Engholm was elected Minister-President of Schleswig-Holstein in 1988, in the wake of the Barschel affair/Waterkantgate: he had been spied on and was a victim of severe defamation (HIV infection, tax evasion, etc.) by the Barschel campaign. The Social Democrats won an impressive 54.2% (up almost 10%) and gained an absolute majority for the first time ever. Engholm served as President of the Bundesrat in 1988/89.
While Engholm was popular with the electorate, he was forced to resign as party leader and Minister-President in 1993 after discrepancies surfaced over the testimonies he gave in the Barschel affair (Schubladenaffäre, drawer affair). A party official had paid DM 50.000 (kept in a kitchen drawer) to the spy of the Barschel affair to keep the espionage a secret for several weeks, to reveal the scandal on election weekend with a bigger impact and the present Engholm as a victim.