The election victory of Angela Merkel's Christian Democratic Union and the free-market Free Democrats is good for Germany's economy and business – but how good remains to be seen. The outcome is complex. Paradoxically, Germany appears to have shifted rightwards just when the financial crisis has exposed the pitfalls of policies traditionally associated with the right. In fact, the result is as much about the decline of Germany's two big parties and rise of smaller parties at either end of the spectrum. The CDU and Social Democrats, which once commanded 90 per cent of votes between them, this time took below 57 per cent, both scoring their worst result for nearly six decades. While the Free Democrats' 15 per cent is their best result ever, the Greens achieved the same feat and the populist Left party came close.

The strong showing of the CDU's new partners ought to give Ms Merkel scope to deliver the radical reform agenda she ran on in 2005. But it is not clear she wants to. The penchant for compromise she showed in government may reflect not just the need to keep the uneasy Grand Coalition with the Social Democrats afloat. Ms Merkel may herself have shifted towards the centre. If so, how radical the programme is will depend on the FDP's ability to draw advantage from its robust vote in coalition talks. Agreement with the CDU should be straightforward on income tax cuts and inheritance tax reforms. But Ms Merkel may resist the FDP's labour market deregulation plans.