September 19, 2005

Germany faces power struggle after vote

By Mark John

BERLIN (Reuters) - Germany girded for a weeks-long battle
for power on Monday after a general election gave Angela
Merkel's conservatives a victory so narrow that Chancellor
Gerhard Schroeder refused to concede defeat.

Merkel's lead of just three parliamentary seats on
Schroeder's SPD dismayed financial markets, who feared a
stalemate blocking economic reform. The euro slid nearly one
percent to a 7-week low against the dollar and Frankfurt
dealers said German shares fell some 2.3 percent in pre-bourse

Easterner Merkel will have the first shot at forming a
government but the ambitious tax and labor reforms she pledged
on the campaign trail could be sacrificed in the political
deals she would need to cut to become Germany's first woman

An exuberant Schroeder, buoyed by a better-than-expected
result, vowed his Social Democrats would never enter a
coalition under Merkel and told his party lieutenants to study
options on Monday for a power-sharing government under his

"War of the chancellors," top-selling German daily Bild
said in its headline. "Coalition Chaos in Berlin" declared
business daily Handelsblatt, arguing that Merkel's
conservatives had been denied a clear mandate to reform
Europe's largest economy.

The Sueeddeutsche Zeitung said the weeks ahead would belong
to "the Machiavellians and the grand strategists" and warned
any Merkel government would be weakened before it entered

Early official results showed Merkel's conservatives scored
just 35.2 percent, less than a point ahead of the SPD and up to
14 points down on her poll ratings before a campaign which
critics said lacked charisma and was ridden with gaffes.

The likeliest outcome of Germany's most inconclusive
postwar election seemed to be a "grand coalition" of Merkel's
Christian Democrats (CDU), their sister party, the Christian
Social Union (CSU), and Schroeder's Social Democrats (SPD).


But hostilities between Germany's top two parties, after an
unusually nasty campaign, could prevent any grand coalition
before October 18, the deadline by which the new parliament
must sit and traditionally chooses a chancellor.

"Do you really think my party would take up an offer for
talks from Frau Merkel?" Schroeder declared on Sunday night.

"The strongest party in parliament has the job of forming
the government," countered a grim-looking Merkel. "I'll find a
way to talk with the Social Democrats."

If all attempts at coalition-building fail, the only way
out would be new elections -- a first for postwar Germany.

Merkel had vowed to cut bureaucracy, ease rules on firing
and cut payroll costs to reinvigorate a German economy that has
gone from Europe's powerhouse to its weak link. Schroeder
insisted his more gradual reforms were starting to show

Countries like France and Italy had been watching the
election closely, eager to see which path Germans chose -- the
liberal, unregulated route favored in the United States and
Britain or the state-heavy role preferred in much of Europe.

In Asian trade, the euro fell nearly one percent to
$1.2113, from $1.2232 late in New York on Friday. That was the
lowest since July 29.

Valerie Plagnol, chief economist at French broker CM-CIC
Securities, described the outcome as "the worst case scenario."

"There's no certainty whatsoever on whether these parties
can agree to form a coalition, whether this coalition can agree
on an economic program, and if this program will at least be a
continuation of the reforms initiated by Schroeder," she said.

The election's impact on German foreign policy is less
clear. Merkel vowed to improve ties with Washington, strained
by Schroeder's vocal opposition to the Iraq war, and prevent
Turkey from joining the European Union. Whether she will be
able to see these policies through is now questionable.

The tight result immediately set off speculation about new
coalition possibilities, some never seen before.

Schroeder could seek a so-called "traffic-light" coalition
with the Greens and pro-business FDP, whose 9.8 percent score
was better than expected. FDP chief Guido Westerwelle ruled out
such an alliance on Sunday but faces pressure to reconsider.

"With the surprisingly good result they scored, the FDP
cannot say they will stay out of the search for a stable
government," SPD board member Sigmar Gabriel told German radio.

Merkel's conservatives and the FDP could also try to woo
the Greens into what commentators have dubbed a "Jamaica"
coalition because the colours of the parties match the
black-green-yellow of the Jamaican flag.