A new direction for Germany

The victory for the centre-right in Germany gives Chancellor Angela Merkel the chance to give the country a new direction without the in-built constraints of the outgoing 'grand coalition'.

The two clear winners in this election were Merkel's Christian Democrats and the liberal Free Democrats led by Guido Westerwelle. Merkel got what she campaigned for - a parliamentary majority for these two centre-right parties despite an electoral trend against the large parties and despite the fact that Germany was badly affected by the global economic crisis. Westerwelle's FDP enjoyed its best result ever and increased its share of the vote from 9.8 to 14.6 per cent.

Merkel was always much more popular than the Social Democratic candidate for Chancellor, Frank-Walter Steinmeier - her Foreign Minister in the outgoing 'grand coalition'. Merkel is considered by many Germans to be a "safe pair of hands", who skilfully guided the country through its economic crisis and who sought compromise and consensus. Cleverly, Merkel also stole the Left's clothes during the campaign. At the recent G20 meeting, for example, she insisted on bonuses to be capped and closer regulation of global finance.

Although the Christian Democrats' share of the vote decreased marginally from 35.2 to 33.8 per cent, the Social Democrats suffered their worst post-war electoral defeat and received a humiliating 23 per cent of the vote compared to 34.2 per cent in 2005.

The SDP, like many other European social democratic parties, now has to undergo a major soul-searching exercise. It must get to terms with the fact that despite a major economic crisis where some people actually questioned the future of capitalism, the German electorate turned to the centre-right and not in the opposite direction.

Many traditional SPD voters, however, also abandoned the party for other parties of the Left. The Greens increased their share of the vote from 8.1 to 10.7 per cent and the Left Party - made up of former Communists and left-wing SPD dissidents - got a respectable 11.9 per cent of the vote compared to 8.7 per cent four years ago.

The rise of the Left Party should be of considerable concern to the SPD, which has to decide whether to arrive at some sort of compromise with or keep its distance from this new movement. There are political risks either way.

Merkel always said that only a coalition between her Christian Democrats and the pro-business FDP could bring about the economic reforms that Germany needs. Now that she is no longer constrained by the Social Democrats in a 'grand coalition' she can show the country what she really believes in and give it a new direction.

The question most analysts are asking is: How different will this Merkel government be from the outgoing one? In her first term as Chancellor, Merkel adopted a cautious middle-of-the-road approach, pumped money into the economy to safeguard jobs and criticised the "Anglo-Saxon" model of capitalism for being responsible for the global financial crisis.

True, she governed in coalition with the Social Democrats, so her room for manoeuvre was limited, but still, she never showed any Thatcherite instincts either in government or during the campaign.

Merkel will now govern with the Free Democrats who believe in lower taxes, less regulation, a more flexible labour market and less government intervention in the economy.

Broadly speaking, Merkel agrees with most of these policies but will be more cautious than her liberal allies. However, she now has an opportunity to bring about a number of economic reforms and to take on board many of the FDP's proposals, which will hopefully kick-start the German economy, Europe's largest.

Merkel has already said she won't reverse the middle-of-the-road policies adopted by the 'grand coalition' of the last four years, such as minimum wages in the services sectors.

What she will do, she stressed, is to implement new policies over which there was no agreement with the Social Democrats in the outgoing government, such as tax cuts. But even here, the Christian Democrats say there will have to be a balance between tax cuts and sustainable public finances.

In foreign policy we can expect continuity, although there might be a more hostile attitude towards Russia coming from the FDP.

Certainly there will be a new direction in Berlin, but I doubt there will be a radical policy shift. One has to keep in mind that Germany is a federal Republic where power is diffused down to the state level.

Furthermore, Merkel's majority in the Bundesrat (Parliament's upper house) is slim and could disappear after next year's election in the state of North-Rhine Westphalia.

I believe Merkel will keep her centrist political orientation but at the same time will have to be bold and show German voters she can make a difference with this centre-right coalition.