COLUMN-Germany may take the slow road to change: Paul Taylor

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

By Paul Taylor

PARIS, Sept 28 (Reuters) - Germany's voters have opted for change by a surprisingly clear margin.

But while the switch from grand coalition to one between the Christian and Free Democrats may take the country in a more business friendly direction, the journey is likely to be a slow and cautious one. And Chancellor Angela Merkel may act more as a brake than an accelerator.

The strong showing of the liberal Free Democrats, boosted by young voters and middle-class defectors from Merkel's Christian Democrats, suggests many Germans want to shake Europe's biggest economy out of lethargy and support a tax-cutting reform agenda. Dashing FDP leader Guido Westerwelle registered his party's best ever score by campaigning to free up the German economy.

But for all its success at the ballot box the FDP won't be running the show. As the crude electoral maths make clear, it's very much the junior partner. And while Westerwelle may have highlighted the economy, he is likely to be foreign minister and hence less directly involved in economic policy.

The senior partner in the government remains the CDU which is a much more cautious and consensual animal. It is still coming to grips with the problems thrown up by the financial crisis -- huge deficits, worryingly fragile banks and the prospect of soaring unemployment. These are likely to reinforce the party's conservatism and discourage it from attempting radical and risky reforms.

Policies to revive growth after an expected output contraction of at least 5 percent this year will be central to the centre-right coalition's programme, on which negotiations begin later this week.

This may dovetail with the FDP's programme of cutting income tax rates, reducing corporation and inheritance tax and capping public health insurance contributions. But the CDU may be warier about its plans to open up pensions, healthcare and education to more private sector provision.

Tax cuts too may take time. Given the record deficit and unemployment expected in 2010, they may have to wait until 2011. Merkel has declined to be pinned down on a start date.

That brings us to the role of Merkel herself. It will be the chancellor's task to weld together the new coalition, after all.

She often behaved like a non-executive chairman in the outgoing coalition, letting both sides thrash out policy in public argument, then arbitrating at the last minute rather than giving a strong lead. This may have been because of the inherent compromises involved in governing with the SPD.

But her cautious management style seems unlikely to change just because she now has her partner of choice. Merkel was scalded in 2005 when the CDU ran on a more radical free-market platform and squandered a big poll lead, squeaking home only a few decimal points ahead of the Social Democrats and having to share power with them. That moved her to the pragmatic centre.

Now, she has a choice between a higher-risk course of early action to clean up and restructure the banks, tax cuts to spur domestic demand and a new privatisation drive, and a lower-risk strategy of modest, incremental change in the hope that manufacturing exports will lead the economy out of crisis.

The former would increase the deficit in the short term and engender more resistance but offers higher growth dividends. An export-led recovery may be anaemic given the likely strength of the euro. Unfortunately, her cautious instincts point towards the latter. (editing by David Evans)