GERMANY made an impression in the Middle East in 1995 with its high-profile support for the peace process. More recently, it has been preoccupied with what can best be described as damage limitation in its relations with Iran, leaving little time for initiatives in other parts to the region.

'With the peace process, Bonn set a new emphasis in its Middle East policy,' says Udo Steinbach, director of the German Oriental Institute in Hamburg. 'Because of our special relationship with Israel, we had not been politically very active. Now for the first time, the government used political overtones.' He refers to Chancellor Helmut Kohl's visit to the Palestinian self-rule areas in 1995, to the enthusiastic involvement of German aid agencies in water projects there, and the fact that Germany was the first country to set up a representative office in Jericho.

All this was in 1995. 'Since then, the initiative has gone to sleep. The people in Bonn lack ideas,' Steinbach says. The Foreign Ministry has shown little enthusiasm for France's recent initiative to push for a greater EU role in the peace negotiations and is not keen to comment on renewed violence between Israelis and Palestinians.

Germany's historically co-operative attitude to Israel still dominates official policy in the region, but advocates of a more pro-Palestinian approach have taken heart from what they see as encouraging signs. In a recent television interview, a junior foreign minister called for the EU to use its free trade and co-operation agreement with Israel to exercise political pressure, pointing to discussions which have taken place inside the ministry.

Iran has dominated the Middle East policy agenda this year, as German relations with one of its most important partners in the region have hit one of their periodic lows. To the irritation of the US and Israel, Bonn has maintained a critical dialogue with Iran, in the hope that Iran's human rights record can be improved while German interests are preserved. 'This led to the exchange of prisoners and bodies with Hezbollah [and Israel in the summer]. It is seen by Bonn as a significant result of this approach,' says Steinbach.

However, relations have soured considerably since the federal prosecutor issued an arrest warrant against a member of the Iranian cabinet for an alleged plot to murder four people in Berlin in 1992. 'While the trial is going on, we are stuck. We are waiting for the presentation of the prosecutor,' Steinbach says. In the worst-case scenario, the prosecutor will accuse Iran of state terrorism, ruining any chance of repairing relations soon (see page 39).

Less interest in Libya

By contrast, a similar affair with Libya has made few waves. A state prosecutor accused Libya of state terrorism in October when issuing arrest warrants against four Libyan nationals in connection with the bombing of a Berlin nightclub in 1986. The case attracted minimal media coverage. As a buyer of large quantities of Libyan oil, Germany has nurtured friendly and low-profile relations with the North African country. Sources say that a former member of parliament has been working on a diplomatic initiative behind the scenes in recent weeks, in the hope of negotiating a solution to the Lockerbie affair which has led to the imposition of UN sanctions on Libya and the threat of even tighter restrictions.

Bonn's Mediterranean policy initiative has also fallen victim to the preoccupation with Iran. In the run-up to the 1995 Barcelona conference, charities connected with the powerful political parties launched several projects to promote a regional approach in the Mediterranean, but interest has since died down. The continued civil strife in Algeria has worked as a deterrent against getting involved too deeply. 'We prefer to keep out. The French take care of that,' says Steinbach.

The government tries hard to maintain a non-partisan approach to Algeria. The courts have granted asylum to Islamic Salvation Front (FIS) leader Rabah Kebir, sought by the Algerian authorities for terrorism offences, although the authorities rarely enforce a ban that is supposed to prevent him from making political statements. At the same time, two sons of another FIS leader are standing trial for their alleged involvement in arms trafficking to Algerian rebels, further fuelling the public debate over the rights of asylum seekers and the presence of a large number of foreigners in Germany.

However, the debate which dominates all others is about how Germany needs to change to meet the challenges of a global economy. Unemployment stands at 3.9 million, or just over 10 per cent, and economists say the causes of it are largely structural. 'High salary costs, rigid protection against redundancies and other regulations prevent new hirings,' says Frankfurt- based Commerzbank in its September economic report.

Chancellor Kohl, who on 31 October became Germany's longest-serving post- war chancellor, is trying to strike a balance between protecting traditional institutions and removing the barriers that discourage job creation. His coalition government launched a 'programme for greater growth and employment' in April 1996 to address some of the problems, and has passed a law to cut statutory sick pay by 20 per cent. But it has also been careful to emphasise the continued value of the trade unions, which have played a central role in shaping Germany's post- war economic policy. Measures under the growth programme include reducing the public sector share of total spending to 46 per cent, from 50 per cent at present, and the reduction of non-wage labour costs to 40 per cent of gross wages by 2000.

There is still a danger that such measures are too little and too late for the German companies that have taken their investment money elsewhere. The German motor industry has been investing heavily in Eastern European countries and the UK, where wages are much lower. In a sign of mounting corporate frustration, a group of metal industry companies pre-empted the government by slashing sick pay entitlements unilaterally. The companies, led by the transport division of Daimler-Benz, were obliged to back down after strikes in October, but the episode has cast a pall over the future viability of the German system of co-operation between unions and employers.

Regardless of government policies, employment patterns are already changing. Large companies are steadily reducing staffing levels and are contracting out more services as an alternative to hiring people themselves. As a result, more Germans are becoming self-employed and these workers tend to have little sympathy for protected employees who work only 35 hours a week.

The labour market is also being distorted by the state's efforts to reconcile the need for an increasing number of healthcare workers with its efforts to cut spending on salaries. The solution is a uniquely German one. It entails increasing the number of young men drafted for military service and using the many conscientious objectors as helpers in the health sector where they work for pocket-money wages. Cost-free labour is also supplied by students, who spend a large part of their study period gaining work experience in private companies.

Further changes are being forced upon Germany by the EU, which is demanding that state-controlled infrastructure should be opened up to the private sector. The monopolies are not giving up without a struggle. Deutsche Telekom has prosecuted out of business a small company that was attempting to set up a directory enquiries service, but change is inevitable. Telekom will be partly owned by private investors after its imminent flotation and the telecommunications sector will be fully liberalised in early 1998 under EU law. A regulation to allow large electricity users to choose their suppliers is also being debated.

Exchange rate: $1=DM 1.5234 (Oct 1996)