They used to call Oskar Lafontaine the Napoleon of the Saar: The descendant of a Napoleonic soldier, he even looks rather like Bonaparte.

His sudden

Waterloo

Thursday afternoon has shocked all of Germany and much of Europe. Lafontaine resigned not only as finance minister but also as chairman of the ruling

Social Democratic Party

, or SPD. He has even decided to give up his seat in the German parliament. His resignation is thus not a tactical retreat, undertaken with the short- or medium-term aim of regaining power. If it was that, he would not have abandoned the party leadership.

Instead, his departure resolves a key ambiguity -- one that has dogged the German government ever since it took office -- regarding the needs of industry. Lafontaine's own deeply held Keynesian beliefs, combined with the

Green Party's

love of punitive taxes on energy, produced policies that were decidedly hostile to the requirements of the economy.

In contrast to this anti-industry wing of the coalition,

Chancellor Gerhard Schroeder

himself was a market-friendly front man who the SPD used to win the election. In some respects, Lafontaine was the boss -- until the election had been won. After that, he discovered that the office of Chancellor prevailed -- even over the office of party leader.

This issue had been simmering away behind the scenes until the government suffered two spectacular defeats. SPD lost an important regional election in Hessen, where it had been the traditional party of power, over the question of whether to allow naturalized foreigners to maintain dual nationality. The party was also forced to water down its plans to rapidly abandon nuclear energy.

These setbacks were due in no small part to the extraordinary vigor with which the

Christian Democrat

opposition picked itself up after its defeat; they found a new leader and immediately set about opposing the government. The contrast with the British

Conservative Party

, still paralyzed by the shock of defeat nearly two years ago, could not be greater.

The defeats naturally created tension in the cabinet. Wednesday morning, there was, by all accounts, a severe argument between Schroeder and Lafontaine. The rumor in Bonn Thursday morning was that Schroeder himself had threatened to resign. The German newspaper

Die Welt

reported that Schroeder said he would "no longer take responsibility" for policies which, being bad for the economy, were "against the majority of the people." Government spokesmen, however, denied that an argument took place.

The suddenness and decisiveness of Lafontaine's departure is an indication of the degree of panic that has gripped the German government and industrial circles. Lafontaine was a red flag to the German industrial bull. Not only were his tax policies suffocating an economy already dying on its feet but, above all, Lafontaine's belligerent

attitude toward the

European Central Bank

, or ECB, threatened the only route by which Germany might escape its long-term structural problems -- European monetary union.

As former Italian Foreign Minister and Harvard economics professor, Antonio Martino told the

BBC

Thursday morning, the weakness of the euro was the direct result of the open arguments which had broken out between the ECB and Lafontaine. German industry and the German government reasoned that, without a euro which enjoyed the confidence of the markets, their master plan for overcoming the constraints of an economy where domestic demand is weak, and where wage costs are stubbornly high, would be in tatters. For jeopardizing the euro, Lafontaine had to go.

Thus his resignation has been greeted with delight by market-friendly politicians and by the representatives of big business. The leader of the opposition,

Wolfgang Schauble

, says the resignation demonstrates the utter lack of substance in the present government. The president of the German Federation of Industry,

Hans-Olaf Henkel

, says, "This gives us hope that the reform-friendly wing of the coalition will be strengthened." The leader of the small free-market FDP-Liberal party said that Lafontaine's Keynesian policies were wrecking the budget and endangering investment in Germany.

One of the most immediate questions Chancellor Schroeder will have to answer is whether to take over control of the governing Social Democratic Party. Historical precedent suggests that he should. The main source of Helmut Kohl's extraordinary political longevity (he was Chancellor for 16 years until last September) was that he controlled the Christian Democrat Party, a machine he skillfully manipulated as a vehicle for his own power. By contrast, when

Helmut Schmidt

was Chancellor, he left control of the SPD in the hands of

Willy Brandt

-- a decision that, ultimately, was one of the causes of his downfall. One prominent SPD politician has already predicted that there is no alternative to Schroeder becoming leader of the SPD.

If he does take over the party, this will only underline how facile comparisons are between Schroeder and

Tony Blair

or Schroeder and

Bill Clinton

. Blair spent years modernizing his party before assuming power: Schroeder will be taking on an unmodernized, broadly antimarket party, and will have to drag it behind his own unambiguously pro-market policies, inventing reform as he goes.

And there is a broader reason why easy slogans about Schroeder fail to capture the difficulty of his position: Unlike Blair or Clinton, Schroeder is running a nation which has never been governed by a

Ronald Reagan

or a

Margaret Thatcher

.

John Laughland is a commentator on European political and economic affairs. He has written for several British national dailies and published two books, The Death of Politics: France Under Mitterand and, most recently, The Tainted Source: The Undemocratic Origins of the European Idea.