Schröder has acknowledged the government's handling of the economy must improve and pledged to speed up reform.

The vote was the first national electoral test of the red-green coalition formed by Chancellor Schröder just eight months ago after 16 years of conservative Christian Democrat rule.

The Christian Democrats won 48.7% of the vote (up from 38.8%), while the SPD scored just 30.7% - down from 32.2% from 1994, and 10 points down on its support at last September's general election.

The chancellor said it would be "completely wrong" to deny that the Euro-poll was a "bad result".

"The Christian Democratic Union-Christian Social Union has clearly won. It is the winner of the election, and we are the losers," he said.

He blamed the "disastrously low turnout" and the SPD's failure to "motivate" its voters to the polls.

The SPD's poor showing looked set to sharpen divisions within the party, with the chancellor's emphasis on the "Third Way" attracting criticism.

A further ominous sign for the SPD from Sunday's elections was the slide in its support slide municipal elections in six states held in parallel with the Euro-vote.

"This is a warning for government policy in Bonn," said SPD parliamentary leader Peter Struck, who said the SPD-Greens coalition should stick to its principal goal of fighting unemployment.

Left-wingers, still recovering from the loss of their standard-bearer, the former finance minister Oskar Lafontaine, seized on the SPD's dismal showing as evidence that voters were unconvinced by the chancellor's policies.

Third Way 'not to blame'

He flew to London last week to present a policy paper with UK Prime Minister Tony Blair which laid out a pragmatic Third Way for Europe's Social Democrats.

This infuriated SPD traditionalists, who see it as an attack on Germany's once fabled welfare state. Left-wingers in Mr Blair's Labour Party see it in similar terms.

But interviewed on television the day after the vote the chancellor rejected criticism of the Schröder-Blair paper.

The business-friendly course envisaged in the paper was not neo-liberal, he insisted, but necessary to unite economic competence and social responsibly.

He also said he intended to continue the Bonn coalition, "without any restrictions", with the Greens until the end of the legislative period.

The Budget on 30 June is expected to lower corporate taxes and trim pensions as part of Chancellor Schröder's drive for what he calls the "Neue Mitte" - the "new centre" - of German politics.