When its 82 million people bridged the Cold War divide to become a reunited nation nine years ago Sunday, Germany seemed poised to emerge from the shadows of Nazi and Communist dictatorships and blossom into a new superpower whose political influence would be commensurate with its clout as the world's third-largest economy.
Yet nearly a decade after the fall of the Berlin Wall signaled a new era of German ascendancy, the foundations of the nation's prosperity are rapidly eroding. There is broad agreement among politicians, economists, labor leaders and businessmen interviewed that Europe's most pivotal state is living perilously beyond its means and has failed to achieve a consensus on how to solve the crisis.
"We simply cannot go on living the way we have been doing," Chancellor Gerhard Schroeder said in a recent debate in the newly refurbished Reichstag. "We have built up a mountain of debt that is placing an intolerable burden on the backs of our children. We are dealing with nothing less than a challenge to the nation's future as one of the world's most affluent democracies."
Acknowledging a crisis, Schroeder has staked his government's survival on what he describes as "the biggest reform package in postwar German history." He plans to trim the budget by $16 billion next year and raise gasoline taxes to stop the hemorrhaging debts caused by Germany's runaway spending on entitlements.
But the stinging defeats he and his ruling Social Democratic Party have suffered in recent state elections suggest that voters are not willing to make even token sacrifices to redress imbalances in the nation's social contract.
How Germany copes with the challenge of modernizing its economy will also shape its neighbors' destinies. As the continent's largest nation west of Russia, surrounded by nine countries and endowed with an economy twice the size of Britain's, Germany has become more critical than ever as an anchor of stability in the heart of the continent.
As a regional power that, in Foreign Minister Joschka Fischer's words, "prefers to lead from the second row," Germany has made impressive gains toward shedding past inhibitions while facing up to historical responsibilities. In Kosovo, it dispatched peacekeeping troops beyond its borders for the first time since the Nazi era; it has welcomed more refugees from the Balkan wars than all other European nations combined; and it took the lead in promoting early European Union membership for new Eastern European democracies, such as Poland, Hungary and the Czech Republic.
But the future of its political ambitions, German officials say, will depend on the nation's ability to put its economy in order. "A prosperous Germany is necessary to ensure stability not just at home but also beyond our borders," said Michael Stuermer, a foreign policy expert and adviser to former chancellor Helmut Kohl. "If Germany continues to go into serious decline, it will bring a lot of other countries down with it."
For now, the situation is bleak and getting worse. A study published last week by the Organization of Economic Cooperation and Development showed that in terms of growth and jobs outlook, Germany languishes at the bottom.
The basic problem is clear: The terms of the generous social contract drawn up in the days of Germany's postwar economic boom have become too expensive. The high cost of subsidizing 4 million unemployed workers and their families, paying pensions sometimes equal to full salaries and lavishing almost $100 billion a year on the east have caused the national debt to triple in less than a decade. It is running close to $900 billion -- a burden of $11,000 for every German.
Just when Germany requires more investment, the enormous price of doing business here is driving away domestic and foreign companies. With average wage costs running close to $30 an hour, nearly double that of the United States, many flagship companies like Siemens AG and Volkswagen find it more profitable to shift production abroad. More than a million jobs have been lost since 1995, and the trend is accelerating.
In addition, much of the state's treasury is being wasted on preserving jobs in antiquated industries, such as coal and steel, rather than building up a strong technology sector. Despite such occasional success stories as the SAP software firm, Germany's economic power is largely concentrated in three sectors: automobiles, chemicals and machine tools.
Meanwhile, the tax base is shrinking. A growing number of jobless people means that fewer are paying taxes and more are drawing state benefits. Hefty taxes have encouraged a flourishing underground economy worth $350 billion, about one-sixth of total output. And many large companies in Germany still find legal ways to avoid taxes. A government study found that corporations in Germany pay only 8 percent of total tax revenue, compared with 24 percent in the United States.
