Reforms in jeopardy as Merkel ally quits

German Chancellor Angela Merkel's fragile coalition government was dealt a further blow yesterday with the resignation of a key ally. The exit of Franz Müntefering, vice-chancellor and labour minister in the Conservative-Social Democrat cabinet, signals that Ms Merkel's industrial and welfare reform programme is all but dead.

Mr Müntefering quit because his wife Ankapetra, 61, who has cancer, has undergone several operations recently. Her husband, who has chosen to put her before politics, is a lifelong Social Democrat who once famously branded British and US hedge-fund managers as "locusts" for buying up German companies.

The 67-year-old nonetheless became a staunch supporter of the reforms put in place by his former boss, Gerhard Schröder. He then just as rapidly became Ms Merkel's greatest cabinet ally. He was virtually the last advocate for continuing the Agenda 2010 programme which cut welfare spending, specifically cutting back on payments to the long-term jobless. More importantly, he was the link to his party, the ever-more fractious SPD which recently lurched to the left after mass defections.

All the while he counselled Ms Merkel to continue to pursue the reforms which industry and economists claim are vital to Germany's long-term recovery – a course on which she has grown increasingly wobbly.

Mr Müntefering's departure tips the Merkel coalition government into its biggest crisis as whoever steps into his shoes will be from a re-energised SPD and will be opposed to any more trimming of the welfare state. Observers fear a lame-duck government for the next two years. Even Ms Merkel's supporters have little appetite for tinkering too much with the lavish system: they too are tuned into the profound collective German angst and have a weather eye on their own futures come election time in 2009. On Monday night, her cabinet agreed to increase unemployment benefits for older jobseekers – a measure Mr Müntefering had vehemently opposed.

The SPD expert Karl Lauterbach said he did not think the coalition was in danger of collapse with his going but said that Mr Müntefering may have hastened his decision to quit because he felt he was not getting the support he needed from Ms Merkel.

Last night, the moderate leftist foreign minister Frank-Walter Steinmeier was appointed as vice-chancellor and the centrist SPD MP Olaf Scholz took over Mr Müntefering's labour portfolio. Both are likely to throw down the gauntlet to the chancellor to dilute or halt the reforms. Given her own confrontation-averse nature, she will probably not be too unhappy despite public statements about "staying the course".

The heads of the German Chambers of Trade and Industry want her to keep the reforms on track but with elections just over 700 days away, there seems little chance that she will achieve anything meaningful.

As Hugo Mueller-Vogg, political commentator and author of the book Angela Merkel: My Way put it: "Rather than asking what is good policy, she asks what is doable. Rather than saying what she wants, she sells the smallest common denominator as the greatest possible success."

But business leaders say that failure to act is simply putting off the day when Germany will have to be dragged into the competitive world.