SNAP ANALYSIS: German center-right would cut tax, shrink state

BERLIN (Reuters) - Chancellor Angela Merkel's conservatives have won enough votes in Germany's election to form a center-right government with their preferred partners, the Free Democrats (FDP), early results showed Sunday. That brings to an end an awkward "grand coalition" over the past four years between Merkel's conservatives and the Social Democrats (SPD).

IMPACT ON POLICY

* Under a center-right coalition, policy will shift to the right, with the focus likely to be on cutting taxes and rolling back the state. However, with the centrist Merkel still as chancellor, there will be no radical lurch.

* The pro-business FDP will probably occupy three or four major cabinet posts. Traditionally, it has held the foreign, economy and justice ministries. The conservative camp, made up of Merkel's Christian Democrats (CDU) and the Bavarian Christian Social Union (CSU), would control the others.

* Economy: Europe's biggest economy has just emerged from its deepest recession since World War Two but the recovery is fragile. The coalition will aim to reduce income tax but a bulging budget deficit -- set to hit 6 percent of GDP next year -- is another consideration. The FDP and some CSU members advocate spending cuts to tackle the deficit. The coalition will also seek less state influence and pursue privatizations, such as that of rail operator Deutsche Bahn.

* Energy: the coalition is widely expected to extend the lives of some nuclear plants which have been earmarked for closure, although neither party wants to build new atomic plants.

STABILITY, ABILITY TO PASS LAWS

* A center-right coalition will have a slim majority in the Bundestag lower house but that may not cause problems for legislation as conservatives have little tradition of rebelling.

* The political scene will be more polarized, with a beefed-up opposition, comprising the SPD, Greens and the Left party. It is unclear to what extent they will work together but they have potential to eventually try to topple the government.

* The coalition partners could hit obstacles in the Bundesrat upper house where they lack a majority. This could mean delays and compromises on major legislation.

* Arguments within the coalition, especially between the CSU, with its strong social and interventionist vein, and the pro-business FDP, could dog the coalition.

IMPACT ON MERKEL, CONSERVATIVES

* This outcome will strengthen Merkel, at least in the short term, as she has achieved what she failed to do in 2005's vote.

It will probably silence her critics within her own party, at least for now. The presence of the FDP could give a boost to some on the right of the party.

IMPACT ON SPD, LEFT CAMP

* The result, its worst since World War Two, is a heavy blow for the SPD who will have to rebuild themselves and probably choose new leaders. But a period in opposition could be what it needs to regenerate after 11 years in government. It is riven by deep divisions over direction and ties with the Left party.

A new generation could eventually take over and some of the potential candidates, including Berlin mayor Klaus Wowereit, are more open to cooperating with the Left party in the long term.

(Editing by Mark Trevelyan)