It was only a slight tremor, too small and too far away to be noticed in Berlin. But it was clearly noticeable last Tuesday in the town hall of the northern German town of Bad Fallingbostel, where Chancellor Angela Merkel was attending a regional conference of her Christian Democratic Union party.

As she sat on the stage during the event attended by 2,000 local conservatives, people stood up to criticize her government's domestic record  after almost six months in a power-sharing "grand coalition" of conservative Christian Democrats, their Bavarian allies, and center-left Social Democrats (SPD).

"The government is shamelessly taking money out of our pockets," said one doctor. Another man demanded: "Start scrapping laws rather than constantly creating new ones!" One pensioner warned Merkel that Germany's old people faced increasing hardship if the government implemented its planned three-percentage-point hike in sales tax (VAT) next year. "The government has deserted the weak," he lamented. "Why didn't you push through labor market reforms against the SPD?" asked one irritated CDU member.

Only 24 hours later, Merkel was a world away from the disgruntled conservatives of Fallingbostel. She was sitting in the White House's Oval Office next to US President George W. Bush. Global affairs dominated the agenda, Iran, the Middle East, world trade. Bush praised "Angela" as a "clear thinker." Merkel's eyes shone with pleasure.

Ahead of her visit, Time magazine had put her on its list of the world's 100 most influential people. At home in Germany, Merkel is more popular than almost any German leader since World War II, with 72 percent satisfied with her work. And the grand coalition remains the preferred government constellation, surveys show.

So why shouldn't she quickly forget about the critics in her own party, whose complaints at the regional conference didn't even make it into the nationwide press?

Merkel is living in a curiously parallel world these days. On the one hand, her popularity is easily explained. Her reticent, modest manner is a welcome respite from the wolf-like ego trips of her media-savvy predecessor Gerhard Schröder. With charm and determination, she quickly repaired Germany's damaged relations with the United States, redefined her country's ties with Russia and rescued European Union budget talks by following the example of her former tutor, ex-Chancellor Helmut Kohl -- filling EU rifts with German money.

"Don't worry ... Be happy!"

But there is also something irrational about her unexpected love affair with the German people. Merkel runs a government whose appetite for reform in its first months in office has been confined to taking money out of people's pockets more unabashedly than any other government before.

The tax hikes agreed by Merkel and her cabinet will cost consumers more than €100 billion in the next three years. Most economists are predicting that the increases will hurt Germany's already weak economic growth.

Virtually every day the machine of government churns out new reform ideas which are largely based on the same principle -- that the welfare system should be rescued not through fundamental structural reform, but through never-ending cash injections. At the same time the government is displaying an astounding degree of creativity in spending billions of euros it doesn't have. The government's "growth package" aimed at boosting employment through investment in central growth areas will cost €25 billion.

There's an eerie calm on the reform front. So far the voters, tired of the loud and unsuccessful reform battles of the previous government, are thanking Merkel. "Don't worry…Be happy," is how "Newsweek" summed Germany's curious mood these days, adding: "Germans seem to prefer inaction from their not-so-new chancellor."

Strangely, no one is stressing the need for reforms more insistently than Merkel herself . She knows the disastrous state of the welfare system's coffers, and that the worst financial strains have yet to come in the next few years when the baby boom generation starts retiring and an ever decreasing number of employees has to pay for a growing army of retirees.

Even now, only 39 percent of Germans derive their income from employment, according to official statistics. The federal budget is almost totally used up paying for pensions, unemployment benefit, interest on debt and the military. Every cent spent on top of that, say on road construction, research or education is funded through debt. Germany is wasting its future.

Closing window of opportunity

Merkel is tirelessly pointing out these problems. She speaks of a closing window of opportunity for reforms, and that the changes will have to be more radical with each year that they aren't implemented. But she isn't following up her description with a plan of action.

The verbal reformer suddenly seems to have plenty of time. She and her allies point out that there's limited scope for radical action in a grand coalition. The chancellor, intent on preserving her government, wants to avoid unsettling the SPD with overly ambitious reform plans , especially because the party is busy getting familiar with its fourth chairman in two years.

Merkel's government has mutated to a coalition of the unwilling. The measures they do manage to agree on are watered-down versions of original plans, and usually involve distributing money they haven't got, only to get it back elsewhere through new taxes. Last week's agreement on parental benefits coupled with the imposition of a new "wealth tax" are a prime example of this. The original idea was to pay working mothers-to-be 67 percent of their salary for a year to encourage women with careers to have children.

But after weeks of debate within the coalition, an agreement was reached to pay parent benefit to all mothers, including those who don't have jobs and are registered as long-term unemployed.

Under the new wealth tax coming into force in 2007, people earning over €250,000 per year (over €500,000 if they're married) will face a three point income tax hike to 45% -- a key demand of the SPD. During the election campaign ahead of last September's election, the CDU had pledged to be "honest" to voters and said it would raise sales tax by two points to shore up government finances. The SPD bitterly opposed what it called the "Merkel tax". After the election, the two parties sat together and agreed a three-point value-added tax on almost all purchases.

Inefficient government

But despite the rising taxes, Germans don't seem too be getting much for their money. In the center of Berlin, remains of New Year's Eve fireworks litter the streets months after the event. In Munich, it takes an hour for the police to show up after a traffic accident without injuries. Parents are spending Saturdays painting their children's kindergartens and schools because there is no public money to refurbish the buildings. In the rich city of Hamburg, the streets are full of potholes.

The German state is proving to be a highly inefficient collector and administrator of the nation's money. "The problem in Germany isn't that taxes are generally too high, but that we levy contributions where they obstruct growth and employment," said Bert Rürup, head of the "five wise men," the government-appointed panel of independent economic advisors.

Germany's mass unemployment can't solely be explained by the dark forces of globalization. The other European countries face the same low-cost competition from Eastern Europe and Asia, yet have far lower jobless rates.

Germany's entire welfare system -- jobless benefit, pension and health insurance -- is largely financed not through straight taxes but through contributions split between employers and employees. That has the effect of driving up labor costs, with the result that many jobs become too expensive to be viable. So unemployment rises, which in turns leads to increased jobless benefit payouts. Contributions rise as a result, labor becomes even more expensive, further jobs are lost.

The parties had firmly pledged to break this vicious circle. The CDU said during the election campaign that it would only raise sales tax if it could lower jobless benefit contributions at the same time. But under the current plan, only one point of the three point VAT hike is to be used for that purpose. The country's leading economic institutes warned in their spring report last month that the sales tax hike in 2007 could wipe half a point off GDP growth. Consumer spending is likely to slump 6 percent in the first quarter of 2007, the institutes said.

A year ago, Germany's largely ceremonial President Horst Köhler said job creation must be made a priority. "Whatever serves to create and secure competitive jobs must be done," said Köhler.