Merkel, Schroeder both claim election victory
(Reuters)
Updated: 2005-09-19 06:50

CAUTION BEFORE RADICALISM

But voters appear to have bought Schroeder's warnings that Merkel would dismantle their cherished social welfare system, effectively redistributing money from the poor to the rich.

Sunday's result shows they rejected her approach in favor of a more cautious path, which financial markets fear will not bring the far-reaching change Merkel had promised.

The euro slipped in early Asian trading and investors predicted damage to stocks when trading begins in Europe.

"It's not exactly a dream result for markets and will lead to disillusion on the stock market," said Frank Schallenberger, equity strategist at LBBW. "Many market players had hoped for a conservative-led government pressing faster for reforms."

In foreign policy, Merkel had vowed to improve ties with Washington, strained by Schroeder's vocal opposition to the Iraq war, and prevent Turkey joining the European Union. Whether she will be able to see these policies through is now questionable.

There are other constellations besides a "grand coalition" that could work, but none have been tried at the national level and all could breed instability.

Schroeder could try to seal a so-called "traffic-light" coalition with the Greens and the liberal FDP, which did far better than anticipated. But FDP chief Guido Westerwelle categorically ruled out such an alliance on Sunday.

Merkel's conservatives and the FDP could also try to woo the Greens, but analysts said that was highly unlikely.

Another option that cannot be ruled out is brand new elections, if after weeks of coalition negotiations none of the major parties are able to form a majority government. This has never happened in the post-war Germany.

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