THE political stalemate in Germany pushed down shares, bond yields and the euro and sparked dismay across Europe yesterday as it became obvious that the reform process had been seriously derailed by Sunday’s general election.

The problems injected urgency into the attempts of Angela Merkel, the conservative challenger to Gerhard Schröder, the Chancellor, to find a coalition that can rule Germany.

Frau Merkel and Herr Schröder are now in an extraordinary competition to find a government. It has become, as the left-wing Tageszeitung newspaper said yesterday, a “land of two chancellors”.

But Frau Merkel, rather than Herr Schröder, has the constitutional prerogative to form a government, if she can find one. Her Christian Democratic party emerged as the largest party in parliament, a whisker ahead of the Social Democrats.

The executive board of the Christian Democrats held back from criticising Frau Merkel — her 35.2 per cent of the vote was well below expectations — and authorised her to begin the search.

She will do so informally, beginning with talks with the pro-business Free Democrats. This small party remains her favourite partner in a centre-right reformist government but together they fall short of the necessary absolute majority.

The Social Democrats, meanwhile, have sent invitations to all potential partners, apart from the Left Party. “It is beginning to resemble the Mad Hatter’s Ball,” one diplomat said.

“We have to overcome the paralysis in this country,” Frau Merkel said, and most business leaders agreed yesterday. It will take weeks to find a coalition during which there will be a minimal amount of government in Europe’s largest economy.

“It is going to be much more difficult to govern Germany,” Jürgen Thumann, president of the Federation of German Industry, said. His main concern is that a grand coalition of Christian Democrats and Social Democrats will now be formed, perpetuating the political stalemate and slowing reform to a standstill.

The European Commission, the EU Executive and national governments around Europe had pinned their hopes on a clear election result. José Manuel Barroso, the president of the European Commission, said: “With all respect for the internal sensitivities of Germany I urge the German leaders to find as soon as possible a stable solution . . . Without a dynamic Germany, Europe cannot recover.” Michèle Alliot-Marie, the French D efence Minister and key ally of President Chirac, said: “The German voters have responded in a way that will certainly not allow the implementation of a totally liberal model.”

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Central and East European states were also upset by the confused election result. Lech Walesa, the former president of Poland, spoke for many of his countrymen when he said that he had wished for a clearer victory for Frau Merkel. Chancellor Schröder is disliked by many Poles because of his close relationship with Vladimir Putin, the Russian President.

The German economy can probably survive a period of little or no active government.

One of the great boom periods of the Italian economy in the 1980s was when it had no government for nine months.

Klaus Kaldemorgen, head of equities at DWS Investment in Frankfurt, said: “Eventually the stock market will return to business as usual and political topics will recede into the background.”

A new workable coalition has to be found by October 18 when parliament will vote on Frau Merkel. If she fails to win the necessary majority then Herr Schröder can make his bid for power with an alternative alliance.

If that fails to convince, President Horst Koehler may be forced to call a new election. Germany’s stalemate would thus continue at least until January.

REACTION IN THE EUROPEAN PRESS

“The voters have spoken, but what they have said is not easy to understand.”
Berliner Zeitung

“Only one party achieved all its objectives: The party of the radical left formed by disillusioned social-democrats in the West and former communists in the East. They contributed to the failure of the centre-left and they prevented the formation of a centre-right coalition.”
Le Monde

“The last thing the country needs now is to carry on in a period of uncertainty with protracted negotiations...Germany is the largest economy in the euro zone and her recovery is key (to reviving its economy).”
Expansion, Spain’s main financial newspaper

“What has happened in Germany is what none of the parties hoped for and what other European governments were afraid of..."
Corriere della Sera, Italy

“Germany shows its feminine side."
Kommersant, Russia

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