Merkel, Schroeder claim win in German election

Voters plunged Germany into political limbo yesterday, splitting their ballots between Angela Merkel's Conservatives and Chancellor Gerhard Schroeder's Social Democrats (SPD) so evenly that both claimed victory.

Projections at 11:15 p.m. (2115 GMT) gave Ms Merkel's Conservatives a two- to three-seat advantage over Mr Schroeder's SPD - far short of the number she needed to form a governing coalition with her preferred partner, the liberal FDP.

The neck-and-neck result, which no pre-election polls had predicted, is likely to bring many weeks of political uncertainty, which could weigh on financial markets.

"Germany faces difficult times because the formation of a new government will be tough," said Thomas Straubhaar, head of the Hamburg-based HWWA economic research institute.

"Whatever emerges will be comparatively unstable."

The most likely outcome appeared to be a so-called "grand coalition" between Ms Merkel's Christian Democrats (CDU), their sister party, the Christian Social Union (CSU), and the SPD.

But neither Ms Merkel, 51, nor a defiant Schroeder, 61, seemed prepared for the compromise and cooperation necessary to link up with each other in an alliance that would normally put the strongest party's candidate in the chancellery.

Projections gave Ms Merkel's Conservatives the biggest share of the vote at around 35.1 per cent; the liberal Free Democrats (FDP) who they had wanted to link up with around 10 per cent; Mr Schroeder's SPD around 34.2 per cent, their partners the Greens 8.2 per cent and the new Left Party around 8.6 per cent.

"We are the strongest party and have responsibility for forming the next government," said Ms Merkel, the pastor's daughter from the former communist East Germany, who may yet become Germany's first woman chancellor.

But a beaming Mr Schroeder told cheering SPD members: "There will be no coalition under her leadership with my Social Democrats...

"I don't understand, and I am certain the people of Germany also don't understand, how the Conservatives can claim a mandate to lead from such a disastrous result..."

Germans may have to wait weeks to know the shape of their next government.

Voting in one district in the eastern city of Dresden has been delayed until October 2 because of the death of a candidate and that by-election could now be decisive.

Whatever constellation results, the vote appears to be a blow to those who had been seeking a clear shift after seven years of Red-Green government under Mr Schroeder.

German growth is now the slowest in the 25-nation European Union, unemployment went above the five-million mark earlier this year for the first time in the post-war era, and the deficit is set to breach EU limits for the fourth straight year. Ms Merkel had argued that Germany should accelerate reforms that Mr Schroeder introduced. She vowed to cut bureaucracy, ease rules on firing and cut payroll costs to reinvigorate Germany's economy - a path that some experts thought other countries in Europe might follow if she was successful.

But voters appear to have bought Mr Schroeder's warnings that Ms Merkel would dismantle their cherished social welfare system, effectively redistributing money from the poor to the rich.

Yesterday's result shows they rejected her approach in favour of a more cautious path, which financial markets fear will not bring the far-reaching change Ms Merkel had promised.

The euro slipped in early Asian trading and investors predicted damage to stocks when trading begins in Europe. "It's not exactly a dream result for markets and will lead to disillusion on the stock market," said Frank Schallenberger, equity strategist at LBBW.

"Many market players had hoped for a Conservative-led government pressing faster for reforms."

In foreign policy, Ms Merkel had vowed to improve ties with Washington, strained by Mr Schroeder's vocal opposition to the Iraq war, and prevent Turkey joining the European Union. Whether she will be able to see these policies through is now questionable. There are other constellations besides a "grand coalition" that could work, but none have been tried at the national level and all could breed instability. Mr Schroeder could try to seal a so-called "traffic-light" coalition with the Greens and the liberal FDP, which did far better than anticipated. But FDP chief Guido Westerwelle categorically ruled out such an alliance yesterday.

Ms Merkel's Conservatives and the FDP could also try to woo the Greens, but analysts said that was highly unlikely.

Another option that cannot be ruled out is brand new elections, if after weeks of coalition negotiations none of the major parties are able to form a majority government. This has never happened in the post-war Germany.