Germany's recession-hit economy faces the added burden of months of uncertainty over whether Chancellor Gerhard Schroeder will get his tax cut and welfare reforms through a hostile parliament.

As data on Thursday confirmed the economy shrank in the first half of 2003, analysts said the obstacles faced by Schroeder's plans to revive the "sick man of Europe" are so complex and unpredictable that only two things are sure:

¤ the measures implemented will look very different from the Mr Schroeder blueprint;

¤ the lawmaking process is effectively on hold until after a Bavarian state election on September 21.

The cabinet on Wednesday approved draft laws to revamp the jobless benefit system, reform local business tax and bring forward €15.6 billion of tax cuts by one year to 2004.

But surveys show most Germans lack faith in Mr Schroeder's ability to implement what he has called the biggest ever overhaul of Germany's welfare state.

The prospect of parliamentary gridlock looks set to revive criticism of a federal structure where 16 states wield power through their seats in the Bundesrat upper house of parliament.

"Our system is so convoluted that you never know what will be left of the laws you put into it," said Michael Rogowski, president of the BDI Federation of German Industry. "The powers of the federal government and the states need to be reshuffled."

In the coming months, much depends on the stance of the opposition conservative Christian Democrats (CDU), who control the Bundesrat and have made clear they aim to enforce big changes to Mr Schroeder's "Agenda 2010" reform package.

Personal ambition by regional CDU barons seeking to rob CDU leader Angela Merkel of the nomination as candidate to become chancellor in the 2006 election has prevented the party from agreeing common positions on various parts of the reforms.

But a mixture of regional financial interests has also come into play to obscure the outcome.

For example, they are divided over the extent to which the planned tax cuts should be funded with new borrowing. The planned removal of a host of tax breaks is also threatening to divide the CDU. Thomas Amend, an economist at HSBC Trinkaus & Burkhardt, a Duesseldorf bank, said he saw a risk the measures will be watered down in their passage through parliament.

"We have the problem in Germany as well as in the euro zone that domestic demand is very weak and that is partly because confidence in politics has waned," said Mr Amend.

"All these discussions are not going to help fan confidence, rather the opposite. People are just going to get more unsettled about whether the hoped-for tax cuts will be offset by extra costs resulting for example from the planned health reforms."

CDU leader Angela Merkel, once a protege of former Chancellor Helmut Kohl, has rejected the reform plans but signalled the CDU is ready to negotiate.

Ms Merkel, who has failed to stamp her authority on the CDU, faces a quandary - help Mr Schroeder reform Germany and watch him get the credit, or block everything and take the blame.

Mr Schroeder told German N-24 television on Thursday he was sure he will get the reforms through parliament.

"I am convinced that if the conservatives just say 'no', just stonewall, it will rebound on them because people understand that we need this reform process now," he said.

Analysts see a number of different possible scenarios:

¤ Ms Merkel and Mr Schroeder may hold talks and find compromises before the draft legislation enters parliament this autumn, similar to their cross-party deal on health reforms last month.

¤ State leaders from both the CDU and from Schroeder's Social Democrats may club together to ensure they get more federal cash out of the changes.

¤ CDU-led states in the Bundesrat may reject the laws and enforce compromises in a mediation committee between the Bundesrat and the Bundestag lower house of parliament.

¤ Mr Schroeder may outflank the opposition by persuading individual states to back his reforms with the offer of financial concessions - a tactic that paid off in 2000 when he secured the Bundesrat's approval of tax cuts.

Mr Schroeder, who faces opposition to some of the reforms even from within his own ranks, will have no option but to compromise, wrote liberal daily Sueddeutsche Zeitung.

"In the end, during a long December night in the mediation committee, the old Mr Schroeder we know will return - the moderator of the big compromise," the paper wrote.

Josef Schmid, a political scientist at Tuebingen University, said: "There are so many options you can play that the outcome is relatively open."

"It's like with soccer. You may be leading one-nil 10 minutes into the match, but you have no idea what the final score will be," Mr Schmid said.