CONSERVATIVE leader Angela Merkel was anointed the first female Chancellor of Germany yesterday but with her power to reform the nation’s faltering economy greatly curtailed.

As dawn broke in Berlin and the Christian Democrats and Social Democrats unveiled their plan for a grand coalition Government, it became clear that Frau Merkel had paid a very high price for the leadership. During a night of horse-trading, she was forced to give Herr Schröder’s Social Democrats eight seats in her Cabinet, leaving only six for her Christian Democrats.

The Social Democrats will control the Foreign Ministry, Finance, Justice, Employment, Environment, Health, Transport and Development Aid. The Christian Democrats are left with Defence, Home Affairs, Economy, Family, Education and Agriculture.

Herr Schröder, 61, Chancellor for the past seven years, made clear that he would not accept a post in the new Government.

Leaders elsewhere in Europe welcomed an end to the gridlock that has paralysed Germany for the three weeks since its general election. Tony Blair, President Chirac and others telephoned to congratulate Frau Merkel.

Financial markets responded coolly to an arrangement that leaves the Social Democrats in a position to thwart Frau Merkel’s plan to shake up Germany’s welfare state and labour market.

“There is no doubt we will see a watering down of Merkel’s programme,” Katinka Barysch, of the Centre for European Reform, said. “When you look at the breakdown of her Cabinet, it is clear she will need a lot of skills to keep this Government together.”

Johannes Kahrs, a leading member of the conservative wing of the Social Democrats, said: “How is it supposed to work with the economy in the hands of the Christian Democrats and employment under our umbrella?” The parliamentary party, he said, was outraged by the deals.

Talks to thrash out the new Government’s programme will begin on Monday and should be completed by November 12. The Christian Democrats and Social Democrats will then hold congresses to approve the new platform. If all goes according to plan, Frau Merkel’s Government should be in place by early December. Meanwhile, Herr Schröder will remain in office and Germany will remain in limbo, complicating Britain’s presidency of the European Union.

Frau Merkel, 51, sounded upbeat yesterday. “We all know there is no alternative to reform for Germany,” she said.

It remains to be seen whether she can impose her authority on the new Government, as both Washington and Tony Blair will be quietly hoping. Both had hoped that Frau Merkel would change the tone and direction of German foreign policy and, in theory at least, that she could indeed usher in new alignments.

She is more conciliatory towards the White House than Herr Schröder, who won re-election in 2002 by opposing the Iraq war. However, she, too, opposed sending troops to Iraq. “I am convinced that good transatlantic relations are an important task and that they are in the German interest,” she said yesterday.

She is more sceptical about President Putin’s Russia and more ready to consider agricultural reform in the European Union.

Unlike Herr Schröder, she opposes full Turkish membership of the EU. Yet the Foreign Ministry will be controlled by a Social Democrat, possibly Peter Struck, the outgoing Defence Minister.

Many areas of European policy are likely to be in the hands of the designated Economics Minister, Edmund Stoiber, at present the premier of Bavaria.

Whether he will allow Frau Merkel to loosen ties with France and reform the Common Agricultural Policy — which benefits many Bavarian farmers — is one of the many imponderables.

Ultimately, the success of the new Government will probably hinge on Frau Merkel’s ability to centralise power within the Chancellery office. From there she should — with luck and skill — be able to influence foreign and European affairs.

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