Election Limbo Raises Industry Fears

The many variables concerning possible coalition set-ups arising from the results of Sunday's election in Germany are worrying business leaders who fear that, whichever type of government is formed, Germany will be ill-equipped to push through the necessary reforms to resuscitate Europe's largest economy.

Contrary to expectations that the conservative Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU) would win, early results Sunday showed the CDU/CSU parties lost valuable ground to the ruling Social Democrats, robbing them of sufficient votes to form a majority government with their free-market liberal allies, the Free Democrats (FDP).

Preliminary results on public television showed Angela Merkel's CDU with around 35 percent, only slightly ahead of the SPD and well short of the 38.5 percent needed to secure an overall majority with the FDP.

For their part, the FDP tallied a strong 10.5 percent, while the Greens, junior partners in the current government under Chancellor Gerhard Schröder, reached 8.1 to 8.4 percent.

It meant that neither side had secured the outright mandate to form a new government, which in turn suggested a so-called grand coalition of both left and right -- roundly poo-poohed by both sides in the run-up to the election -- looks increasingly likely.

A grand coalition had also been viewed as the worst possible outcome by the markets, with the blue chip DAX 30 index falling last week.

Business leaders are concerned that none of the possible coalitions will be strong enough or reform-oriented enough to decisively attack the issues, such as deregulation of the labor market, that are crucial to creating faster economic growth and reducing unemployment.

Many believe that the most that can be expected from the next German government, in whatever form it may take, is progress on issues where there's relative agreement. That means some simplification of the tax system, limited cuts in government subsidies, and reduction of bureaucracy.

The president of the BDI industry federation, Jürgen Thumann, called the election results "bitterly disappointing" and added that "Germany is becoming more difficult to govern."

Anton Börner, president of the BGAwholesale and export trade association, regretted that clear reforms were likely not in the cards. "Germany is evidently not yet ready for modernization," he said. "That means companies are on their own." He added that he thought it was a pity that Germans had not chosen a clear direction.

Hubertus Pellengahr, spokesman for the German Retailer's Federation HDE, urged the parties to settle the dispute and set up a new government as soon as possible.

Wary electorate

The political confusion produced by the German election also underlines the extent to which voters are unwilling to stomach the harsh medicine of economic reforms needed to get Germany back on its feet, analysts said.

As a result, experts predicted, the performance of the euro zone's biggest economy is unlikely to improve significantly in the near future.

Economists said the results demonstrated just how weary Germans have become of the painful economic and social reforms prescribed by the coalition of SPD and Greens during their seven years in power.

But it also showed that voters are wary of further reforms as advocated by Merkel and the CDU.

"People are clearly fearful of radical changes," said DB Research economist Stefan Bielmeier.

"This was seen from the way the CDU lost ground in the opinion polls as soon as Merkel put Paul Kirchhof forward as her future finance minister," he said.

Kirchhof, a 62-year-old professor and former constitutional court judge whom Merkel thought would be the joker in her pack for the election, quickly turned into a vote killer who may have cost the conservatives outright victory.

It was Kirchhof's audacious proposals for a flat-rate tax of 25 percent that boomeranged on her, said Bank of America economist Holger Schmieding.

"People were scared off by the tax debate," Schmieding said. "The attempt for a fundamental shake-up of the tax system has failed. People are inordinately fearful of new reforms. This vote was a vote against a fundamental re-orientation of the German economy."

Gift for Schröder

For Schröder, who had been trailing badly in the opinion polls all summer, Kirchhof's nomination proved a godsend.

The chancellor argued that Kirchhof's visions would make Germany an even starker and colder place.

And his arguments appear to have struck a chord with voters, decimating the CDU/CSU's earlier lead over the SPD in the opinion polls in recent weeks.

"People simply want the reforms to stop," said Bielmeier at DB Research.

UBS economist Holger Fahrinkrug agreed.

"People are shying away from new reforms," Fahrinkrug said, even though they were widely acknowledged to be needed if the German economy wants to get back on its feet after long years of near stagnation.

Important reforms in danger

Bielmeier predicted that with the most important reforms -- an extensive shake-up of the labor markets -- still outstanding and perhaps even unlikely.

"Germany's economic performance is unlikely to improve significantly in the near future," he said.

Bank of America economist Schmieding said no new government, of whichever political persuasion, would roll back the reforms achieved so far.

"We won't see any steps backwards, but the tempo of reforms will slow," Schmieding said. "Germany won't be able to tap into its full potential. The economy is improving, it'll simply improve more slowly."

At UBS, Fahrinkrug said that while a grand coalition was one possibility that had to be considered given the outcome of the vote, "I don't think it will really be feasible."

"There's simply no common denominator" between the two parties, he said.

"Their platforms are diametrically opposed. But it's early days yet. In Germany, there's almost a tradition that the impossible can become possible. So you can't rule anything out. We'll have to wait and see who talks to whom."