High expectations

Germany's business world on Sunday reacted positively to the new center-right government as the right alliance to nurse Europe's largest economy back to health.

"Angela Merkel and Guido Westerwelle are the dream couple for German mid-sized companies," Mario Ohoven, head of Germany's federal association of medium-sized companies, told news agency Reuters.

Chancellor Angela Merkel's conservatives won 33.5 percent of the vote while their preferred coalition partners, the FDP, led by Guido Westerwelle, captured a record 14.5 percent.

The result gives Merkel a second term in office and allows her to form the center-right coalition she has argued is best placed to lift Europe's largest economy out of its worst post-war recession.

"We can really celebrate tonight, but afterwards we have a hard job ahead of us," Merkel told cheering supporters on Sunday night.

Major economic challenges

Even though Germany emerged from a deep recession in the second quarter of this year thanks to a slew of economic stimulus measures, economists warn that a sustained recovery is far from assured.

The country faces a ballooning budget deficit, rising unemployment, soaring social security contributions, stagnant consumer spending and a deep credit crunch.

The business-friendly FDP, a party which saw its support rise in the wake of the financial crisis, is committed to promoting free markets and small government.

The party, which is expected to take over either the finance or economics ministry, has campaigned for lower taxes, health reforms and labor market reforms that will make it easier for companies to hire and fire workers.

FDP leader Guido Westerwelle said on Sunday that he planned to make good on his campaign pledges. "Be assured that we want to push through, step by step, everything that we promised voters."

Both the FDP and Merkel's conservatives are in favor of reversing a planned phase-out of nuclear powering Germany by 2020.

How reform-friendly will the coalition be?

All that prompted Germany's business world on Sunday to welcome the new center-right coalition.

"I'm sure that the financial markets will react positively to this result," said Folker Hellmeyer, chief strategist at the Bremer Landesbank. "A conservative-liberal government will improve the confidence of companies and the entire sector of medium-sized firms."

But others have called for far-reaching economic reforms that include sweeping corporate tax relief and labor market reforms.

"We will judge the new government according to its reform policies, not according to its political colors," said Hans Heinrich Driftmann, president of the German Chambers of Industry and Commerce.

Pessimism about government's reform drive

But some experts warn that the next government will have little maneuvering power in the face of tight budget constraints and spiraling debt.

Germany's federal deficit is projected to rise to six percent of gross domestic product (GDP) next year. New federal borrowing is expected to reach a record 86 billion euros ($126.5 billion).

"In terms of policies for the new government, I think everything will be overshadowed by the fact that the budget is in crisis," said Jan Techau of the German Council of Foreign Relations. "When you look at the amount of debt Germany has, there is very little that government can do."

sp/reuters/dpa/ap

Editor: Toma Tasovac