Chancellor Angela Merkel could find it more difficult to deliver on key elements of her policy agenda if she wins a second term next month and ends up forming the centre-right "dream coalition" that eluded her in 2005.

Germany's Free Democrats (FDP), who favour small government and free markets, are Ms Merkel's partner of choice in a campaign that pits her against the Social Democrats (SPD), the party with which she has ruled for the past four years.

That is because the FDP more closely mirrors the views of Ms Merkel and her Christian Democrats (CDU) on a range of economic issues at a time of global crisis, from privatisations to taxes and industrial policy.

But people close to the chancellor acknowledge that after pulling her party to the left during her first term, she now has more in common with the SPD on a host of other key issues, including climate change, financial market reform, domestic security, family policy and the future of carmaker Opel.

That has left her more pragmatic than is commonly assumed about the merits of the two most likely post-election constellations - a CDU partnership with the FDP or SPD.

"She wants a coalition with the FDP because she believes the big challenge in the next legislative period will be to deal with the impact of the crisis and on economic policy there is simply more common ground," said one official close to her.

"But she knows the climate will not necessarily be better with the FDP and expects them to push aggressively for what they want. She is under no illusions that it would get easier, nicer or more harmonious," the official added, requesting anonymity.

Even on the economy, there is potential for conflict. Like the FDP, Ms Merkel has promised to pursue tax relief, but on a far smaller scale than her preferred partners want.

And she no longer advocates making it easier for firms to lay off workers, a step the FDP is demanding.

When MsMerkel's conservatives scraped by the SPD in the 2005 election and were forced into Germany's first right-left coalition since the 1960s, the assumption was that it would be a recipe for infighting and gridlock.

But after four years, it is the coalition's achievements that stand out more than its failures, especially when measured against the low expectations that greeted it.

Ms Merkel and the SPD pushed through an increase in the retirement age to 67 and came close to balancing the federal budget before the crisis hit and sent the deficit soaring.

Perhaps the coalition's biggest accomplishment has been its handling of the crisis itself.

Many within the CDU fear Ms Merkel's coalition with the SPD has outlived its usefulness, having already tackled many of the issues where compromise was possible.

Amid the common ground, big differences remain between the parties on nuclear power, Turkey's EU bid and reform of Germany's costly healthcare system - an area where the parties produced a messy compromise that the CDU would like to revisit.

Ms Merkel would find it easier to overhaul Germany's complex tax system, a key priority that dates back to her 2005 campaign, if she dropped the SPD in favour of the FDP.

Still, Gerd Langguth, a political scientist at Bonn University who has written books about her, says the common assumption that Ms Merkel would see another "grand coalition" as a major setback is wrong.

"Ms Merkel is pragmatic, she is an unideological problem solver and could live very well with another grand coalition," he said.

German parties' election policies

Germany's parties are campaigning for an election to be held on September 27 which could usher in a new coalition. Polls show Ms Merkel's conservatives (CDU/CSU) may win enough votes to form a coalition with the pro-business Free Democrats (FDP).

Below is a comparison of the leading parties' policies, highlighting their contrasting positions on issues where there are major differences:

Taxes

• CDU/CSU: Reject tax increases and call for a two-step cut in the lowest income tax bracket to 12 per cent from 14 per cent. Want to raise the threshold for highest regular income tax rate of 42 per cent to €60,000 from €52,552.

• SPD (Social Democrats): Want to cut the lowest income tax rate to 10 per cent from 14 per cent. Would raise the top tax rate - including a "rich tax" for the super wealthy - to 47 per cent from 45 per cent. Would tax stockmarket trades of €1,000 or more at a rate of 0.5 per cent or 1.5 per cent.

• FDP (Free Democrats): Plan tax cuts aimed at families and middle income earners worth up to €35 billion. The party wants to simplify the tax system and shift to a three-band system, with rates of 10 per cent, 25 per cent and 35 per cent.

• Greens: Want to raise regular top tax rate to 45 per cent from 42 per cent. Plan sales tax on financial transactions to prevent speculation.

• Left Party: Want a "redistribution from the top to the bottom". Only incomes of above €12,000 per year should be taxed and the top tax rate should be raised to 53 per cent. Wants a "millionaire's tax" on private wealth.

Economy

• CDU/CSU: Support a minimum income for all in Germany and urge a "stabilisation" of non-wage labour costs and better security for workers who lose their jobs due to economic crisis.

• SPD: Aim to create four million jobs by 2020. Want binding minimum wages for as many sectors as possible, and preferably a general minimum wage. The SPD would try to retain Germany's industrial base and sees the biggest opportunities in green technology.

• FDP: Want to strengthen the so-called Mittelstand small- and medium-sized businesses that form the backbone of the German economy; propose business tax rates of 10 and 25 per cent compared to just under 30 per cent now. Rules on protecting workers from dismissal would be loosened. Want a comprehensive programme of privatisations.

• Greens: A million new jobs should be created by investment and financial incentives.