The future of economic reform in Germany is hanging in the balance as Christian Democrat leader Angela Merkel attempts to build a coalition after an indecisive general election.

Merkel beat her centre-left Social Democrat rival, the incumbent chancellor Gerhard Schroeder, by just 1%, gaining 35% of the vote but lacking the majority she needed to win the election outright.

She must now seek to form a coalition with smaller parties if she can form a government and push through radical changes.

Merkel wants to break away from the traditional Franco-German axis and work more closely with Britain and European states.

This could mean support for Britain’s policies on employment in Europe, including support for a more flexible labour market. Latest figures showed unemployment in Germany is 9.3% and the country’s economy is stagnating.

Commentators have expressed their display at the result. Miles Templeman, director general of the Institute of Directors, said: “The question is whether Germany’s leaders can assemble a government with the decision-making capacity to tackle the urgent task of economic reform.

“From the UK perspective, we have everything to gain from economic revival in our second largest export market.”

Merkel has until 18 October to build a coalition and if she fails, Germany will hold another general election.