Who will take Germany's top office?

Merkel and Schröder are both claiming the country's chancellery after voters refused to give either a mandate.

Europe's largest economy is momentarily rudderless as both incumbent Chancellor Gerhard Schröder and his challenger Angela Merkel claimed Germany's top office the morning after one of the biggest election surprises in the country's recent history.

The unexpected subpar performance of Ms. Merkel's Christian Democratic Union and its sister party, the Christian Social Union, in Sunday's election gave Mr. Schröder an outside shot at staying in office after reform-shy German voters refused to give either of the major parties a clear mandate. "I'm very pessimistic about the prospect for wholesale economic reform," says Karen Donfried, senior director of the German Marshall Fund in Washington. "It's very clear that's not what Germans want."

The conservative Union parties are less than one percent ahead of Schroeder's SPD, dooming their plans to form a coalition with the pro-business Free Democrats that aimed to aggressively liberalize Germany's social market economy.

The chancellor, emboldened by the SPD's strong showing in the election's final spurt, declared that he planned to stay on as chancellor, whether at the head of a so-called grand coalition with the CDU/CSU or in another party constellation.

The confusion over who will take over at the helm of Europe's economic motor, has unsettled financial markets and business leaders and surprised European politicians. The German capital was abuzz Monday with the political fallout of a tight race which saw the pro-business Free Democrats claim a surprising 9.9 percent share of the vote, followed tightly by the Left Party, their polar opposites in the reform discussion. The Green Party finished a disappointing fifth.

Rumors of coalition possibilities, described using the colors assigned to Germany's parties, made the rounds rapidly as both Merkel and Schröder lay claim to the chancellery.

After seven years of rule, voters had had enough of Schröder's coalition with the Green Party, the so-called red-green government. The government's popularity has been at rock bottom after welfare, health, and labor market reforms it introduced in 2003 cut significant benefits but failed to create jobs for the more than 4.7 million out of work.

But voters also weren't ready to hand over the reins to Merkel's conservatives and Free Democrats, who were planning to strip away hiring and firing laws, reduce unemployment benefits, and push through tax cuts for wealthier Germans, all in the hope of kick-starting growth and investment.

"It's a very mixed message from the voters," says Uwe Andersen, political scientist at Ruhr University. "The majority of the population is still not ready to go through with a harder reform course. On the other hand, they know that things can't go any further with the red-green coalition government."

In the coming week, Merkel, whose party still won the largest share of the vote at 35.2 percent, will begin meeting with the Greens and Schröder's SPD to decide how to proceed. The likely coalition outcome remains a so-called grand coalition, which would put the SPD and the CDU together and Merkel as Germany's next chancellor.

But Schröder doesn't see it that way. The Chancellor appeared visibly smug during a television talk show Sunday night, and his party pointed out that the CDU only has more votes than the SPD if the performance of its sister party, Bavaria's CSU is counted. Such logic would indicate that Schröder, not Merkel, should stay on as Chancellor.

Either way, the predicted political infighting has left industry heads and other European leaders doubtful the continent's largest economy is serious about turning its fortunes around any time soon.

"We won't see any steps backwards, but the tempo of reforms will slow," Holger Schmieding, an economist at Bank of America in London told Agence France Presse. "Germany won't be able to tap into its full potential. The economy is improving, it'll simply improve more slowly."

Others were less optimistic. The head of the BDI industry federation, Juergen Thumann called the results "bitterly disappointing." European politicians expressed confidence that Germany's political class would find an appropriate coalition solution, but acknowledged Germans were obviously not ready for drastic change.

"I think the Germans have responded in a way that will certainly not allow a totally liberal [economic] model to be put in place," French Defense Minister Michèle Alliot-Marie told Europe1 radio. And it's unclear how much power Merkel will wield after leading her party to one of its worst federal electoral showings in German postwar history. Political analyst Mathias Micus said the confusion surrounding who will govern the country plays perfectly into the hands of Schröder.

"Times like this need a power player like Schröder," said Mr. Micus, at the University of Mainz. "He is someone who knows how to play with all his cards, who isn't held up by party dogma and who is Machiavellian."

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