Vote leaves Germany in a political mudbath

On Monday, the Euro fell over more than one percent to a seven-week low against the dollar, while German stocks shed 0.8 percent, with German utility and auto stocks were particularly hard hit.

"On balance, the only certainty is a period of uncertainty ahead," said economists at Credit Suisse First Boston.

New alliances in the cards?
The uncertainty has brought with it the prospect that that new alliances, to date unseen in German political history, could take effect.

Because the three smaller parties all performed strongly — with the FDP winning 9.8 percent, 8.1 percent for the Greens and 8.7 percent for the Left Party (the former communist party) — they have all emerged as key players in coalition talks.

The coalition of Schroeder's SPD and the Greens, who have been in charge for the past seven years, would be able to stay in power if they manage to bring the FDP into the boat.

For decades, the FDP has wielded power beyond its size due to its role as a parliamentary swing vote and has paired with both the CDU/CSU and the SDP in return for key policy moves and cabinet positions

However, Guido Westerwelle, head of the FDP party has categorically ruled out support for the SDP.

Another option would be what has been coined the "Jamaica" coalition: Merkel's conservatives, the FDP and the environmentalist Greens. (The three party’s colors match the black, yellow and green in the Jamaican flag.) Strong differences, though, with the Greens over immigration and environmental policies would make consensus extremely difficult.

Could ‘grand coalition’ be the answer?
Also touted is a "grand coalition" between Merkel’s CDU/CSU and Schroeder’s SPD. In fact, polls ahead of the election suggested that voters believed this would be the only alliance with enough clout to push through painful reforms on taxes, health care and outdated federal structures.

But analysts say that because of fundamental policy differences between the traditional rivals such a coalition could be fragile and further paralyze the country.

"The difficult political alliances and also strong gains for the former East German communist party (the Left Party), especially in western Germany, are dynamic factors for further stagnation," said Professor Wilke.

So now the spotlight moves away from the ballot box to the backrooms, where party leaders have to hammer out a deal before an Oct. 18 deadline for the new parliament to sit.

"The coming weeks will be the weeks of the Machiavellians and the grand strategists," Germany's Süddeutsche Zeitung wrote in an editorial.

And if that fails? Likely chaos — and unprecedented round of new elections.

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