BERLIN: German reform is likely to come to a standstill, at least in the short term, after an election on Sunday left the country’s two main parties almost level in parliament and scrapping over who should head a new government.

Economists said the outcome meant Angela Merkel’s conservatives (CDU/CSU) would probably be forced into a coalition with Chancellor Gerhard Schroeder’s Social Democrats.

But with both politicians insisting they should lead any new government and the election’s final results on hold pending a by-election in Dresden on Oct. 2, the only thing that was certain was weeks of political uncertainty.

Schroeder last year launched a package of pension, health and labour reforms to try to drag Europe’s largest economy out of years of stagnation. But the unpopular measures failed to dent unemployment and cost his party a string of regional elections, triggering the national poll a year ahead of schedule.

The vote had been viewed as a watershed for the whole euro zone, setting the tone for elections in 2006 and 2007 in Italy and France. The outcome left economists disappointed. Financial markets’ immediate reaction was to sell euros.

Merkel campaigned on a platform of further reform. Her proposals included raising value added tax to compensate for a reduction in labour charges, replacing wage-linked health insurance payments with flat fees, and breaking German unions’ power to set wages across whole sectors.

The liberal Free Democrats (FDP) — her favoured partners — backed even more radical measures.

But whereas they increased their share of the vote, support for the CDU/CSU crumbled, suggesting swing voters did not like what they saw.

Most economists said a “grand coalition” under either Merkel or Schroeder would struggle to find common ground, dodging hard decisions in the areas of the labour market and tax policy.

“You have all the ingredients for a stalemate in economic policy,” said Thomas Mayer, chief European economist for Deutsche Bank in London.

“The reforms will definitely not be cohesive. There will be some movement, but there will be no great leap forward. There’s no question it’s not a good sign for Germany’s structural problems and unemployment,” said Thomas Straubhaar, head of the HWWA institute in Hamburg.

A grand coalition would probably also not be stable, he said. “The next early elections are already on the cards.”

A few economists saw hope for reforms only if Merkel’s Christian Democrats join with the Greens, Schroeder’s current partners, and the liberals (FDP) — something that is mathematically possible but has never been tried before.

Michael Burda, a professor of economics at Berlin’s Humboldt University, called it the “Jamaica” coalition because the three parties’ colours of black, green and yellow are those of the island’s flag.

Political commentators dubbed it the “Schwampel”, after the German for black

(“schwarz”) and traffic light (“Ampel”).

“I think it would be the best thing for reforms. I don’t see reforms happening in any other constellation,” Burda said.

Holger Schmieding from Bank of America in London said: “If it were Merkel with the FDP and Greens it would ... be the least bad outcome because it would probably mean they can get a noticeable part of her programme through.”

The Greens, with a younger voter base, were often credited with being the most radical of the two partners in the coalition with Schroeder’s SPD, which started in 1998.—Reuters