SPIEGEL:

Chancellor Merkel, your fellow party member, President Horst Köhler, has criticized your policies for what he calls an absence of a "considered, developed superstructure that outlines how the world has changed and what the objective is." Were you surprised by this criticism, perhaps even irritated, or do you admit that his assessment wasn't entirely incorrect?

Merkel: I interpreted the president's comments differently. He was calling for a public debate, just as I have. He is interested in a discussion of the circumstances in which we live and work today. It was an appeal to everyone -- to politicians, to the media and to the business community. I did not interpret his comments as a specific criticism of the administration.

SPIEGEL: But it was abundantly clear that the president's comments were directed at you. In referring to a phrase you used in your government policy statement, "policy of small steps", Köhler said: "The smaller the steps, the more steps we have to take."

Merkel: That isn't criticism. It's a statement of fact that anyone with common sense will find difficult to contradict. One can reach an objective with many small steps, and perhaps one can also reach an objective with a few large steps.

SPIEGEL: The Grand Coalition apparently favors the small step.

Merkel: One can remain more sure-footed by taking small steps, but perhaps achieve greater speed by taking bigger steps. Of course, one also runs the risk of setting out in a completely erroneous direction. Surely the important thing isn't the length of our steps, but that the objective is clear.

SPIEGEL: What is the most important objective of the administration under your leadership?

Merkel: I want us to be able to preserve our level of prosperity. We must constantly remind ourselves that Germany has been eating into its capital. It is only through successful management that we can once again secure our foundation of prosperity and social security.

SPIEGEL: The country has gone through a decade of reforms in which there was much talk and little action. Unemployment and the national debt are at record levels. Many government initiatives were also ineffective because the pace of reform in Germany was outrun by globalization.

Merkel: There was a very interesting story about economic development in China in a recent issue of SPIEGEL. The article made it clear that the pace of reform in Germany definitely isn't too fast.

SPIEGEL: Germany continues to lose ground to countries like China and India. Isn't it the case that Europeans and Asians now live in a world of two different paces?

Merkel: Of course we also have strengths compared with the countries you mentioned, strengths we should preserve. We have very stable mechanisms of conflict resolution in terms of labor relations, we have a very good transportation infrastructure, we provide our children with an excellent education and the gap between rich and poor in Germany is relatively narrow. On the other hand, we have trouble accepting change.

However, I do believe that a Grand Coalition has an advantage over other political constellations in that we will have an easier time convincing people of the need for unavoidable reforms.

SPIEGEL: Would you have been able to embark on a faster pace of reform with the FDP (Free Democratic Party) as your coalition partner?

Merkel: I'm a person who acknowledges reality. I don't get up every morning and ask myself: What would I do differently if I were chancellor in a black-and-yellow (Christian Democrat and Free Democrat) coalition? The SPD (Social Democratic Party) and the (Christian Democrat and Christian Social) Union stand to weaken their own positions if they don't make this coalition a success. And we both want success.

SPIEGEL: Before the election, you championed an unambiguous reform program, one that would by no means exclude cutbacks and changes to the system. Since then, you have shown a tendency to talk about reforms in more vague terms and to resort to making motivating appeals. In your New Year's address to the nation, you said that everyone should begin putting in more effort "starting tomorrow morning."

Merkel: The role of the opposition leader differs from that of the chancellor. If this government is to be successful, I have to take the emotional state of all partners into account. Besides, the Social Democrats didn't exactly present me with the motto "Let us dare to have more freedom" on a silver platter.

SPIEGEL: It was sufficiently murky to avoid upsetting anyone.

Merkel: No, it was sufficiently clear. As the head of the government, it is my responsibility to make the overriding political goals and relationships more clear. Part of the reason the public didn't understand some of the reforms enacted during the past legislative period was that there was far too much talk about the details, while the general picture often remained invisible.

SPIEGEL: A lack of clarity can also serve as a cover-up for unresolved conflicts within the coalition.

Merkel: Don't worry, I'll be more than happy to get involved in the details at this week's cabinet meeting, for example, when we discuss the issue of a vigorous building renovation program and the future of healthcare policy.

SPIEGEL: Which details? After all, the basic tenets of the policy are still unclear. The parties haven't seen eye-to-eye for years on healthcare. In the low-wage sector, everyone seems to be offering the public a different program. And when it comes to pensions, the only thing the parties agree on that no one wants to make any decisions at this point.

Merkel: You're wrong on that issue. A coalition of conservatives and FDP wouldn't have managed to proceed any further than we have on pension reform. We will increase the retirement ago to 67 and allow early retirement legislation to expire.

