By Jack Ewing Germans have a reputation for being averse to change. Based on the results of Sept. 18 national elections, it appears there's something to that stereotype. German citizens gave far fewer votes than predicted to Angela Merkel and the center-right Christian Democratic Union, after Merkel ran a campaign based on the premise that painful change is needed to preserve Germany's standard of living.
Merkel's CDU won 35% of the vote, vs. pre-election polls that predicted as much as 43%. "That's not enough to implement our reform program," Dieter Althaus, a Merkel confidant who's prime minister of the state of Thuringia, told ZDF TV.
The CDU was the strongest party, but Merkel is well short of the majority of Bundestag seats needed to form a coalition with the pro-business Free Democratic Party (FDP), its traditional partner, which won a surprisingly high 10% of the vote. The most likely option now is a so-called Grand Coalition between the CDU and Chancellor Gerhard Schröder's Social Democratic Party, which won about 34%.
"LOWEST COMMON DEMONINATOR." But a bewildering array of other coalitions are mathematically possible, including a coalition of the CDU, FDP, and Green party. "We have to speak to everybody," Bavarian Prime Minister Edmund Stoiber, chairman of the CDU sister party Christian Social Union, glumly told German TV.
One thing is clear: 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. "Reforms will boil down to the lowest common denominator," says Oskar Niedermayer, a political science professor at the Free University of Berlin. Gripes Michael Gadesmann, a 42-year-old civil servant who was drinking a beer at a café in the Stuttgart train station: "Once again, nothing is going to be accomplished."
The election results are also a setback for Merkel, the pastor's daughter from East Germany who stood to become Germany's first female Chancellor. Technically, she was the victor via her leadership of the strongest party. And rivals within her party, such as Roland Koch, prime minister of the state of Hesse, swore allegiance to her on election night. But it would be a surprise if CDU traditionalists, who have never liked Merkel, don't soon try to exploit the disappointing election result to push her aside. Merkel is famous for her skill at intraparty maneuvering, but she'll need all the tactical acumen she can muster to survive.
AVOIDING THE BIG ONES. In fact, on election night it wasn't even certain who'll be Chancellor. Schröder surprised listeners by predicting he'll continue to lead a government -- though it's hard to imagine a scenario that would allow him to stay in office. Several weeks of complex negotiations lay ahead as the parties try to cobble together a workable majority.
For business and investors, the results are deeply disappointing. The most that can be expected from the next German government, however it looks, is progress on issues where there's relative agreement. That means the country could see some simplification of the tax system, limited cuts in government subsidies, and reduction of bureaucracy.
Hans-Olaf Henkel, former president of the German Federation of Industry and an outspoken proponent of reform, held out hope that the parties could agree on changes to the German political system. The current system is incapable of reform, according to Henkel, who says: "We have to reinvent our system of federal government." But significant deregulation of the labor market, key to growth and employment, is unlikely.
LONG-SHOT SCENARIO. The risk is that no combination of parties will be stable enough to get much done. That could bring several years of uncertainty, perhaps leading to elections before the usual four-year term is over. The worst case, from investors' and business' point of view, would be a government combining the Social Democrats, the Greens (who won 8%, according to early results), and the far-left Left Party (which also won 8%). Such a long-shot left-wing coalition would mean higher taxes for the wealthy to prop up Germany's embattled social welfare system.
Social Democrat leaders swore on election night they would never join with the Left Party, which includes communists and extremists. But Germans won't get a reform government, either. Voters have postponed the day of reckoning with economic reality. After a decade of poor growth and rising unemployment, though, change will have to come someday -- whether Germans want it or not.
With Katharine Schmidt in Stuttgart and Gail Edmondson in Berlin
Ewing is BusinessWeek's European regional editor, based in Frankfurt