When the German Chancellor, Mr Gerhard Schroder, stood alongside his wife Doris to wave goodbye to his guests after the Cologne summit this week, he acknowledged that his sights would now shift from the lofty uplands of international diplomacy to the dreary plains of domestic politics.

As president of the European Council and the Group of Eight, the Chancellor became a key figure in the search for a diplomatic solution to the Kosovo conflict. Within six months he was transformed from an inexperienced regional politician into an impressive international statesman.

"Now I'll concern myself with domestic issues and I'll do that just as well as foreign policy," he declared.

The first test will come this morning, when the Finance Minister, Mr Hans Eichel, will announce measures to curb the massive public debt.

Presented as the biggest budget reform since 1945, the plan will cut a staggering DM30 billion (£12.08 billion) from public spending, but will ease the tax burden on families and companies alike. Much of the cost of these cuts will be borne by the old and the poor, as the centre-left coalition trims pensions and unemployment benefits.

Mr Schroder attempted yesterday to present the budget as evidence that his government had finally found its feet after a shaky start and was ready to take decisive action to put Germany on its feet again.

But all the evidence points in the other direction - to a government plunged into chaos by internal divisions, personal rivalry and sheer incompetence. The atmosphere within the cabinet is sulphurous, as ministers accuse the Chancellor and his inner circle of intriguing against them.

Mr Schroder has backtracked on one coalition commitment after another, from the promise to allow foreign residents to hold dual citizenship to the government's pledge to shut down all of Germany's nuclear power stations as soon as possible. Most of his U-turns have been a hurried response to public opinion or adverse comment in the mass-circulation daily Bild.

Now that the former finance minister, Mr Oskar Lafontaine, has retreated into private life Mr Schroder's most turbulent cabinet colleague is the Environment Minister, Mr Jurgen Trittin.

The Chancellor threatened to sack the Green minister last week after the Volkswagen chairman, Mr Ferdinand Piech, complained about a plan to oblige car manufacturers to dispose of old cars free of charge.

The plan is a draft EU directive backed by most European environment ministers, but the Chancellor promised his old friends in the motor industry that he would lobby to have it watered down.

When Mr Trittin was less than energetic in persuading his EU colleagues to modify the proposal, the VW boss complained to the Chancellor that the government was breaking its word to the industry.

The Chancellor and the Environment Minister are also at odds over the pace of their planned shutdown of Germany's 19 nuclear power stations.

Under pressure from the energy companies, Mr Schroder has agreed that each nuclear plant should have a total life span of 35 years, so that the last nuclear power station would not close until 2024.

Mr Trittin argues that such a phased closure of the plants is not enough to satisfy Green voters, who expect their environmental concerns to be reflected in government policy.

The old-age pensioners and unemployed who voted for Mr Schroder's Social Democrats had good reason to hope that their interests would be protected by the new government. After all, Mr Schroder made much in his campaign speeches of his commitment to protect the "poor, old widows" and the sick.

Mr Eichel will not cut pensions or other benefits but, for at least the next two years, they will rise in line with inflation rather than, as before, with the general level of wage increases. This will save almost DM13 billion.

Mr Schroder justifies these cuts on the basis of his commitment to Third Way policies, known in Germany as die neue Mitte, or the New Centre. Just before their parties' catastrophic performance in the European elections, Mr Schroder and the British Prime Minister, Mr Blair, published a joint paper calling for flexible labour markets and for the public to show more self-reliance in providing for their futures.

In this spirit the Labour Minister, Mr Walter Riester, proposed that all German workers should be obliged to make private pension payments alongside their state pensions.

Bild did not like the plan and, as the opposition Christian Democrats threatened street protests, Mr Schroder's henchmen whispered to the press that the Labour Minister's future was in doubt.

By yesterday, the compulsory private pension scheme had been finally put to rest, leaving Mr Riester a wiser, disappointed man.

Despite Mr Schroder's a la carte approach to the politics of die neue Mitte, he has won the hearts of the bankers and bosses of Frankfurt, who are confident that the Chancellor will champion their interests.

They are expecting more good news today, when Mr Eichel announces sweeping cuts in corporate tax rates - possibly reducing the top rate from 60 to 35 per cent.

It remains to be seen whether industry will reciprocate the government's generosity by creating the jobs and training places the Chancellor needs to make a success of his much-trumpeted "Alliance for Jobs".

The alliance, which brings together employers, trade unions and the government, has yet to bear fruit. Its next meeting, on July 6th, could be crucial.

Mr Schroder was elected, above all, on a pledge to cut Germany's dole queues. If he fails to deliver on this, the Chancellor's considerable charm and telegenic appeal will not be sufficient to save him from the wrath of a weary, exasperated public.