Such grand coalition or period of 'cohabitation' (as it is known elsewhere in Europe) is not something new in German politics. It was first tried between the two parties back in 1966 after an indecisive result in the elections held that year. CDU's Kurt-Georg Kiesinger and SPD's Willy Brandt formed a grand coalition, with the two of them serving, respectively, as Chancellor and Vice Chancellor. Kiesinger had earlier taken over from Ludwig Ehard who himself had succeeded the long-serving Konrad Adenauer.

This grand coalition did not go through a happy time. It limped along through difficulties till 1969, when Brandt, in coalition with the smaller Free Democratic Party of Walter Schell, formed a new government. The CDU went into opposition and Germany had its first 'socialist-dominated' government which through its policy of 'Ostpolitik' unleashed forces that eventually led to the reunification of Germany.

Germany passed through a period of flux since its September 18 election and the formation of the grand coalition was seen as a way out of the political chaos that followed the election. The uncertainty reflected among its 62 million voters was also particularly disturbing because Germany, this October, was marking 15 years of national unity. The political impasse over the knife-edged deadlocked poll results (the Christian Union Alliance won 35.2 percent of the vote as opposed to 34.4 percent for the Social Democrats) was further muddled as a result of the fierce wrangling over the post of Chancellor.

CDU's Angela Markel finally won the battle and became Germany's first woman leader and the first from the former communist east to govern united Germany. Having failed to obtain outright majority, Merkel and her colleagues fought on the democratic principle that the biggest party in Parliament nominates the head of government. Merkel has reached the pinnacle after a remarkable political career which saw her entering active national politics on 1990, and since then, rising through the CDU ranks despite opposition from traditionalists in the male-dominated party.

Merkel won her fight to oust the incumbent Schroeder at the price of a power-sharing deal which gave Social Democrats eight of the 14 Cabinet posts, among them the powerful portfolios of finance to Peer Steinbrueck, a state premier and the foreign ministry to Frank-Walter Steinmeier, the Chief of Staff in Schroeder's Chancellery. The other important concession was the decision to have former Social Democrat party Chief Franz Muentefering, a close ally of the outgoing Chancellor a number two (for all purposes as Vice-Chancellor) in the Cabinet and Minister for Labour.

Six Cabinet posts were set aside for the conservative Christian Union group. It included-economy, interior, defence, agriculture, education and family and also that of the Chair of the Parliamentary Speaker.

Merkel's victory has been welcomed, as expected, by the right wing political parties in Europe. Conservative French Interior Minister Nicolas Sarkozy, who has already shown interest in seeking the French presidency in 2007, shot off a congratulatory message pointing out that 'the trust that German voters showed in your confirms that the ideas and values that we share are correct'. This was a pointed dig at French President Chirac, who was a close friend and ally of Schroeder. Poland and some of the other countries of Eastern Europe, who have been uneasy with Schroeder's warm links with Russia, have also welcomed the change in Germany.

As is usual, after any important election in Europe, analysts will focus on the new government's foreign policy. Trans-Atlantic relations with Washington will come under special scrutiny. The previous SPD government was not only critical of US and UK policy in Iraq but had also disassociated itself from the 'Coalition of the willing'. Merkel on the other hand had been more receptive and agreeable. It would therefore be interesting to see how the new grand coalition will treat this issue, given the fact that it is led by Merkel with a Foreign Minister from the SPD.

Another area that might create ripples will be the question of Turkey's entry into the EU. Merkel and her party had openly opposed Schroeder's support for Turkey's entry into the EU. Her view was based on the argument that a large Muslim majority country, relatively 'poor', would be out of place in a club of prosperous countries with 'predominant Christian values'. She supported the idea of Turkey gaining a status of 'privileged membership'. One will have to now wait and see how the coalition, with differing agenda handles this sensitive issue.

Despite all the hoopla, one thing is however clear. European nations -- France, Italy and now Germany -- are hamstrung by the weakness of their political leadership. The inconclusive nature of the elections in Germany, Europe's biggest and yet one of its most sluggish economies might further deepen the prospects for stagnation in Europe at a time when pressing domestic and international problems call for decisiveness.

Another aspect has been underlined. Stefan Theil had correctly observed that the difficulty that Germany's major parties have faced in assembling a governing coalition may be 'a tipping point'. Michael Meyer has also interestingly pointed out that 'with the decline of the SPD and the CDU, coupled with the rise of the radical Linkspartei and its split from the Social Democrats, the country's political landscape has not only fractured but veered further to the left'. The CDU lost a 20 point lead in the polls and today, the parties of the Left in German politics -- the SPD, the Greens and the Linkspartei control 54 percent of the seats in the German parliament. The majority in Germany, despite a Christian Democratic government is left of center.

It would however be wrong to underestimate Chancellor Merkel. She, in her own way is a tough minded liberal, who genuinely believes that she can clear away the obstacles that are preventing Europe's biggest economy from realising its potential. She also appears to be ready to take the necessary risks in this regard.

I had several meetings with her in 2001 and 2002, when I was Ambassador in Brussels, and recall her firm and quiet confidence that unemployment in Germany can be reduced through encouraging an increase in domestic consumer spending and gaining a greater share of global exports of manufactured goods. Last year Germany became the world's top exporter, larger even than the USA, despite the fact that the American economy is five times bigger than Germany. Given her past comments, many analysts will now monitor Merkel's handling of the scenario with care.

Others in the EU will also carefully follow how her coalition plans to tackle the plugging of the nearly US$ 42 billion budget shortfall by the end of 2006 in order to bring Germany within EU budget limits in 2007. It may be recalled here that years of sluggish growth has pushed Germany's budget deficit over the EU-mandated limit of 3.0 percent of GDP.

Some pundits have pointed out that Merkel has very little room to manoeuvre and have therefore already expressed pessimism about Merkel's ability to hold such a broad coalition together. They have also expressed doubts about whether she can achieve anything 'of lasting value'. In this context, they are pointing out that many of Merkel's proposed reform programmes have already been shelved-a flat-fee health care premium to lower non-wage labour costs, further labour-market reforms, such as loosening Germany's strict protections against dismissal, and radical tax reform.

I believe that such prognostication of failure is a bit hasty. The two camps have been able to nominate and put together a better group of people than anticipated. Yes they will have the challenge of not only convincing Germans that they need economic reform but also persuading them to feel better about it. They will also have the tough job of simplifying the country's less than efficient 'financial constitution' and the regulatory mechanisms pertaining to tax-revenue equalisation and joint public spending.

Chancellor Merkel has however already demonstrated that she has nerves of steel. One thinks that she, despite the odds, will give it a serious try, at least for a year or two. If it does not work, and if she finds that she has a reluctant coalition partner, both in matters of financial reforms and foreign relations, then she will probably seek fresh elections in the last quarter of 2007. Till that time, the SPD will have to learn to deal with her determination.

In the meantime, the market reaction to the election and the formation of the grand coalition has been positive. After a slight dip, the Frankfurt Stock Exchange's Dax index has come back strongly. The IFO business confidence index has also risen. This indicates that the European business community is willing to give the coalition a chance to prove itself.

Muhammad Zamir is a former Secretary and ambassador -- any response to [email protected]