A day after the crushing defeat of Chancellor Gerhard Schroeder's Social Democrat SPD party in key regional elections in the state of North Rhine-Westphalia, the German stock market was in a cautiously optimistic mood, with the blue-chip DAX 30 index showing a gain of 37.46 points or 0.86 percent at 4,398.14 points.

Investors were relieved that, following the SPD's landslide defeat in its former stronghold, Schröder wanted to hold the next general election this fall, a year ahead of schedule.

Analysts say the move will avoid long months of economic and political paralysis as the conservative CDU/CSU and liberal FDP parties block reform SPD-Green coalition reform initiatives in the upper house of parliament, the Bundesrat.

"Without this move, the time between now and fall 2006 would simply have been filled with empty political posturing," said HypoVereinsbank economist Andreas Rees. He added that the reform process was more likely to be restarted if the opposition were to win the general election, because the Christian Union and Liberal parties already hold the majority in the Bundesrat.

The prospect of additional reforms -- including the further liberalization of the labor markets and a drastic simplification of the tax system -- would buoy sentiment on the stock markets.

Industry applause

The automobile industry has also welcomed the prospect of an early election. "Germany needs a strong government," said the head of the VDA auto industry federation, Bernd Gottschalk. The decision to bring forward the elections "must be seen as a chance," he added.

The ZDH handworkers' association agreed. "Any decision that puts an end to the political lethargy and economic stagnation is good," said ZDH chief Otto Kentzler. "An early election could be the right step."

During its two terms in power, Schröder's Red-Green administration has failed to make any inroads into unemployment, currently at a post-war high of around five million, or steer the euro zone's biggest economy out of the doldrums.

Merkel's alternatives

The question is whether the conservative opposition under CDU leader Angela Merkel will be able to handle the economy any better. HVB economist Rees noted that the CDU in North Rhine-Westphalia had won more by default than on the argument for its own reform programs.

UBS economist Holger Fahrinkrug agreed. "The conservative parties don't have an election platform as yet and, like the SPD, they also have internal struggles on key policy issues, especially in the fields of social and labor market reforms," he said.

Gernot Nerb, chief economist of the influential Ifo think tank, also believed that the mere prospect of a change in government would not necessarily lead to a lasting improvement in economic sentiment in Germany.

Concrete progress would have to be made in reforms first, Nerb argued. But banking and stock market professor Wolfgang Gerke disagreed. "After the elections, there's more chance that policies will become more reliable, more calculable," he said. "It's not so important for many companies whether the SPD or the CDU is in power. They just want an end to the endless political manoeuvering and the political blockades."

Window of opportunity?

Morgan Stanley economist Elga Bartsch said the CDU would have to show it meant business in pressing ahead with reforms if it were to win the election.

"It is a regular feature of the German political landscape for the Bundesrat to be dominated by the opposition parties after a few years of the new government being in office," she said. "An incoming CDU-led government would therefore have to make the most of the window of opportunity to push through reforms while it still enjoys a broad majority in both houses."