Germany goes for a 'grand coalition'

A broad agreement between Germany's two main political parties, the Christian Democrats (CDU/CSU) and the Social Democrats (SPD) has been reached and a 'grand coalition' will now be formed as the basis for the next German government.

In the aftermath of last month's inconclusive election, when no bloc received a parliamentary majority, this option was always the most viable one, and the speed with which the agreement was reached between the two major parties shows their determination to adopt a "business as usual" approach and, hopefully, to put economic reform at the top of the new government's agenda.

The fact that Angela Merkel, the CDU leader, is to be the new Chancellor is indeed historic. She will be Germany's first woman Chancellor and the first Chancellor to come from former East Germany. Although she did not lead a particularly dynamic electoral campaign and lacks the charisma of Gerhard Schröder, Mrs Merkel deserves credit for being a tough political operator and for her skills in negotiating the grand coalition with the SPD, who after all, had originally insisted on Mr Schröder remaining Chancellor. She is also well respected for her analytical talent and her sharp intellect.

The agreement brings to an end the political career of Mr Schröder, who has led Germany for the last seven years, and who announced that he will not form part of the new government. Mr Schröder deserves credit for trying to reform Germany's economy and for enabling his party to come back in the polls after trailing massively against the CDU/CSU at the beginning of the electoral campaign. However, his coalition government was clearly defeated and, after seven years in office, unemployment is still very high and the economy is not in good shape. Mrs Merkel, as head of the largest political party, deserves to be Chancellor and Mr Schröder did the right thing in exiting from the political stage.

Under the deal arrived at by the two parties, the SPD and CDU/CSU will each get eight Cabinet posts. The Social Democrats get the foreign, finance, justice, development co-operation, labour and social security, health and social affairs, transport and environment ministries, while the Christian Democrats will get the chancellorship and the chancellery, economy and innovation, defence, interior, education, family, youth and the elderly and consumer affairs and agriculture ministries.

The big imponderable is whether this new coalition - expected to take office some time next month - will be able to work together and arrive at a common platform to bring about economic change in the country. The new government's concrete plans will be spelt out this week when a common programme is launched detailing the administration's economic, fiscal, labour market and foreign polices. Franz Müntefering, the SPD chairman who is to be Vice-Chancellor in the new government, said that the new Cabinet will have to "strike a balance between the necessary renewal and the preservation of social justice".

Mrs Merkel will now need to use all her skills to make the new government work and to keep the coalition together. The fact that the new coalition has such a huge parliamentary majority provides Germany with a great opportunity to get things done and to push through reform, but naturally there will be a lot of horse-trading and hard bargaining and both sides will have to compromise. An agreement will have to be reached over a clearer division of power between the central government and the federal states (Länder), cutting unemployment, curbing the deficit, reforming the labour market and tax reform.

On foreign policy issues the government will have to come up with a way of improving ties with Washington and will have to decide whether the Franco-German axis is to remain the cornerstone of German foreign policy. It will also have to reach a consensus over Turkey's EU membership bid, something which the SPD favours and the CDU/CSU opposes.

Some economists doubt how far the new government will go in implementing economic reform. The economics ministry, for example, to be headed by CSU chief Edmund Stoiber, has been stripped of its labour market portfolio, which remains in the hands of the SPD. Labour market reform is absolutely essential to the turnaround of the German economy and the fact that this is to be the SPD's responsibility has left some observers unconvinced that much will be done in this area.

Finance and health - two policy areas that also need reform - are also in SPD hands. However, a lot depends on just who is appointed to these Cabinet posts. The SPD have plenty of reformers within its ranks, as well as left-wingers, so there will be a lot of infighting within the party for such sensitive posts. One hopes that it will be the reformers who will emerge victorious.