Having one of the world's lowest birth rates also threatens Germany's future. Soon, one in five Germans will be retired and drawing a large pension, yet the imploding demographic pattern -- coupled with an aversion to accepting more immigrants -- means that a much smaller core of working people will support them.
"We are in the process of becoming an old people's home and an industrial museum," says Arnulf Baring, an economics professor at Berlin's Free University and the author of a bleak prognosis titled "Is Germany Failing?" He says the combination of Germany's low birth rate and heavy welfare costs is a ticking time bomb that frightens politicians and voters so much that no one is willing to touch it.
"Are the people to blame for demanding no cuts in subsidies and benefits, or are the politicians to blame for our stagnation? Either way, the result is the nation's most fundamental problems have not been addressed since unification," Baring said.
Upon taking office, close associates say Schroeder was stunned by the ruinous state of the nation's finances that he had inherited from Kohl. As a master of consensus, the chancellor of German unity had tried to please everybody by pouring huge sums of money into the east while fueling an economic boom in the west.
"We now realize we should have used reunification as an opportunity to push through reforms needed to modernize Germany and prepare the nation for the 21st century," said Wolfgang Schaeuble, the Christian Democratic Union leader who was Kohl's most trusted lieutenant. "But we had campaigned on the promise that it all could be achieved without any pain."
Schroeder also promised a better life and thus shirked from making a dramatic bid for economic reform. During his first months in office, he even reversed the modest steps Kohl had taken toward reducing the growth of pensions and sick leave.
As the U.S. and Britain pruned the role of government, Germany's dependence on the state expanded when West Germany absorbed 17 million people born and raised in a cradle-to-grave communist society. Schroeder now proposes to reduce the state's role in the German economy from 48 percent to 40 percent, but his loss of support in the east testifies to deep anxiety about such a move.
"We are not ready to make the jump into a market society like the United States," said Lothar de Maiziere, a lawyer who served as the last prime minister of the defunct German Democratic Republic. "History took such an amazing and sudden turn for us that the social problems of adapting to a new society were badly underestimated. How much freedom can someone bear who is not prepared for it?"
As Germany confronts the pressing challenge to streamline the welfare state and adapt to the competitive pressures of a global economy, it seems less prepared than at any time since reunification to undertake the wrenching changes needed to revitalize society and make people more responsible for their own welfare.
"The whole nation may be reunited, but it is in a bad mood," says Guenter de Bruyn, an eastern German novelist whose latest book explores the widespread feelings of disenchantment felt nearly a decade after the wall came down. "Few people are happy about the way things turned out and the direction they are going." The westerners, de Bruyn said, are disgruntled because they resent having to subsidize the east with their high taxes. And the easterners dislike the patronizing attitudes they encounter among their rich cousins in the west.
Indeed, one-eighth of Germans say they would like to restore the Berlin Wall and the Iron Curtain that once sundered their nation. "The wall in people's minds" -- often evoked to describe the disparity between east and west -- still remains so formidable that only one in 10 says it is correct to speak about a single German people, added De Bruyn.
"We are still a long way from seeing the light at the end of the tunnel of reunification," says Rolf Schwanitz, the chancellor's chief adviser on rebuilding eastern Germany. "Despite all the subsidies that have been provided, the problems we face in bridging the gap remain gigantic."
With former Communists established as the second-most powerful party in the east and xenophobic right-wing parties gaining a foothold in state parliaments, there is mounting concern that successive failures of centrist governments led by Social Democrats and Christian Democrats will fuel the rise of fringe parties.
Kurt Biedenkopf, the Christian Democratic premier of Saxony, said Germany suffers from the "Buddenbrooks phenomenon," a reference to the Thomas Mann novel that describes the rise and fall of a German family.
"The first generation were the founders, the second enlarged the wealth and the third squandered it," he said.
"Many Germans, especially in the west, are part of that third generation that became spoiled because they grew up knowing only good times. Now that we are spending far more than we can afford, nobody is willing to tighten belts because they still think the government is obliged to care for them."