German Chancellor Gerhard Schroeder has pledged to remake his Social Democratic Party along the lines of British Prime Minister Tony Blair’s “new” Labor Party. Those plans suffered a rude setback last weekend when the SPD lost two state elections to its conservative rival, the Christian Democratic Union. While the CDU actually shares many of the chancellor’s objectives, the new balance of power will slow the pace of German reform. Worse, there is the danger that the SPD will be tempted to revert to its old form to woo back the voters it lost. Either course bodes ill for the German economy — and that means for Europe as well.

Although defeat was expected, the size of the losses was surprising. In Saarland, the SPD lost control of the state assembly for the first time in 14 years. Four more elections will be held over the next month and similar results are likely. Although Mr. Schroeder’s post is not yet at risk, he has lost control of the upper house of the German Parliament, the Bundesrat, in which the German states (the Lander) have seats. As a result, the chancellor will have to alter his legislation, either by bargaining with the opposition to win their support or by rewriting bills that must get the Bundesrat’s approval.

Either way, reform is the victim. The CDU has already announced its opposition to parts of the government’s $16 billion austerity package, particularly pension reform. The new governor of Saarland has said that plan will not pass in its current form, but he has also pledged to avoid outright obstruction in the legislature.

That is encouraging. The last thing Germany needs is an opposition more concerned with scoring political points than firming up the country’s nascent recovery. Germany is finally making some progress. Exports are up. Unemployment, although still too high at 4 million people, or 9.1 percent of the population, is holding steady. Economists forecast 1.6 percent growth this year, which, while modest, is an improvement over the negative growth of last year.

The biggest problem for Mr. Schroeder is not the opposition. After all, they say they are willing to deal with him. And philosophically, they are not too far apart. If anything, Germany’s conservatives, like Republicans in the United States, grouse that their left-leaning opponents have stolen their program.

Mr. Schroeder’s real challenge comes from the left wing of his own party, which has shown no inclination to follow him down the path to the Third Way. They have not followed the chancellor into the center. Instead, they continue to stand behind Mr. Oskar LaFontaine, “Oskar the Red,” the former chairman, finance minister and “conscience” of the SPD. The left pins the blame for last week’s loss in Saarland, one of the party’s strongholds, on Mr. Schroeder’s move to the center and his rejection of its traditional emphasis on equality.

The prospect of a rebellion in the ranks has obliged the chancellor to reorganize the party leadership and install his own man as party manager. But juggling seats will not solve Mr. Schroeder’s dilemma. To win voters over to his new line, he must deliver results. He has to restore growth, but most important, he must cut unemployment. That, more than any party manifesto or personnel shuffle, will shore up support for his new centrism.

His efforts to stake out the center should be aided by the strong showing of the far right in last week’s elections. An electoral agreement between several of those groups, under which they would not compete against each other, allowed the German People’s Union (known by its German initials as the DVU) to win 5.3 percent of the vote and claim five seats in the Brandenburg Parliament. The chancellor’s failure to make a dent in the unemployment rates has helped the DVU and like-minded parties, which are concentrated in the eastern states of Germany. Although polls generally understate the level of support these parties have, there is no prospect of a resurgence of the right in Germany. Still, their recent successes underscore the need to get the economy back on track.

The SPD defeats last week are a wakeup call for the chancellor. He has wrapped himself in the symbols of action and revitalization, but he has, in fact, done little that is specific. He must move beyond the rhetoric and start his country down the path toward the Third Way. He has time to reclaim his mandate, but the clock is ticking down. It may be unpleasant for both parties, but the chancellor may yet discover that his best allies are in the opposition. If so, Mr. Schroeder may have to abandon talk of a Third Way: Grand coalitions have a grand history in postwar German politics.

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