Schroeder vows to stay

German Chancellor Gerhard Schroeder vowed not to give up his post without a fight after his party was pipped by Angela Merkel's Conservatives in a tight election, setting the stage for weeks of political turmoil.

Energised by a vote that put them just three parliamentary seats shy of Ms Merkel's Conservatives despite forecasts of a blow-out, Mr Schroeder's Social Democrats said they were ready to talk with everyone on forming a new government.

Mr Merkel echoed the line, telling reporters: "We have the mandate to form a government. We are clearly the strongest party."

But the SPD had lost none of its election-night bombast yesterday, insisting that no coalition was possible without Mr Schroeder at the top - akin to calling for the Conservatives to topple Ms Merkel, whom he had publicly taunted on Sunday night.

"It is clear that Germans do not want Mrs Merkel as their chancellor," SPD chief Franz Muentefering told a news briefing.

The election left both main parties too weak to secure a majority with their natural coalition partners - Ms Merkel with the liberal Free Democrats who share her radical economic reform goals; and Mr Schroeder with the environmentalist Greens who have ruled with him for seven years.

Even after a bitter campaign in which Mr Schroeder painted Ms Merkel as a cold radical bent on dismantling the welfare state and the Conservatives labelled him a liar, many analysts believe a "grand coalition" between the two largest parties is the most likely outcome to Sunday's debacle.

But with Ms Merkel and Mr Schroeder both claiming a mandate to rule and personal hostilities between the two leaders at a high point, an agreement between them looks far off - and the prospect of more exotic, unforeseen alliances has begun to loom.

Roland Koch, Conservative leader of the state of Hesse, said Mr Schroeder's attacks would fail to divide the CDU/CSU from seeking to form a government with the liberals.

A vote to reappoint Ms Merkel head of the CDU/CSU parliamentary group today would demonstrate the Conservatives remained fully behind their candidate, he told ZDF television.

"The Chancellor is seeking, in my view out of an unbelievable mixture of arrogance and overconfidence, to claim he won the election. But the truth is both camps didn't achieve their goals," Mr Koch said.

The unprecedented uncertainty weighed heavily on financial markets, which had hoped for a clear mandate for Ms Merkel's Christian Democrats (CDU), their sister Christian Social Union (CSU) and the FDP. They had vowed cuts in payroll costs, easing of firing rules and a simplification of the tax system.

The euro currency slumped to a seven-week low against the dollar yesterday, while German stocks shed 1.2 per cent, underperforming shares across Europe.

"The stalemate that emerged in the election is of course the worst result that you could have wished for, the worst for the interests of Germany and for Europe," European Central Bank Governing Council member Klaus Liebscher, who heads Austria's central bank, told reporters in Vienna.

Bank of America economist Holger Schmieding predicted the pace of reform would slow regardless of what government eventually emerged.

The parties will try to agree a majority government by October 18, when the new parliament must meet.

The weeks leading up to that date will be characterised by grandstanding and hard-nosed politics, as the SPD, CDU/CSU and their potential partners, the FDP and Greens, manoeuvre.

The stalemate prompted talk of coalitions that have never been seen before in Germany. The only plausible alternatives to a grand coalition involve either the CDU/CSU or the SPD managing to draw both the leftist-environmentalist Greens and the free-market FDP in from opposite ends of the spectrum.

SPD officials made clear the party would push hard to convince the FDP to join with them and the Greens, a possibility FDP officials rejected.

"I'm pretty sure that in the next days there will be talks taking place that are being dismissed today," SPD board member Kurt Beck told ZDF. Mr Beck is leader of Rhineland-Palatinate, a state he governs in a coalition with the FDP.

The long-term impact of the election on German foreign policy is unclear, although Turkey revelled yesterday in Ms Merkel's failure to secure a clear victory.

Unlike Mr Schroeder, Ms Merkel opposes Turkish entry into the European Union, and Turkey had feared a clear win for her would have doomed its long-standing bid to join the 25-nation bloc.

"It was an auspicious result for the EU process," Turkish Prime Minister Tayyip Erdogan said.

In other countries, the reaction was less cheerful. In an editorial headlined 'The worst result', Britain's Times newspaper said the uncertain outcome was "probably the worst possible for the country and for the cause of reform".

Italy's newspaper Il Messaggero wrote: "If this is a foretaste of a future trend in Europe, there is nothing to be cheerful about."