Germany will next month make an important political choice – probably the most important it has made since 1969, when it first embraced the politics of social democracy. It is essentially a choice between of whether to confront ing the future through economic reforms or seek ing refuge in the illusions of a defunct dysfunctional social-market system.economy.

The outcome of the country’s general election will have deep important reverberations in the European Union. A vote for reform would encourage reformers in other EU countries member states and strengthen the European Commission in its efforts to liberalise goods and services markets. It would alter the EU’s balance of power much more than a ny change of government in any single EU country of its member nations has done for many years.

No single German political party has got its approach quite right, although some have got it more wrong than others. The Christian Democrats (CDU) and the Free Democrats (FDP), the two national parties of the centre-right, offer some reforms in labour markets. This These include an long overdue change in the law that currently gives entitles trade unions and employers’ associations the right together to set industry-wide wages. Another proposal is to relax hiring and firing make it easier for small companies to shed staff. The list also includes proposals to reform the country’s inefficient labour bureaucracy and health care reforms service and cut s in non-wage labour costs. The FDP goes further than the CDU in most respects.

Given the stable majority in the Bundesrat, the upper chamber of the German parliament, the CDU and the FDP would at least be in a position to implement their reforms. politically. The chances prospect of a coalition between those CDU and the FDP two parties were was considered almost certain a few weeks ago. They are It is greatly reduced now. Last week’s opinion polls showed a drop in support for the CDU to 42 per cent, compared with over more than 50 per cent in early June. The outcome of the September 18 election is therefore wide open again.

The question is not whether Gerhard Schröder, the German chancellor and leader of the Social Democrats (SPD), can win. This seems unlikely, given the SPD’s persistent poll rating of less than 30 per cent. The important question It is whether Ms Angela Merkel, the CDU leader, will be able to lead head a centre-right coalition that implements reform or whether she will lead a CDU/SPD /CDU coalition, which will probably will not.

Supporters of Such a the latter construction – is known in Germany as a “grand coalition” – a grand coalition point to the late 1960s, when both the two large parties formed a coalition government together under Kurt Georg Kiesinger. He may be one of Germany’s least-known chancellors but his This grand coalition comprised contained two future chancellors, Willy Brandt and Helmut Schmidt. It successfully steered the economy out of a recession and implemented important financial and macroeconomic reforms.

If a The grand coalition that would resulted from next month’s election, it would not so be “grand” in any other respect. The two parties have come to disagree on almost everything that matters, such asincluding the for example eeconomy, ic reform, foreign policy and immigration. If such a grand coalition came to power, it would face be confronted by an opposition consisting of three small parties: groupings: the FDP, the Greens and an ultra-left party alliance co-headed by Oskar Lafontaine, a former SPD party chairman and arch-rival of Mr Schröder. Of those three, Mr Lafontaine’s is doing best in the polls. His party’s rating has gone up to 12 per cent nationwide – and more than 30 per cent in east Germany, where it is the single largest party. A grand coalition would elevate Mr Lafontaine to the job of leader of the opposition, representing both the left and the east. This is a constellation that serves no one except Mr Lafontaine.

By being drawn into a centrist government, the SPD would alienate its hardcore socialist base and risk an internal split. An increasing number of SPD grandees are warning against it For the SPD, this would what could be a dangerous trap.

But what then? If the two centre-right parties do did not have a majority, then logically the remaining three leftwing parties would. do. Mr Schröder and the SPD party leadership have repeatedly ruled out a coalition with Mr Lafontaine. But this promise may not amount to much if the SPD were to change its leadership. If the election results are bad, the party may do just that.

Consequently, there is a small but not insignificant risk chance that the German electorate will replace Mr Schröder’s government with one that is even more to the left, dashing any expectation of reform. What separates us from this nightmare scenario is a fraction of one a percentage point in the opinion polls, combined with more-or-less credible pledges by both the SPD and the Greens not to enter into a coalition with Mr Lafontaine.

All of this raises a number of troubling issues. questions. How can it be that, 15 years after German unification, the strongest political party in east Germany is once again st on of the far left? What does this say about the cohesiveness of the country’s political system and its economy? If a large number of Germans are turning against the free market, what chance is there of economic reform in Germany and in the rest of continental Europe?

The really important question is not whether Ms Merkel will become Germany’s next chancellor. She probably will. It is whether Germany will opt for structural economic change. One would be an optimist indeed to if one were put this chance at more than 50 per cent right now.

wolfgang.munchau@FT.com

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