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Germany's Not-So-Grand Coalition

By Jack Ewing It could be a reality TV show: A group of sleep-deprived politicians who don't particularly like each other are forced to live together, watched by millions. Their task: Run Europe's largest economy.

That's pretty much what Germany faces in the coming years, following an agreement announced Oct. 10 by Angela Merkel's center-right Christian Democrats (CDU) and Gerhard Schröder's center-left Social Democrats (SPD) to form a so-called Grand Coalition of Germany's two major political groupings. Merkel, looking fatigued after weeks of negotiations, told reporters her agreement with the SPD promises "a coalition of new possibilities."

MASTER TACTICIAN. But she didn't sound very convincing, and not many Germany watchers are optimistic. In fact, the two main parties had little choice but to cooperate. Neither won enough votes in the Sept. 18 national elections to form a government, and neither of the two minor parties, the Greens and the Free Democrats, was willing to enter a three-way coalition. "In the final analysis, the CDU and SPD are dependent on each other," says Carsten Klude, economist at Hamburg private bank M.M. Warburg.

The fear now is that the Grand Coalition will be doomed to constant compromise that will produce lowest-common-denominator legislation. There's even a risk the government will prove impossibly unstable, forcing new elections in two years or so.

Certainly, there's little chance that Merkel will do for Germany what Margaret Thatcher did for Britain, as some business people had hoped. The message of voters was all too clear: They are not ready for the strong market-oriented reforms that Merkel preached during her disastrous election campaign, in which she blew a commanding lead in the polls.

Still, as she prepares to become Germany's first woman Chancellor, Merkel could prove to be a stronger leader than might now seem to be the case. The argument is this: Merkel may not have been much of a campaigner, but as a party tactician she is second to none. She has shown that in the last three weeks. Some pundits were predicting her political downfall after her party and its allies, the Bavaria-based Christian Socialist Union (CSU), just barely edged Schröder's Social Democrats in the Sept. 18 voting. But Merkel recovered with amazing speed, silenced critics in her own ranks, and hung tough in negotiations with Schröder to claim the Chancellorship.

CONSISTENCY OVER BIG MOVES. Those infighting skills, which helped her rise to the top of her party in the first place, will serve her well as the two parties enter into formal coalition talks, which will produce a common policy platform probably by mid-November. "Don't underestimate Mrs. Merkel," says Klude.

Merkel and SPD Chairman Franz Müntefering have already agreed on some issues, such as simplifying the tax code. The parties will split the 16 Cabinet posts, with the SPD getting the Foreign Office, Labor, and Finance while the CDU and CSU get Defense, Interior, and the Economics Ministry, which will be led by Bavarian Prime Minister Edmund Stoiber, according to press reports. Schröder will not take any leadership posts.

Will such a government be capable of grand achievements? Probably not. But after the political chaos that marked the last few years of Schröder's government, most business people will settle for consistency and modest progress.

Ewing is BusinessWeek's European Regional Editor in Frankfurt

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