The first months of the new government had policy disputes between the moderate and traditional left wings of the SPD, and some voters got fed up. The first state election after the federal election was held in Hesse in February 1999. The CDU increased its vote by 3.5%. The CDU became the largest party, and replaced a SPD/Green coalition with a CDU/FDP coalition. The result was seen in part as a referendum on the federal government's ideas for a new citizenship law, which would have made it easier for long-time foreign residents to become German citizens, and also to keep their original citizenship as well.
In March 1999, SPD chairman and Minister of Finance Oskar Lafontaine, who represented a more traditional social democratic position, resigned from all offices after losing a party-internal power struggle against Schröder.
In state elections in 2000 and 2001, the respective SPD- or CDU-led coalition governments were re-elected into power.
The next election for the "Bundestag" was September 22, 2002. Gerhard Schröder led the coalition of SPD and Greens to an 11-seat victory over the CDU/CSU headed by Edmund Stoiber (CSU). Two factors are generally cited that enabled Schröder to win the elections despite poor approval ratings a few months before: good handling of the 2002 European floods and firm opposition to the USA's 2003 invasion of Iraq.
The coalition treaty for the second red-green coalition was signed October 16, 2002. There were a lot of new ministers.
In February 2003, elections took place in the states of Hesse and Lower Saxony, were won by the conservatives. In Hesse, the CDU minister president Roland Koch was re-elected, with his party CDU gaining enough seats to govern without the former coalition partner FDP.
In Lower Saxony, the former SPD minister president Sigmar Gabriel lost the elections, leading to an CDU/FDP-government headed by new minister president Christian Wulff (CDU).
The protest against the Iraq war changed this situation a bit, favouring SPD and Greens.
The latest election in the state of Bavaria led to a landslide victory of the conservatives, gaining not just the majority (as usual), but two thirds of parliamentary seats.
In April 2003, chancellor Schröder announced massive labour market reforms, called Agenda 2010. This included a shakeup of the system of German job offices (Arbeitsamt), cuts in unemployment benefits and subsidies for unemployed persons who start their own businesses. These changes are commonly known by the name of the chairman of the commission which conceived them as Hartz I - Hartz IV. Although these reforms have sparked massive protests they are now credited with being in part responsible for the economic upswing and the fall of unemployment figures in Germany in the years 2006/7.
The European elections on June 13, 2004 brought a staggering defeat for the Social Democrats, who polled only slightly more than 21%, the lowest election result for the SPD in a nationwide election since the Second World War. Liberals, Greens, conservatives and the far left were the winners of the European election in Germany, because voters were disillusioned by high unemployment and cuts in social security, while the governing SPD party seems to be concerned with quarrels between its members and gave no clear direction. Many observers believe that this election marked the beginning of the end of the Schröder government.
In September 2004, elections were held in the states of Saarland, Brandenburg and Saxony. In the Saarland, the governing CDU was able to remain in power and gained one additional seat in the parliament and the SPD lost seven seats, while the Liberals and Greens re-entered the state parliament. The far-right National Democratic Party, which had never got more than 1 or 2% of the vote, received about 4%, although it failed to earn a seat in the state parliament (a party must obtain at least 5% of the vote to achieve state parliamentary representation).
Two weeks later, elections were held in the eastern states of Brandenburg and Saxony: once again, overall, the ruling parties lost votes and although they remained in power, the right to far-right parties made the big leaps. In Brandenburg, the Deutsche Volksunion (DVU) re-entered the state parliament after winning 6.1% of the vote. In Saxony, the NPD entered a non-competition agreement with the DVU and obtained 9.2% of the vote, thus winning seats in the state parliament. Due to their losses at the ballots, the ruling CDU of Saxony was forced to form a coalition with the SPD. The rise of the right to far-right worries the ruling political parties.
On May 22, 2005 as predicted the SPD was defeated in its former heartland, North Rhine-Westphalia. Half an hour after the election results, the SPD chairman Franz Müntefering announced that the chancellor would clear the way for premature federal elections by deliberately losing a vote of confidence.
This took everyone by surprise, especially because the SPD was below 25% in polls at the time. On the following Monday the CDU announced Angela Merkel as conservative candidate for chancellorship.
Whereas in May and June 2005 victory of the conservatives seemed highly likely, with some polls giving them an absolute majority, this changed shortly before the election at September 18, 2005, especially after the conservatives introduced Paul Kirchhof as potential minister of the treasury, and after a TV duel between Merkel and Schröder where many considered Schröder to have performed better.
New for the 2005 election was the alliance between the newly formed Electoral Alternative for Labour and Social Justice (WASG) and the PDS, planning to join into a common party (see Left Party.PDS). With the former SPD chairman Oskar Lafontaine for the WASG and Gregor Gysi for the PDS as prominent figures, this alliance soon found interest in the media and in the population. Polls in July saw them as high as 12%.
After success in the state election for Saxony, the alliance between the far right parties National Democratic Party and Deutsche Volksunion (DVU), which planed to leapfrog the "five-percent hurdle" on a common party ticket was another media issue.
The election results of September 18, 2005 were surprising. They were very different from the polls of the previous weeks. The conservatives lost votes compared to 2002, reaching only 35%, and failed to get a majority for a "black-yellow" government of CDU/CSU and liberal FDP. The FDP polled a 10% of the votes, one of their best results ever. But the red-green coalition also failed to get a majority, with the SPD losing votes, but polling 34% and the greens staying at 8%. The left party alliance reached 8.7% and entered the German Parliament, whereas the NPD only got 1.6%.
The most likely outcome of coalition talks was a so-called "grand coalition" between the conservatives (CDU/CSU) and the social democrats (SPD), with the three smaller parties (liberals, greens and the left) in the opposition. Other possible coalitions include a "traffic light coalition" between SPD, FDP and Greens and a "Jamaica coalition" between CDU/CSU, FDP and Greens. Coalitions involving the Left Party were ruled out by all parties (including the Left Party itself), although the combination of one of the major parties and any two small parties would mathematically have a majority. Of these combinations, only a red-red-green coalition is politically even imaginable. Both Gerhard Schröder and Angela Merkel announced that they had won the election and should become next chancellor.
On October 10, talks were held between Franz Müntefering, the SPD chairman, Gerhard Schröder, Angela Merkel and Edmund Stoiber, the CSU chairman. In the afternoon it was announced that the CDU/CSU and SPD would begin formal coalition negotiations with the aim of a Grand Coalition with Angela Merkel as the next German chancellor.