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Germany's main parties meet to decide who governs
Updated: 2005-09-22 14:23

German Chancellor Gerhard Schroeder's Social Democrats and Angela Merkel's conservative Christian Democrats meet on Thursday for the first time since inconclusive elections to try resolve disputes over who should run the country, Reuters reported.

But with the two leading parties apparently still far apart after Sunday's elections, warnings mounted from industry that political deadlock could hit growth and investment in Europe's largest economy, already stagnating and in need of reform.

Burning issues blocking a "grand coalition" between the two sides are Schroeder's insistence on remaining chancellor despite being edged by the Christian Democrats (CDU) at the polls and Merkel's refusal to do a deal without getting the top post.

Some unidentified Social Democrat (SPD) politicians were quoted by the Financial Times as saying they might agree to sacrifice Schroeder and join a CDU-led "grand coalition" in exchange for an assurance Merkel would not be chancellor.

They also wanted a range of concessions from the CDU, including a watering down of its labor market reforms, said the newspaper.

No immediate comment was available from either party on the report, but the Financial Times quoted what it called a CDU insider as saying: "This sounds very much like extortion."


At stake is an economy once seen as Europe's motor but which has flagged badly in the past few years. Growth is now the slowest in the European Union and unemployment topped the 5-million mark this year for the first time in the post-war era.

Markets fear a "grand coalition" with the SPD would doom Merkel's plans to push through aggressive reforms of Germany's labor market, including breaking the power of unions to set wages across whole sectors, and the tax system.

Last year Schroeder launched pension, health and labor reforms to try to fire up the economy. But the unpopular measures cost his party regional elections, triggering his decision to seek a new mandate in Sunday's elections.

As neither Schroeder's center-left alliance nor Merkel's center-right alternative won a parliamentary majority, the conservatives must join the SPD or each must convince the other's partner, the Greens and the Free Democrats (FDP), to switch camps.

On Wednesday, SPD chief Franz Muentefering stuck by the party's insistence that Schroeder, who has painted Merkel as a cold radical bent on dismantling the welfare state, should head the next government.

A leading CDU member said he would prefer a coalition with the liberal FDP and environmentalist Greens to a "grand coalition" with the SPD.

"It is not a tactical ploy, but a realistic option," Wolfgang Schaeuble, deputy leader of the CDU in parliament, told the business daily Handelsblatt. "A grand coalition would be the alternative and far less desirable."

The uncertainty surrounding the shape of the next government has weighed on the euro currency and German stocks.

Warnings grew over the risks of prolonged political inertia.

"Should coalition-building talks drag, or if the new government falters because of a fragile or shrinking majority, this could further unsettle consumers and above all investors considerably," the Essen-based RWI economic institute said.

Many analysts say political stalemate in Germany could hinder EU-level decisions on reforms needed to boost the 25-nation bloc's struggling economy and re-energize the EU after the rejection of a planned constitution.

The new parliament must convene by October 18 at the latest, by which time any would-be chancellor would hope to have a coalition in place.

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