BERLIN (Reuters) - Germany's Angela Merkel began the tough task of trying to build a coalition government on Monday after securing a fourth term as chancellor in an election which saw her support slide and the far right making significant gains.
With the Social Democrats insisting they will go into opposition and all parties shunning the anti-immigrant Alternative for Germany (AfD), parliamentary arithmetic favors a "Jamaica" coalition of her conservatives (black), the pro-business Free Democrats (yellow), and the Greens - so named because their party colors reflect the Jamaican flag.
Merkel's party remains the biggest parliamentary bloc and she has said she is sure a coalition can be agreed by Christmas.
But patching together a coalition deal with three wildly differing parties of the right, left and center, will be no easy task, and some investors are unsettled by the prospect of a weaker Merkel at the head of a potentially unstable coalition.
The following is a list of areas in which the three parties are at odds with each other.
Merkel's conservatives (CDU/CSU) and the liberal Free Democrats (FDP) agree on the primacy of fiscal discipline, but may diverge on the details. The FDP's ambition for a "working middle class" tax cut of 30 billion euros may clash with the CDU's pledge to prioritize investment, though investment in higher education is a shared priority. The conservatives and FDU may accept the Greens' ambition to shutter polluting coal-fired plants and promote green energy, but at a slower pace. However, the Greens' hostility to the terms of major trade deals will be a much more serious sticking point.
The FDP's tougher line on immigration is likely to be more of a sticking point for the Greens than for the CDU. The pro-business FDP wants immigration to serve the needs of the economy but, like the other two parties, is committed to the right to asylum for war refugees. The FDP will likely be able to sign up to the CDU's plan to remove the right to remain from those who fail to integrate or break the law. Both parties, traditionally stricter on citizenship policy, are likely to resist the Greens' wish to let anyone born in Germany become a citizen. However, the liberals and the Greens may be able to make common cause on civil liberties: the FDP opposes widespread data retention for security agencies, while the Greens want a security policy that is more responsive to civil rights concerns and opposes mass surveillance.
EUROPE AND TURKEY
The FDP will be resistant to CDU plans to deepen the euro zone. A coalition incorporating the FDP would also ramp up the pressure on Merkel to agree to a suspension of Turkey's EU accession talks, a key policy demand of the liberals that Merkel has always resisted. The Greens, who traditionally enjoy strong support from Germans of Turkish ethnic background but are sharply critical of the government of President Tayyip Erdogan, are likely to side with Merkel in her attempts to avoid a serious rupture with Turkey. The Greens share the CDU's belief in deepening the EU, but also favor the kind of intra-EU transfers of funds and financial solidarity that raise hackles in the fiscally conservative CDU and FDP.
RELATIONS WITH RUSSIA
The Greens favor maintaining a tough line against Russia over its annexation of Crimea and its support for separatists in the Donbass region of eastern Ukraine. FDP officials have expressed divergent views on the issue, but several key members of the party distanced themselves from a call by FDP leader Christian Lindner to set aside the issue of Crimea. There are fissures within the conservative bloc on the issue, with Bavaria’s CSU - sister party of Merkel's CDU - more concerned about maintaining economic ties with Russia and probably more open to some easing of sanctions. Ultimately much will depend on whether the foreign ministry post goes to the FDP or the Greens. Regardless of how a coalition is formed, the German government has a longstanding interest in implementing the Minsk ceasefire accord and is looking carefully at a proposal by Russian President Vladimir Putin to put U.N. peacekeepers into Ukraine, a stance facing opposition from the United States and Kiev.
The Greens oppose large increases in military spending, but may find a compromise that allows small increases paired with increases in development spending. Merkel has said she intends to fulfill a promise to increase military spending to 2 percent of GDP from around 1.2 percent now, in line with a pledge to NATO, but experts and government insiders say Germany will come nowhere near the 2 percent mark over the next four years, so the new coalition government could defer conflicts about the issue.
SOCIETY AND INEQUALITY
The CDU and the Greens share a belief in investing in housing: the CDU wants financial aid to boost home ownership, while the Greens want to build a million new affordable homes. But the FDP, one of whose slogans is "people can do great things if you let them", is generally opposed to state intervention in the free market. That view could also be a stumbling block when it comes to the CDU's plan to help Germany's automotive sector shift toward electric cars and to support other "strategic" sectors such as microelectronics. The FDP may also resist the Greens' goal of introducing quotas for woman managers at senior levels in the private sector. The Greens and the FDP are both strong supporters of education reform and investment in digital technologies, such as by building fiber optic networks.
(Reporting By Thomas Escritt and Andrea Shalal; Editing by Gareth Jones)