SPIEGEL: It'll be extended before it expires. Under the current system, someone who is 58 and unemployed can remove himself from the labor market and draw a pension without providing any explanation. This is generous, costly and the complete opposite of the principle of "challenge and promote" everyone is touting these days.

Merkel: We extended the so-called 58-year provision for another two years, but it was the last extension. It ensures that those who truly don't stand a chance of becoming employed in the current labor market aren't forced to report to the unemployment office once a week. Besides, early retirement incentives will expire because the period of eligibility for unemployment benefit was shortened.

SPIEGEL: The pension insurance subsidy already consumes almost a third of the federal budget today. Why don't you just say: Once again, we lacked the courage to call upon pensioners to contribute their fair share to cleaning up public finances?

Merkel: Because it isn't true. The consistent application of the sustainability factor will lead to a reduction in the retirement age in the coming years. This most certainly represents a contribution by today's pensioners to the idea of generational fairness.

SPIEGEL: But empty phrases like "sustainability factor" and "catch-up factor" are really just code for something that's abundantly clear: pensioners will not, after all, contribute to paying for closing the pension gap to the extent previously planned. If you had allowed the sustainability factor to take its course, pensions would already be lower today.

Merkel: In theory we could already have reduced pensions. But we made a political decision not to reduce pensions. On the other hand, we're also telling pensioners that there can be no pension increases in the foreseeable future. A pension increase next year, which would have been possible from a purely mathematically standpoint, will be offset against the pension reduction that would have actually been needed this year. That's what we call the catch-up factor. I don't known anyone -- including the FDP -- who would have cut pensions at this point.

SPIEGEL: Meanwhile, the erosion of our social security system continues unabated.

Merkel: The real problem is that the financial base for our social security system is shrinking because the number of normal jobs is falling. In other words, we have to address the challenge of how to make employment, in the classic sense, attractive once again.

SPIEGEL: What's your solution?

Merkel: We must attempt to sever the connection between the cost of labor and social costs. I found it interesting to watch how French President Jacques Chirac tackled the challenges of globalization in his New Year's address. Instead of complaining about globalization, he suggested a discussion over separating labor costs from the taxes imposed on labor.

SPIEGEL: It's a discussion that's been going on for years. What prevents the political parties from drawing conclusions from this debate?

Merkel: You're impatient, which I can understand. But you underestimate the parties, which most certainly have arrived at their conclusions. But the fact is that you need a majority to bring about change in a democracy. In some instances, we were certainly all too slow in the past, and we've already paid the price for it, namely in the form of the loss of more jobs. But I am confident that in the Grand Coalition, we will focus on the issue of separating social costs from wages more than ever before.

SPIEGEL: What could a model look like that would satisfy both the Union and the SPD?

Merkel: The model that the CDU continues to believe will satisfy the objective requirements is the healthcare premium.

SPIEGEL: ...which is recommended by many experts, but has encountered rejection and even vehement resistance within the conservative parties. In this model, each insured person initially pays the same premium. Differences in social circumstances are then reflected through taxation. The SPD is completely against the idea. Do you plan to enforce a decision at the cabinet meeting in Genshagen?

Merkel: I'm fundamentally against enforcing anything. What I want is results that are objectively feasible. To that end, I would like to see a non-ideological discussion on the following issues: What's the source of revenues? Is the current system fair? How is expenditure developing? Is the whole thing transparent and conducive to competition? As the head of the CDU, I can tell you that I do have answers, at least when it comes to the healthcare premium model. What I want to organize now is a process that will lead to a sustainable solution for the Grand Coalition.

SPIEGEL: Have you already come up with a compromise solution?

Merkel: We have to think about how our healthcare system came about in the first place. The notion at the time was that higher wage earners and the self-employed could bear the risk of illness on their own. The solidarity-based health insurance system was designed for the vast majority of employed people. What we're experiencing today is that fewer and fewer people
with jobs subject subject to social insurance contributions are financing the solidarity-based insurance system. For example, while the number of patients insured under the national healthcare system is shrinking, the costs of providing medical care for children remain unchanged.

SPIEGEL: And your conclusion?

Merkel: I wonder whether it's fair that those who work in jobs that require them to contribute to the national healthcare system are the ones who are paying for the health of our children. And then only with income below the €3,500 assessment ceiling. Why shouldn't someone's entire earnings be used (to pay for the system) in the form of taxes? It's even become a broadly discussed issue within the SPD.

SPIEGEL: In other words, you're in favor of a healthcare solidarity payment?