Berlin  - German Chancellor Angela Merkel broke into a broad grin when her Christian Democratic Union (CDU) overwhelmingly reelected her chairman at a party convention early December.

It was welcome relief for the party leader, whose low-key response to the global financial upheaval has disappointed Germany's neighbours and raised questions by some in the conservative camp.

An economic stimulus package of more than 30 billion euros (38 billion dollars) was seen as too little and also led to opposition charges that Germany had sleepwalked into the crisis.

With the country bracing for the full force of the international financial storm, the chancellor will need a steady hand to guide Europe's largest economy out of recession.

Her ability to deal with crisis is likely to have a major impact on how her centre-right party performs in a string of elections next year, culminating in national polls on September 27.

"The economy will play a central theme in the run-up to the general election," said Professor Manfred Guellner of the Forsa opinion research organization.

Merkel has headed a "grand coalition" with the left-of-centre Social Democrats (SPD) since November 2005.

Many in her party would like to see this alliance end next year, preferring a coalition with the business-oriented Free Democrats instead.

The first test of voter support comes on January 18 when the SPD and CDU face off in an election in the federal state of Hesse, where the financial centre Frankfurt is located.

The SPD narrowly failed to unseat the state's conservative Premier Roland Koch in the previous poll a year earlier, but has been dogged by infighting since them, triggering a plunge in voter support.

At national level, opinion polls show the CDU with a comfortable lead of more than 11 per cent over the SPD and Merkel herself neck- and-neck with Foreign Minister Frank-Walter Steinmeier, the SPD candidate who will take her on for the chancellorship next year.

But the lead could melt if the recession drags on and unemployment rises sharply, as the Paris-based Organization for Economic Cooperation and Development
(OECD) predicts it will.

Merkel experienced a similar situation in the last election in 2005, when her party was well ahead of incumbent Gerhard Schroeder's SPD in opinion polls, only to see the gap narrow to 1 per cent on election day. That left the CDU without enough parliamentary seats to form an alliance with its preferred partner, the Free Democrats.

If the same thing happens next year, Merkel might be forced to shop around for a three-way coalition, possibly including the environmentalist Greens.

The two parties aligned for the first time this spring in the city-state of Hamburg where they have been working well together after setting aside their differences on education and energy policies.

The SPD in Hesse lined up a similar coalition with the Greens in a bid to unseat Koch, but the deal was torpedoed last month by SPD right-wingers because it would have required the support of deputies in the radical Left party.

The Left is distrusted by many in Germany because some of its leading members were closely associated with the one-party state in communist East Germany.

The SPD has ruled out a coalition with the Left at national level, citing the party's stance on foreign affairs, particularly its opposition to the German troop presence in Afghanistan.

With foreign policy taking a back seat to the economy, analysts are divided over which party is best placed to make political capital out of the recession in the run-up to the September elections.

Some believe the SPD is the traditional beneficiary in trying economic times while others feel that voters' sympathies are more likely to go to parties with business-oriented policies.

Research by Forsa has shown the SPD's failure to improve its ratings so far is partially because people feel it lacks the economic authority to deal effectively with the crisis, according to Guellner.

"Merkel, on the other hand, has played her hand well," he said, citing a recent bank bail-out which she took pains to point out "was not to save the bankers but to help the people."

This could work towards the CDU's advantage.

"If (Merkel's party) does not make any major blunders it could win the election in 2009 with the help of a sturdy showing by the Free Democrats," according to Klaus-Peter Schoeppner of the TNS Emnid poll group.

But if neither of the two major parties is in a position to form a coalition with the partners of their choice, they might be forced once more into a government of national unity.

"No one knows how long the global financial crisis will last or what damage it will cause in Germany," political commentator Guenther Lachmann said.

"A stable government majority is an advantage in a situation like this." (dpa)