Feb. 26 (Bloomberg) -- German Chancellor Angela Merkel may end up choosing a rerun of her coalition with the weakened Social Democrats over joining the surging Free Democrats after this year’s election, even if history points her the other way.

While Merkel has said she would like to follow party tradition and ally with the Free Democrats, a continued coalition with the Social Democrats, known as the SPD, might leave her with a freer hand to pursue policies of nationalizing banks and spending more than $100 billion to boost the economy.

“Merkel is a pragmatist,” said Carl Graf Hohenthal, a Berlin-based partner in the Brunswick Group, a business advisory firm, and the former deputy editor of Die Welt newspaper. “She’s currently got a coalition with the SPD which is very weak, and that makes it easier for her to set the agenda.”

From Konrad Adenauer to Helmut Kohl, chancellors from Merkel’s Christian Democratic Union have preferred alliances with the pro-business Free Democrats. In recent months, Merkel’s handling of the economic crisis has moved her closer to the SPD ideologically, while the Free Democrats have emerged as strong critics -- and have risen steadily in opinion polls before the Sept. 27 elections.

The so-called grand coalition “is a real option for the Christian Democrats, above all for Frau Merkel,” Cem Ozdemir, co-chairman of the opposition Green Party, said in an interview. “Her goal is to hold on to power and remain chancellor, and she’ll achieve that with whoever she can.”

Smaller Parties

The rise in opinion polls of the Free Democrats, coupled with increased popularity of the anti-capitalist Left Party, reflects a breakdown in the postwar consensus: Merkel’s CDU and the Social Democrats have alternated in government for 54 of the past 60 years and shared power for the other six. Surveys suggest the fragmentation is accelerating as the recession deepens and FDP leader Guido Westerwelle steps up his attacks on Merkel’s government.

About 39 percent of voters now back parties other than the two biggest, compared with 20 percent during the 2002 election and 26.6 percent in 2005, a Feb. 25 Forsa poll showed. It surveyed 2,506 voters between Feb. 16 and 20 and had a margin of error of as much as 2.5 percentage points.

The Free Democrats have a record 18 percent. That’s up 8 percentage points from mid-September, when the European Commission was saying Germany’s economy would grow 1.5 percent this year. Deutsche Bank AG Chief Economist Norbert Walter now says Europe’s biggest economy may contract 5 percent or more.

Alternative to Merkel

The Free Democrats are benefiting from “potential CDU voters who are unsure about the party’s direction,” Manfred Guellner, head of Forsa, said in an interview. “Market ideologues in the CDU now have an alternative.”

Merkel’s Christian Democrats and their Christian Social Union sister party held 34 percent in the Forsa poll, below the 35.2 percent that forced Merkel, 54, into a coalition with the Social Democrats in 2005. The SPD, whose chancellor-candidate is Foreign Minister Frank-Walter Steinmeier, has 23 percent, more than 11 points below its 2005 result.

The FDP enjoyed the role of kingmaker for much of Germany’s postwar period. Hans-Dietrich Genscher, who served as foreign minister from 1974 to 1992 and helped negotiate reunification of East and West Germany, symbolized the small party’s clout.

Now Westerwelle is focused on sniping at his historical ally. He threatened to derail the 50 billion-euro ($64 billion) stimulus bill that lawmakers approved Feb. 20, calling it the “most expensive election campaign in German history.” He backed off once Merkel promised to consider new tax cuts -- after the election.

Debt and Nationalization

Westerwelle, 47, also has criticized mounting government debt levels and the possible nationalization of property lender Hypo Real Estate Holding AG. He is seeking to open up competition in the health-care industry, reversing rules brought in under Merkel.

The FDP “wouldn’t be so easy to handle, both within the coalition and her own party,” said Klaus Dittko, a Berlin-based political consultant who has advised the Christian Democrats.

Merkel’s Cabinet approved a draft bill on Feb. 18 allowing the government to seize control of Hypo Real Estate, paving the way for the first German bank nationalization since 1931. Two days later, lawmakers backed the stimulus package, the second in two months. Germany’s budget deficit will climb to 4 percent of gross domestic product next year from almost 3 percent in 2009, the government says.

The CDU is suffering defections from “a group of free market-oriented voters who are finding that they’re now better represented by the FDP,” said Bernd Schlipphak, assistant politics professor at the University of Freiburg.

The attraction between the current coalition parties may be mutual as Social Democrat support withers.

Liking Greens

Bild newspaper cited Finance Minister Peer Steinbrueck, a Social Democrat, as saying last July that he favored a continuation of the grand coalition because it “offers good chances to safeguard economic and social stability.” The party’s official policy is for an alliance with the Greens.

Merkel, who told her party convention in Erfurt last month that the FDP was her preferred partner, was asked on ZDF television Feb. 15 about the ascent of Westerwelle’s party at the expense of her own. She fudged the question, saying the CDU could still get votes, and then starting talking about “extremely difficult times” ahead.

Westerwelle, who sought to portray the stimulus package as Steinbrueck’s rather than the chancellor’s, is friendly enough with Merkel to use the German informal “du” form, Bild says.

Yet when it comes to forming a government, Merkel may opt for political expediency, said the Greens’ Ozdemir.

“I’ve never considered Merkel to be zealous about any cause,” he said.

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net.

Last Updated: February 25, 2009 18:01 EST