Weakened Merkel faces future with new partners

Free Democrats flex their muscles as Chancellor sets about choosing ministers

The horse-trading for positions in the German cabinet began yesterday amid signs that Angela Merkel's second term would be heavily influenced by her new coalition partner, the Free Democrats, thanks to their sweeping gains in the weekend election.

Although voters allowed Chancellor Merkel to dump her awkward alliance with the Social Democrats, her party won just over 33 per cent of the vote – its worst election performance in 60 years – while the Free Democrats clocked up a record 14.6 per cent.

Commentators were quick to point out that the result had weakened Ms Merkel's bargaining position and made it difficult for her to reject liberal demands. "She has emerged from the election a half Chancellor," said Der Spiegel magazine, adding that the result had cast Guido Westerwelle, the Free Democrats leader, in the role of her "lifesaver and educator".

Ms Merkel said she hoped to have her new team up and running by 9 November, the 20th anniversary of the fall of the Berlin Wall. "Germany is entitled to have a new government quickly," she said. The two coalition partners are scheduled to begin policy negotiations this week but they are already at odds over tax cuts.

The pro-business Free Democrats campaigned vigorously for tax cuts for medium-sized companies and their employees. With the slogan "Work has got to be worth it again", the party has pledged to cut top and bottom income tax rates and simplify the complicated tax system. It argues that the measures will stimulate enough growth to push the country out of recession.

Ms Merkel's party has proposed more moderate cuts, to be implemented in 2011 or 2012 at the earliest. It has also rejected the idea of deep spending cuts to balance the books. Ms Merkel reiterated that the recession made cuts impossible: "As long as we are in this trough, the question of saving measures is not right."

With Germany facing €86bn (£79bn) worth of debt next year, most experts doubt whether the new coalition will be able to fulfil an ambitious tax cutting programme. Some have suggested that any income tax cuts may be offset by VAT increases. Holger Schmieding, the Europe expert at Merrill Lynch, said: "There will not be any dramatic changes, There will be some tax reductions over the next four years and probably some modest deregulation of the labour market."

Both parties want to bring an end to Germany's plan to phase out nuclear power by 2021 and favour maintaining existing atomic power stations until green energy sources render them unnecessary. It was unclear yesterday whether Mr Westerwelle would accept the role of German Foreign Minister's job, a post normally given to the head of a junior coalition partner.