In recent months, commentators and journalists have rushed forth to heap praise on Germany’s center-right leader, Angela Merkel. In Newsweek International, Stryker McGuire writes that “She is presiding over a sudden and extraordinary economic boom that some have dubbed Wirtschaftswunder 2.0—a second industrial miracle, not glimpsed since the golden era of the ‘60s.”

Germany’s economic growth, projected at 2.3 percent for 2007, is indeed a good rate for a country with a stagnant population but it is still far from the growth Germany achieved during the economic boom years of the 1950s and 60s, the time of the first Wirtschaftswunder. German unemployment, while falling rapidly, remains high, at 9.2 percent. In the United States, the last time unemployment was that high was a quarter century ago, during the recession of 1983, when the Federal Reserve waged open war on inflation. Nevertheless, with 1,200 Germans finding new jobs each day and a remarkable drop in the number of the German unemployed by 900,000 since March of 2006, things are looking good.

It is partly because the current economic upswing is so pronounced that it is surprising that Merkel has not—yet—proven to be a true economic reformer. The left-of-center party in Merkel’s coalition, the SPD, is partly to blame for the current inaction of Merkel’s “Grand Coalition” by consistently agitating against free-market reforms, but Merkel could be leading reform efforts, and she is not doing this.

With 1,200 Germans finding new jobs each day and a remarkable drop in the number of the German unemployed by 900,000 since March of 2006, things are looking good.

True, Merkel’s coalition is set to implement a cut in the de facto corporate-tax rate from 38 to 29.8 percent starting in 2008 (on which lawmakers will vote May 25^th), but these tax cuts “will ease the overall tax burden by only about €5 billion, or $6.4 billion,” not a massive amount for the world’s third largest economy. Strangely, “the plan foresees broadening the tax base by restricting deductions of interest payments, licensing fees and other costs.”

Nor has Merkel shied away from tax increases as she seeks to balance the budget: one of her first actions in office was to raise the sales tax from 16 to 19 percent.  The coalition also raised the top income tax rate from 42 to 45 percent. It is disappointing indeed that Merkel has ruled out any new tax cuts for Germans until the budget is balanced, something not expected to happen until 2010, even though tax revenues are rising rapidly.

Though Merkel gets credit for Germany’s economic good times, many of the current economic benefits Germany is enjoying are the result of reforms undertaken by her left-of-center predecessor, Social-Democratic Chancellor Gerhard Schroeder, who instituted deeply controversial free-market reforms over objections of many within his own party.

Schroeder’s economic policies were as good as his foreign policy was bad: he cut the top income tax rate from 51 percent to 42 percent, and the basic corporate tax rate was cut from 40 percent to 25 percent. (It is the de facto corporate tax rate, much higher than the basic rate, that Merkel is now lowering.)

Schröder even abolished the corporate capital-gains tax that “companies must pay when they sell their stakes in publicly listed German companies,” lowering it from around 50 percent to zero. This drastic reform helped pave the way for corporate re-structurings: in Germany, abolishing this tax was especially significant given the “web of cross-holdings [that] yokes institutions such as Allianz and Deutsche Bank to big swaths of industry.”

It is these re-structurings, in addition to wage growth moderation and modest labor law reforms undertaken by Schroeder’s government, that have made Germany’s economy—and German exporters—far better able to deal with stiff international competition. For Germany, the world’s largest exporter (ahead of the United States and China), this is especially good news.

Merkel should make it completely clear to the German electorate that part of the cause of Germany’s current economic prosperity lies with the Hartz IV reform package.

Merkel’s instincts tend to be very good: she is a firm believer in economic freedom, in positive relations with the United States, and in free trade (both intra-European and internationally, particularly with the United States). Merkel went as far as to consider “the idea of creating a transatlantic free-trade agreement, a TAFTA modeled on NAFTA,” something that goes too far—as of yet—even for the United States.

On tax policy and on fundamental reforms of Germany’s stale labor market, however, Merkel and her coalition have disappointed. True, Merkel does not govern alone, and the SPD-leadership, once so bent on economic reforms when the SPD governed alone under Schroeder, is now agitating against free-market reforms. But Merkel has an opportunity to be a leader on reforms, and she has not stepped up to the plate, though she has successfully rebuffed—so far—most of the SPD’s worst proposals.

Merkel should make it completely clear to the German electorate that part of the cause of Germany’s current economic prosperity lies with the Hartz IV reform package, which caused widespread protests at the time it was adopted. Reforms of the labor market widely condemned as “anti-social” are now bearing fruit in the form of surging employment. Merkel can build on these reforms and take the lead in introducing more flexibility into Germany’s relatively inflexible labor market. On fiscal policy, Merkel’s striving for balanced budgets is admirable, but with tax revenues surging, lowering taxes would not be irresponsible or fiscally unsound. If the current surge in German tax revenues reveals anything, it is that Schroeder’s tax cuts helped produce much more revenue through greater economic growth.

Germany’s current economic good times give Merkel and her “Grand Coalition” a fantastic window of opportunity. Unlike Schroeder, who passed reforms when times were tough, Merkel can pass reforms that will intensify what is already an impressive economic boom, without overheating the economy. Should Merkel implement fundamental reforms, unlike Schroeder, she is likely to still be in office when Germany reaps their benefits. All the more reason for Merkel to start being as much of an economic reformer as her center-left predecessor was.

Jurgen Reinhoudt is a research assistant at the American Enterprise Institute.