Stoiber bows out

Germany's top parties yesterday pledged to press on with trying to form a government as fears grew that a leadership crisis in the Social Democrats and the withdrawal of a top conservative would doom coalition plans.

Efforts to forge a bipartisan "grand coalition" of conservatives (CDU/CSU) and Social Democrats (SPD) suffered a major setback on Monday when SPD chief Franz Muentefering announced he would step aside as party leader.

Mr Muentefering expressed a willingness to participate in a new government but his resignation sparked a leadership crisis within the SPD and prompted influential Bavarian premier Edmund Stoiber yesterday to abandon his plan to serve as economy minister, deepening the sense of crisis.

"The course of the SPD and its reliability is not so clear anymore," Mr Stoiber told reporters yesterday after a meeting of his Christian Social Union (CSU). He said Michael Glos, a top CSU figure in parliament, would take his spot as Economy Minister in a new Cabinet.

Mr Stoiber has been one of conservative leader and chancellor-designate Angela Merkel's staunchest allies since an inconclusive September 18 election forced Germany's top two parties into coalition talks.

He had also played a leading role in the negotiations and his decision to back out could complicate her efforts to seal a coalition deal. From his stronghold in Munich, Mr Stoiber may also emerge as a tough Merkel critic should she become chancellor as head of a fragile coalition.

In a brief statement yesterday, she said she accepted Mr Stoiber's decision and pledged to push ahead with negotiations, while admitting the task had become difficult.

"I sense a desire in the SPD to continue the talks on forming a grand coalition. Based on that, I am still assuming we can bring these talks to a successful conclusion," she said. Germany's conservatives and the SPD were forced into talks after the general election result left them with few viable alternatives for a stable government.

Those talks have now entered a crucial phase, with both camps under pressure to reach a consensus on policies before a self-imposed November 12 deadline.

Muentefering, seen as a level-headed broker capable of forging consensus with the conservatives, threw those plans into disarray by announcing he would step aside after SPD members voted down his candidate for the party's number two job.

He said in a letter to the party yesterday that he stood ready to help the SPD make a transition to a younger generation of leaders and left open the possibility of serving in a future coalition government, but the damage may already be done.

Should the talks collapse, the big parties could explore other alliance possibilities with smaller parties like the Free Democrats (FDP) or Greens. If those efforts were to fail, the country could face new elections.

The uncertainty weighed on German stocks, which underperformed other European bourses yesterday, and economists warned it could hurt the euro currency if it persisted.

Further delays in forming a government could hit the German economy, which has one of the weakest growth rates in the 25-nation European Union.

It could also aggravate the country's stubborn unemployment problem. The German jobless rate currently stands at 11.7 per cent.

The SPD must now settle on a replacement for Mr Muentefering and decide whether it wants to continue down the centrist course that he and outgoing Chancellor Gerhard Schroeder steered - all while conducting coalition talks with its longtime rivals.