Economy and jobs top Schröder's agenda

The SPD-Green coalition must return to the old problem of employment reform and repair strained relations with Washington

The German Chancellor, Gerhard Schröder, hailed the re-election of his "red-green" coalition yesterday as a vindication of his social and foreign policy priorities and said he had no intention of dropping his opposition to a US war with Iraq.

Looking desperately tired, but beaming, Mr Schröder was speaking at his Social Democrat Party's (SPD) headquarters in Berlin, the day after a surge in voter-support for the Greens had helped him to the slimmest of victories in Germany's election.

Mr Schröder, who had told his supporters after the polls closed to "cross their fingers and hope", admitted that he had sat up most of Sunday night, watching the constituency results come in before he was certain that he had won. The final result came through just before 4am, making the SPD the largest party in the Bundestag with 251 seats, three more than the 248 seats won by Edmund Stoiber's conservative opposition.

The Greens confounded the polls by winning 8.6 per cent (55 seats), pushing the free market FDP, with 7.4 per cent (47 seats) into fourth place. Mr Schröder's coalition will have a majority of 11 over the conservative CSU/CDU alliance and the FDP. The turn-out, at 79 per cent, was slightly down on 1998 but still exceptionally high for a Western democracy where voting is not compulsory.

The FDP had suffered a split in the party leadership in the days before the election, after its deputy head, Jürgen Möllemann, repeated what were seen as veiled anti-Semitic remarks. Mr Möllemann resigned yesterday, under intense pressure from other party leaders, accepting what he called "his part of the responsibility" for the FDP's unexpectedly poor showing. He remains party leader in North Rhine-Westphalia and noted in his resignation statement that he had been re-elected to the Bundestag with an increased majority.

In Munich, Mr Stoiber took his defeat with good grace. He expressed pride in the revived fortunes of the CSU/CDU alliance and claimed the first increase in the alliance's popular vote for almost 20 years. But he declined to re-state his election night forecast that he would be Chancellor "within the year" because the "red-green" coalition would be too fragile to govern. He said he made the remark in the heat of election night, when early returns showed the main parties tied. Now, he promised a "constructive, but tough" opposition.

The leader of the CDU half of the alliance, Angela Merkel, reaped the reward for her loyalty when she was nominated unopposed to head the CSU/CDU in the Bundestag. Ms Merkel had sacrificed her own ambition to lead the alliance after accepting that Mr Stoiber would be the stronger candidate against Mr Schröder. Already Germany's most popular female politician, she is expected to be confirmed as Bundestag party leader today.

Joschka Fischer, who will remain as Foreign Minister, exulted in his Green Party's strong showing, noting the many young people involved in the campaign. "We have broken out of the generation trap," he said, "and this is an important sign for the future." The Greens were seen as an ageing party, locked into the Sixties alternative culture before they joined the SPD in a coalition four years ago.

Mr Fischer and other Greens were discreet about hopes for moreportfolios – perhaps a fourth ministry. As well as the Foreign Ministry, Greens hold the environment, consumer and agriculture portfolios. Mr Schröder stressed that the Greens backed most of the controversial recommendations of the Hartz commission on labour reform, which reported in August. The proposals, which include stricter unemployment benefit terms, more job training and more flexible labour conditions, aim to push the number of jobless below 4 million.

Jobs and the weak German economy was the top domestic issue in the election, and the one on which Mr Stoiber had hoped to prevail. Mr Schröder set up the commission in an effort to remove the sensitive issue of labour reform from party politics but also to have an agenda to present to voters. In the event, the proposals were eclipsed by the flood disaster. Mr Schröder is now committed to rushing them through parliament early in the new term.

Mending fences with the United States is the other urgent issue on the Schröder- Fischer agenda. But the victorious Chancellor gave no sign yesterday that he was ready to give ground – either rhetorical or real – in his stand-off with the Bush administration.

On Iraq, he said: "I think this difference of opinion will remain. We will have it out in a fair and open way without in anyway endangering the basis of German American relations."

Implicitly blaming the Americans for escalating the dispute, he said: "I have always said that we can have differences of opinion about individual issues – we disagree on Kyoto, agricultural policy, steel tariffs, for instance – but they are always handled without generating such overheated debate."

In what might be seen as a small olive branch, he said he had accepted his former justice minister's decision not to return to government. Herta Däubler-Gmelin embarrassed the SPD and infuriated Washington with alleged remarks comparing Mr Bush with Hitler.

Mr Schröder's re-election also appeared to have wrong-footed the French President, Jacques Chirac, who had hoped to revive the old French- German axis in Europe if Mr Stoiber was elected. German relations with Britain, though, emerged strengthened.

Winners and losers - how the result changes the politicians' fortunes

Joschka Fischer

The superstar of the Greens and as big a draw on the campaign trail as Mr Schröder, Mr Fischer is credited with almost single-handedly securing the Greens' best performance since they entered parliament in 1983. A Sixties rebel who turned "legit", he led the Greens into coalition with the SPD in 1998, and abandoned his own instinctive pacifism to acquiesce in Germany's involvement in Kosovo and Afghanistan. Mr Fischer, 54, is the most popular politician in the country. The turnaround for the party is not far short of miraculous: at the beginning of the year, opinion polls put them at less than the 5 per cent needed to enter parliament; they won almost 9 per cent of the vote in Sunday's election.

Angela Merkel

Helmut Kohl's surprise choice to succeed him at the helm of the CDU is back in the limelight after the elections. Openly ambitious, she had hoped to lead the conservative alliance into the election, but was convinced to support Edmund Stoiber as being more likely to beat Mr Schröder.

Mr Stoiber's defeat, although highly honourable, leaves her politically strengthened. An impressive campaigner, at 48 she is Germany's most senior female politician and has a big following especially in the east and among young women. She could become Germany's first female chancellor. When she was appointed head of the parliamentary party in April 2000, many compared her to Margaret Thatcher, a fellow scientist.

Jurgen Mollemann

Known even by friends as a "sly fox", Mr Mollemann, who resigned yesterday as deputy leader of the liberal FDP, is also a mischief-maker. He may have cost his Free Democrats their chance to return to government. Any German politician who criticises Israel and, in this case, the leader of Germany's Jewish community for supporting Israel's leadership, knows that he is asking for trouble. In Mr Mollemann's case, it was second time unlucky. In May, he was forced to apologise after saying that German Jewish leader Michel Friedman might himself fuel anti-Semitism with his "intolerant, spiteful style". He looks intent on keeping his seat in the Bundestag and his leadership of the party in North Rhine-Westphalia.