Schroder makes up lost ground

Gerhard Schröder loves election campaigning and is very good at it

Gerhard Schröder loves election campaigning and is very good at it. So much so that his Social Democrats party has narrowed the gap between itself and the Christian Democrats by more than three percentage points in the last week, making it impossible to predict the outcome of the voting in Sunday's general elections.

What was assumed over recent months to be a clear-cut victory for a centre-right coalition led by Ms Angela Merkel could now usher in a grand coalition between her and Mr Schröder, or conceivably a new left-wing coalition. This is an important election not only for Germany but for Europe and the wider world.

Mr Schröder's particular talent is to spot an issue worrying voters and put his opponents on the defensive. In 2002 Iraq played such a role, giving him an unexpected victory. This time he has exploited Ms Merkel's choice of Prof Paul Kirchhof of Heidelberg university as her principal economic adviser. A vocal advocate of a 25 per cent flat tax to replace the many tax breaks in the German system, and a supporter of reduced social protection, he has alienated floating voters and rallied reluctant SPD supporters in the closing stages of the campaign. His views symbolise a burgeoning polarisation mirrored by the emergence of the Left party as a real electoral force with around 7 per cent support. Mr Schröder has capitalised on policy and personality tensions between Ms Merkel and former leading figures of her coalition displaced during her rise to power, posing questions about her political judgment.

Economic issues have predominated in the campaign, not surprisingly given relatively high levels of unemployment, sluggish growth and flat levels of productivity. German voters are wary of radical change but want to see changes of policy capable of turning these problems around. Reforms already introduced by Mr Schröder's government have been slow to take effect, but his credibility has been boosted at the hustings. There are strong hints from both of the main political blocs that a grand coalition could deliver economic reform. Mr Schröder has had to negotiate change with the CDU-dominated upper house of the federal parliament for the last three years and there are obvious trade-offs in post-election bargaining on wages and unemployment benefits.

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Foreign policy issues have not had such prominence, but are significant nonetheless. There is a sharp disagreement on Turkish membership of the European Union, which Ms Merkel rejects and the SPD is willing to contemplate. This would complicate Ms Merkel's desire for improved relations with the United States should she become chancellor - as would continuing German hostility to any involvement in Iraq. Despite her objective of a closer relationship with the United Kingdom, this would not be at the expense of that with France. Despite a divisive campaign there is more likely to be continuity in foreign than in domestic policy.