A "grand coalition" government of Germany's two largest parties, the Christian DemocraticUnion/Christian Socialist Union (1) (CDU/CSU) and the Social Democrats (SPD) led by CDUcandidate Angela Merkel took office on November 22, 2005, after the two parties worked out anagreement on a coalition governing program. The German federal election of September 18, 2005,had produced no clear winner or direction for the next government. Some see this government asshort-lived and unlikely to succeed, while others believe that only such a coalition has the combinedstrength to implement potentially painful but needed economic and social benefits reforms, assumingthat it can overcome partisan politics. Foreign policy is likely to play a secondary and lesscontentious role, given the press of domestic business and a general consensus on most internationalissues. The atmosphere of U.S.- German relations has already improved since the Merkelgovernment took office, as reflected by the successful first official visit of Chancellor Merkel toWashington on January 13, 2006. On May 22, 2005, German Chancellor Gerhard Schroeder surprised his country byannouncing that he would seek early federal elections in September 2005, a year ahead of schedule. His decision followed the resounding defeat suffered by his Social Democrats (SPD) in the stateelection in North Rhine-Westphalia, a traditional SPD stronghold. (2) This was the most recent ina string of state election losses that had given the Christian Democratic Union (CDU) oppositionfirm control of the German Bundesrat (upper house of parliament). The sluggish economy,persistently high unemployment, as well as concern about welfare and labor reforms, both enactedand planned, were widely seen as principal reasons for the SPD defeat. Early elections are rare in Germany because the German Basic Law (Constitution) makes itvery difficult for the Bundestag (lower house of parliament) to be dissolved. Only the President candissolve parliament and only after a vote of no confidence in the government. German PresidentHorst Kohler set new elections for September 18, 2005 after the Bundestag held a vote of noconfidence in the government which the Chancellor himself initiated on July 1, 2005. Before theelection was held, the decision was reviewed and approved by the German Constitutional Court. The election gave no party the necessary majority with its preferred coalition partner. Although the Christian Democratic Union/Christian Social Union (CDU/CSU) got the most votesby a slim margin, it had an unexpectedly weak showing compared to pre-election polls and in lightof the general disgruntlement with the previous government. Analysts attributed the weak showingto the fact that voters were deeply skeptical of whether a CDU/CSU government could accomplishmore than its predecessor and were also worried about some of the CDU reform ideas. Accordingto official results, the CDU/CSU received 35.2 percent of the vote, barely beating out the SocialDemocrats (SPD) with 34.3 percent of the vote. This left neither party in a position to form agovernment with just its most likely coalition partner. The Free Democratic Party (FDP) actuallydid better than expected with 9.8 percent of the vote and ahead of the Greens who received 8.1percent. The new Left Party, a union of east German former communists and a breakaway factionof the SPD, received 8.9 percent of the vote, enough to be seated as a faction in the Bundestag. Theformer communist party (PDS) did not achieve the 4 percent threshold to gain seats in theBundestag. Voter turnout was 77.7 percent, slightly less than in the 2002 election. (3) Table 1. Major Party vote percentages in the last three GermanFederal Elections

Summary: A "grand coalition" government of Germany's two largest parties, the Christian DemocratUnion/Christian Socialist Union (CDU/CSU) and the Social Democratic Party (SPD) led by CDUcandidate Angela Merkel took office on November 22, 2005, after the German federal election ofSeptember 18, 2005, had produced no clear winner. Some experts believe that the coalition will befragile, short lived, and will accomplish little with each side trying to gain political advantage overthe other. Such negative expectations are not shared by other analysts who believe that only sucha large coalition can implement potentially painful but needed economic and social reforms,assuming that it can overcome partisan politics. The most difficult and crucial areas on which the coalition must cooperate if the governmentis to succeed involve social and economic policy. Government success will be important, not justfor Germany, but also for Europe and global economic health. Experts believe that Angela Merkel,as Chancellor, wants to speed domestic social and economic reforms. It is not clear whether she willhave broader domestic support to do so, especially among the SPD base. Many observers expect more continuity than change in German foreign policy under the"grand coalition" government. On most issues, the CDU/CSU and the SPD are not far apart.Germany is expected to continue to give priority to multilateral approaches to solving internationalproblems. Many expect Chancellor Merkel to balance traditional strong Franco-German cooperationwithin the EU with closer ties to the United Kingdom, and other countries such as Italy, Spain, andPoland. She is expected to pursue European integration as a corollary rather than in opposition to thetransatlantic partnership. U.S. officials and many experts hope for improvement in U.S.-German bilateral relationsunder the Merkel-led government. Merkel has given priority to reducing the strains in transatlanticrelations, as well as improving negative German public opinion regarding the United States. The newGerman government is unlikely to fundamentally change the German stand on Iraq, meaning thatit will provide some financial and training assistance outside Iraq, but no military personnel on theground. It is likely to continue to take a lead in efforts to stabilize Afghanistan. Chancellor Merkelis expected to continue Germany's domestic and international efforts to combat terrorism. TheUnited States, Germany, and the EU are working together to oppose Iran's development of nuclearweapons. Chancellor Merkel has indicated that she will not support a lifting of the EU armsembargo against China, which the United States also opposes. A number of differences are likelyto continue even under the Merkel government, such as on the treatment of terror suspect prisoners,extra-judicial "renditions," environmental policy, and the International Criminal Court. ChancellorMerkel's first official visit to Washington and her talks with President Bush on January 13, 2006,were designed to demonstrate that a new positive chapter had opened in bilateral relations, althoughdifferences were discussed candidly. The two leaders agreed on most points, including the urgencyof addressing Iran's nuclear ambitions. This report will be updated.