Hoping to appease nervous financial markets while pleasing his party faithful, Germany's chancellor, Mr Gerhard Schroder, yesterday told his Social Democrats that social justice must go hand-in-hand with economic modernisation.
Addressing a party conference in Berlin, he promised to press ahead with a reform of the welfare system and praised the efforts of his finance minister, Mr Hans Eichel, to cut public spending and reduce Germany's national debt.
"We are reducing the state budget deficit not because stock market analysts are recommending us to do it but for the sake of our children. The state has to be capable of acting," he said.
Buoyed by a larger-than-expected fall in unemployment in November, the chancellor was reelected party chairman with 86.3 per cent of the vote, compared with the 76 per cent he received in April after the former finance minister, Mr Oskar Lafontaine, stepped down.
Mr Schroder, whose recent move to the left has been blamed for the fall in the value of the euro in recent weeks, played down the role of ideology in economic policy and promised to cut income tax and reduce labour costs for employers.
"I want to end this superficial debate about the difference between demand-side and supply-side economic policy. We need both. Globalisation and digitalisation have taken some of the instruments out of our hands.
"The old formula of more growth plus more redistribution equals full employment doesn't add up any more. That is why we must link social fairness with innovation," he said.
The chancellor defended his decision to bail out the ailing Holzmann construction firm, which had drawn criticism from the president of the European Central Bank, Mr Wim Duisen berg.
Pointing out that almost 70,000 jobs were at stake, Mr Schroder insisted the state must retain the power to act in the common interest, even if it upset economic theorists in the process.
"It is a duty of politics to help avoid such life or death crises, but we didn't do this for ideological reasons. We intervened for the sake of the people involved," he said.
Figures released yesterday showed that Germany's economy grew by 0.7 per cent in the second quarter of 1999, with year-on-year growth of 1.2 per cent. Unemployment fell by 29,000 in November to a seasonally adjusted figure of 4.081 million.
Analysts interpreted the figures, along with Mr Schroder's return to more centrist rhetoric, as promising signs for the future exchange rate of the euro, which has regained ground following its fall below the dollar last week.
"I'm a bit more optimistic on the euro. It's true that we in Germany have structural problems but I think the important story for next year is the recovery in euroland and Germany and expected lower growth in the United States," said Mr Thomas Hueck at HypoVereinbank in Munich.
Mr Schroder faces disagreement at the EU summit in Helsinki this week with the British prime minister, Mr Tony Blair, over a plan to tax interest earned on savings. However, the chancellor went out of his way to praise Mr Blair and to underscore their shared determination to ditch left-wing ideological purity.
