A deal over who leads Germany would open the door to detailed coalition talks following the most inconclusive election result in postwar German history.

The talks to forge a power-sharing coalition of the country’s two largest parties, dubbed a “grand coalition”, are likely to extend into November. It would be only the second coalition of Germany’s top two parties since World War Two. Germany has been mired in a political limbo since the Sept. 18 election and economists have warned that further delay could harm the struggling economy. Germany’s Dax index of leading shares was trading 0.8 percent higher after the reports that Merkel was to become chancellor.

Financial markets are watching the talks closely to see how much Merkel will have to dilute her reform plans to appease the SPD and secure the chancellorship. If Merkel makes too many concessions it could delay or scupper changes which economists say Germany urgently needs to boost its growth rate. German gross domestic product is expected to grow just 1 percent this year, the weakest rate in the 25-nation European Union. Unemployment hit a postwar high in February of over 5.2 million people, 12.6 percent of the workforce.

<B>Philip BLENKINSOP</B>

<B>A new Margaret Thatcher ?</B>

She first came to prominence five years ago during a CDU party slush fund scandal. She had strongly denied allegations that bribes were paid for the supply of tanks to Saudi Arabia, describing them as “totally absurd”. But as the crisis deepened and the full scale of former chancellor Helmut Kohl’s role in it became apparent, she was the first former Kohl ally to publicly break with the man who brought her into the cabinet.

The move paid dividends and she was chosen to lead the party in April 2000. Yet she was not popular enough to be selected as the party’s candidate for chancellor in 2002, and was beaten by Edmund Stoiber, leader of the CDU’s Bavarian sister party, the Christian Social Union (CSU). The Merkel-Stoiber relationship is said to be still difficult - and has not been helped by Mr Stoiber’s controversial remarks about east Germans during this campaign. Some sections of the press have labelled her as Germany’s Margaret Thatcher. But according to Ulrich Klinkert, her deputy when she headed the environment ministry in the mid-1990s, comparisons with the “Iron Lady” are mistaken. “She is a little bit Margaret Thatcher and a little bit Tony Blair,” he says. Politically, she occupies more centrist ground on social issues such as abortion and legal rights for gay couples. But she has castigated Mr Schroeder on the economy, pointing to Germany’s record post-war unemployment rate and pledging a raft of measures to cut the non-wage labour bill. The CDU plans to ease the rules for dismissing workers, limit sector-wide wage deals and increase sales tax.

Role model She has played down the gender issue and brushed off media gibes about her plain appearance. Some CDU members see her as something of a role model. Katerina Reiche once said Mrs Merkel stood for family values, but not as the party has known it before. “In former times, being married was important – now we talk of families being important, but not necessarily the marriage as an institution. Even in a gay relationship people take care of each other - that’s a switch for a conservative party.”