Merkel's coalition hangs in the balance

CNBC

German Chancellor Angela Merkel received a boost this weekend when her allies won a key state election, but the vote could signal the end of her current conservative alliance after national elections on September 22.

The Christian Social Union (CSU) party -- the sister party of Merkel's Christian Democrats (CDU) currently governing together in a coalition -- regained an absolute majority in Bavarian elections on Sunday, showing public support for the conservatives is strong ahead of national elections next week.

However, the pro-business Free Democrats (FDP) party, a junior coalition party in Merkel's center-right conservative alliance, failed to gain the 5 percent of votes in needs to re-enter parliament. If it repeats the defeat at a national level, Merkel could be forced into an uncomfortable coalition with the main opposition party, the Social Democrats party (SPD).

(Read more: German elections: Bavaria's 'alpha male' vote is key )

The Bavarian vote could prompt many Germans who don't want to see the coalition broken up to vote tactically in next Sunday's election for the FDP. Indeed, after the result in Bavaria the head of the defeated FDP said the result was a "wake up call to all liberals in Germany."

One analyst said it was too early to predict what could happen when Germans go to the polls next Sunday, however. "I think it's important not to read too much into one result," Michael Hewson, senior market analyst at CMC Markets, told CNBC on Monday.

(Read more: Forget Berlusconi: Germany may be Italy's biggest concern )

"But if this pattern of FDP weakness is replicated across the country it could well give the Chancellor some problems in terms of the electoral mathematics after the election. Time will tell but this result certainly keeps things interesting in the run up to this weekend's election."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Follow us on Twitter: @CNBCWorld



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