Merkel, Schroeder dig in as Germany waits

By Noah Barkin and Mark John

BERLIN (Reuters) – German Chancellor Gerhard Schroeder and
conservative leader Angela Merkel said they would talk to each
other on forming a new government after Sunday’s election
stalemate, but each insisted on leading it.

Merkel, still looking subdued and shocked after an
unexpectedly poor showing in the vote, struck a conciliatory
tone in promising to talk with all parties except the far-left
Left Party.

“We don’t have a preference,” she told reporters, insisting
however that her Christian Democrats (CDU) and their sister
Christian Social Union (CSU) had come out on top in the vote,
giving her the right to replace Schroeder as chancellor.

Schroeder’s Social Democrats (SPD), energized by a result
that put them just a percentage point behind Merkel’s party
despite forecasts of a blow-out, continued to sound defiant.

“It is clear that Germans do not want Mrs Merkel as their
chancellor,” SPD chief Franz Muentefering told a news briefing.
“We have a responsibility to make clear that we want to rule
with Mr Schroeder as chancellor and implement much of that
which we have undertaken to do.”

The likeliest outcome to Germany’s most inconclusive
election in the post-war era remains a “grand coalition” of the
CDU/CSU and SPD.

OCTOBER DEADLINE

But divergences between the parties — not only about who
should lead but also over CDU pledges to free up the labor
market and its opposition to Turkey joining the European Union
– could prevent any accord before an October 18 deadline for
the new parliament to sit.

The weeks leading up to that date will be characterized by
much grandstanding and hard-nosed politics, as the SPD, CDU/CSU
and their potential partners, the liberal Free Democrats (FDP)
and Greens, manoeuvre to get the most out of the talks.

Both the Greens and the FDP, which with nearly 10 percent
did far better than anticipated, will now be wooed by rival
camps, although leaders from both parties vowed on Monday not
to be lured into a three-way coalition.

In the meantime, the uncertainty weighed heavily on
financial markets, which before the election had hoped for a
clean sweep by Merkel’s conservatives and the FDP — a grouping
that had vowed deep economic reforms.

The euro currency fell over one percent to a 7-week low
against the dollar on Monday, while German stocks shed 0.8
percent, underperforming shares across Europe. German utility
and auto stocks were particularly hard hit.

“On balance, the only certainty is a period of uncertainty
ahead,” said economists at Credit Suisse First Boston.

Bank of America predicted further losses on equity and
foreign exchange markets.

“Whatever the color of Germany’s new government will
ultimately be, the pace of structural reforms is likely to be
slow,” economist Holger Schmieding said.

UNUSUAL POSSIBILITIES

Schroeder’s SPD won three fewer parliamentary seats than
Merkel’s conservatives, trailing them by a percentage point.

The stalemate prompted talk of coalitions that have never
been seen before in Germany. The only plausible alternatives to
a grand coalition involve either the CDU/CSU or the SPD
managing to draw both the leftist-environmentalist Greens and
the free-market FDP in from opposite ends of the spectrum.

Leading SPD members suggested the FDP, whose 9.8 percent of
the vote made them the third-strongest party, could be lured
into government with Schroeder and the Greens.

“We have points in common with the FDP, particularly when
it comes to tax,” SPD Interior Minister Otto Schily told
reporters.

The long-term impact of the election on German foreign
policy is unclear, although Turkey reveled on Monday in
Merkel’s failure to secure a clear victory.

Unlike Schroeder, Merkel opposes Turkish entry into the
European Union, and Turkey had feared a clear win for her would
have doomed its long-standing bid to join the 25-nation bloc

“It was an auspicious result for the EU process,” Turkish
Prime Minister Tayyip Erdogan said.

In other countries, the reaction was less cheerful.

In an editorial headlined “The worst result,” Britain’s
Times newspaper said the uncertain outcome was “probably the
worst possible for the country and for the cause of reform.”

The Italian newspaper Il Messagero wrote: “If this is a
foretaste of a future trend in Europe, there is nothing to be
cheerful about.”