Merkel wins fight to be Chancellor but radical reforms will be ditched

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Yet Ms Merkel's historic victory - she has become the first woman leader of the most powerful, albeit ailing, economy on the continent - is overshadowed by the political deal-making necessary to propel her into office.

She has been forced into a power-sharing deal with Mr Schröder's Social Democrats in a so-called "grand coalition" of the country's two biggest parties. Mr Schröder exacted a heavy price for his departure by securing key ministries for his Social Democrats which could, in effect, torpedo any real reforms the new Chancellor hoped to institute to get Germany working again.

The SPD has come out of 22 days of political horse-trading with eight cabinet seats - two more than Ms Merkel's CDU - and with control of the heavyweight foreign, finance, justice, labour, health, transport, environment and international development ministries.

It means Ms Merkel's plans for radical reforms of the unions, the tax system, rigid labour laws and the influence of unions at boardroom level in most major German companies will be watered down at best: at worst, they will fail in endless partisan bickering, meaning the only real solution may be another general election before very long if the perceived logjam in the Bundestag becomes reality.

"In exchange for getting the chancellery, the conservatives will have to make compromises in personnel," said Andreas Rees, an economist at HVB Group in Munich. "It is unlikely that reform-minded politicians will have a lot to say in this new government."

Ms Merkel admitted at a press conference that the arrangement was not ideal but she was still determined to forge ahead with reforms in a "coalition of new opportunities designed to get Germany working again." She added: "Germany and the Germans realise there is no reasonable alternative to reforms. We have five million unemployed, we face pressure from Brussels over our deficit. We need to do this in a spirit of a strong sense of optimism. We want to work together for the people of this country."

It is unclear whether Mr Schröder, 61, will have any role in a new government but it is widely thought he will bow out of public life for good to write his memoirs, sit on boards of public companies and draw pensions. Over the past three weeks he has made it clear he saw no job other than the one he held as being suitable for him.

Ms Merkel, 51, said negotiations on the fine print about which direction her government would take would continue for several weeks. For Europe in general and Europe in particular, Mr Schröder's leadership loss will be felt at several levels.

In his two terms in office, his political skills were blighted by a deep-rooted desire to keep market forces at bay in a misguided attempt to keep jobs secure and the welfare state afloat in the "Fortress Germany" economy that was no longer sustainable.

He failed and leaves office with economic growth stagnant, nearly five million jobless, a ballooning budget deficit and the bloated cradle-to-grave social security system in jeopardy, despite embarking on a reform programme. But he remains, in personal popularity polls, ahead of his successor and has earned his place in post-war German history as the country's most telegenic leader.

The exit of Tony Blair's greatest ally on the continent - though they fell out over the Iraq war and EU reforms - marks the end of a political era.