UPDATE 1-Merkel fights for majority in tight German election race

Fri Sep 20, 2013 2:53pm EDT

Related Topics

* Merkel seen winning third term in Sunday election

* Chancellor may face tough "grand coalition" talks

* New anti-euro party could win seats for first time

* No major shift in euro policy expected

By Noah Barkin

BERLIN, Sept 20 (Reuters) - Chancellor Angela Merkel looks on track to win a third term in a weekend election in Germany but faced a battle to preserve her centre-right majority and avert a potentially divisive coalition with the centre-left.

Sunday's vote is being watched across Europe, with many of Berlin's partners hoping it will bring about a softening of the austerity-first approach Merkel has promoted since the euro zone debt crisis began four years ago.

But the chance of major shifts in her euro policy are slim, even if forced into a right-left grand coalition with the Social Democrats - whose candidate for chancellor, Peer Steinbrueck, has criticised Merkel for choking off growth in southern members of the currency bloc by insisting on far-reaching spending cuts.

"Germany remains committed to euro zone membership, but public opinion and institutional constraints ... limit the scope for any German government to drastically alter course towards more generous support policies," analysts at Citi Research said.

Two opinion polls on Friday showed Merkel's conservatives and their Free Democrat (FDP) coalition partners in a dead heat with the combined leftist opposition on 45 percent each, while a third poll showed her coalition a point ahead of Steinbrueck's SPD and its potential allies on the left by 45 percent to 44.

The final poll on Friday by the Emnid institute for Bild am Sonntag newspaper showed Merkel's conservatives - her Christian Democrat CDU and its Bavarian sister party the Christian Social Union (CSU) - fully 13 points ahead of the SPD, meaning she will almost surely return for a third term.

But the uncertain performance of smaller parties makes the election in Europe's largest economy too close to call.

Merkel could win a narrow majority with the FDP, her preferred partner, or fall short and be forced into difficult negotiations with the SPD which could last up to two months and result in big changes to her cabinet, including the departure of Finance Minister Wolfgang Schaeuble, a key player in the crisis.

The wild card is a new anti-euro party, the Alternative for Germany (AfD), which was polling around 4 percent and so could still manage to vault over the 5-percent threshold needed to win seats in parliament on election night.

That could doom Merkel's hopes of continuing her current coalition and stir concerns about rising German euroscepticism - though its impact on government policy would likely be limited.

Merkel, at a campaign rally late on Friday, again spoke out against proposed measures to address the euro zone debt crisis by having Berlin share in underwriting the risk on other sovereign borrowers' debts.

"We reject eurobonds and debt mutualisation," Merkel told a rain-soaked crowd in Hanover. "Other parties want that and that's why I'm asking for your vote for the CDU."

UNDECIDED VOTERS

Also complicating forecasts is a large group of undecided voters, estimated by pollsters at more than 30 percent.

"I still don't know who I'm going to vote for," Anja Brueckmann, a secretary who usually votes for Merkel's CDU, said in Berlin. "I keep listening to all this talk from the politicians but no matter who wins nothing changes."

Merkel, 59, would be the third postwar chancellor, after Konrad Adenauer and Helmut Kohl, to win three terms.

Hugely popular at home for her steady, cautious leadership during five years of international financial crisis, supporters have taken to greeting her with signs reading "Mutti" - Mum.

She has presided over a robust economy and booming labour market. At 6.8 percent, the German jobless rate is roughly one quarter that of Greece.

"Germany has had four good years. We have accomplished a lot together," Merkel wrote in a campaign leaflet delivered to German households on Friday.

Critics deride her as a reactive, risk-averse leader whose policies merely follow public opinion rather than shape it. Some say German economic success is largely down to reforms made a decade ago by her SPD predecessor, Gerhard Schroeder.

Merkel, who grew up in the communist east as the daughter of a Protestant pastor, narrowly beat Schroeder in 2005 and was then forced to form the first grand coalition between Germany's two major parties since the 1960s.

Re-elected in 2009, she was able to form a majority government with the FDP. But she may have to look to the SPD again after Sunday. And this time the process may be rougher.

"The (SPD) lost 13 percent of the vote during its last partnership with Chancellor Merkel and is highly concerned about the potential long-term electoral repercussions of repeating the arrangement," said Alex White of JP Morgan in London. "SPD leaders will push for the most advantageous possible deal, likely extending negotiations for a period of many weeks."

In the talks, the SPD is expected to push for a nationwide minimum wage, a tax rise on higher earners and also key cabinet posts, including possibly the finance and foreign ministries.

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