German Chancellor Angela Merkel said she will press ahead with tax cuts and labour-market deregulation after winning re-election with enough support to govern with the pro-business Free Democrats.
With Germany struggling to recover from the deepest economic slump since World War II, voters spurned plans by Ms Merkel's Social Democratic challenger to raise taxes on top earners.
Frank-Walter Steinmeier's SPD had its worst postwar result in what he called a "bitter day" after sharing power with Ms Merkel for four years and governing for the previous seven.
"There's a clear sentiment in favour of economic changes, especially on income taxes," Tilman Mayer, head of the Bonn- based Institute for Political Science, said in an interview. "Voters have turned their back on grand coalition-style compromise politics."
Ms Merkel (55) said on ARD television that talks on forming a coalition with the Free Democrats will proceed quickly, and her focus will be on creating jobs in Europe's biggest economy. She dismissed the FDP's call for a complete overhaul of the tax system, saying she wanted to be seen as the "chancellor of all Germans" and won't let her new junior partner dictate policy.
During the campaign, she pledged to pursue deregulation, extend the life of nuclear-power plants and introduce across-the-board tax cuts of €15 billion.
The result of yesterday's election will modestly enhance the long-run growth potential of the country, Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London, said. "The government has a mandate, not for dramatic change, not for a Thatcherite revolution, but it is a mandate for some supply-side reforms," he said.
The euro may advance and bunds fall on the election result. The currency has climbed 5 per cent against the dollar this year on speculation the euro region may be emerging from recession.
Bloomberg