After their worst result in decades in elections in the former SPD stronghold of Saarland earlier this month, Chancellor Gerhard Schröder's Social Democrats received better news in elections in the Eastern German states of Brandenburg and Saxony last weekend.

His SPD lost considerably less in the two tests of voter opinion than his domestic rivals from the conservative CDU, something Schröder believes will turn around his political fortunes.

"I see that the trend has been reversed and I also see that the conservatives are failing in their attempts to reap political profit from our difficulties with the implementation of the reforms," Schröder said in an interview with German public broadcaster ARD. "There are some exciting times but also a tough two years ahead of us until general elections in 2006.“

Globalization forced reforms

Schröder defended his Agenda 2010 reforms in the interview which include deep cuts in social welfare benefits and a substantial overhaul of the health care and pensions systems. He said that tough economic competition in globalized markets and the costs of an aging German population had forced the government to take measures that are bound to be perceived as painful and unjust by some people.

Schröder stopped short of repeating remarks he made last weekend criticizing parts of the population who were seeking maximum benefit from the state with giving anything in return.

The chancellor also countered criticism, especially from German industry, that his reform drive had now come to a halt with half of the job left undone.

"What is ahead of us is the implementation of the most fundamental social welfare reform of all times and our task in the future is to ensure that the reforms are running smoothly,“ Schröder said.

Industry wants to continue momentum

Industry leaders urged Schröder to continue his drive to lower labor costs that make the country the most expensive im Europe for foreign investors.

"We are still lacking a coherent concept that includes further structural changes," said Dieter Hundt, who heads the Confederation of German Employer's Association. "German businesses are still languishing under a high burden of taxes and contributions to the state and social systems.“

The country's opposition greeted the halfway point in Schröder's second tenure with continued criticism.

"His record is nothing to be proud of," said CDU leader Angela Merkel, who is setting her sights on the Chancellor's office in 2006. "In the past two years 1,000 jobs have been lost every day. His promises of more than 2 million new jobs to be created through his reforms have been utterly false. In addition the nation is indebted like never before.“

Municipal elections this Sunday a barometer

Whether the rest of the populace shares Merkel's concerns can, at least in part, be measured on Sunday, when municipal elections are held in the SPD-governed state of North Rhine-Westphalia.

Five years ago, the conservatives broke the SPD's iron grip on Germany's most populous state. The CDU hopes success in this Sunday's municipal elections across the state will promise more of the same when the governship is up for grabs in May 2005.

Pollsters say that although the CDU will dominate, they won't do so as convincingly as forecast a few months ago. Candidates will most likely drop 5-6 percentage points compared to the last elections.

The difference won't be made up by Schröder's SPD, but the Green party, which will be looking to break the 10 percent barrier, according to current polls. Schröder will nevertheless be looking for any signal that his party could turn its fortunes around in time for next Spring's electios.