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.