German election: What could the next government look like?

Friedrich Merz is on track to be the next chancellor of Germany after the conservative alliance he heads emerged as the largest grouping in the next Bundestag.

The 69-year-old must now negotiate a coalition and has indicated he aims to have a new government in place by mid-April.

The next intrigue lies in who could govern in partnership with the Christian Democratic Union/Christian Social Union (CDU/CSU) alliance, which took about 28.5 percent of the vote in Sunday's federal election, ahead of the far-right Alternative for Germany (AfD) on around 20.5 percent, and what their agenda might include.

Although Merz's alliance won a clear victory in a high-turnout election—around 84 percent—the result was the grouping's second worst in about eight decades, and forming a coalition will not be easy.

The major gains were made by the AfD, which jumped about 10 points from the previous election four years ago, and the left-wing Linke, which won over 8 percent, both boosted by strong support from young people.

The longstanding "firewall" against the far-right among the mainstream parties means a coalition featuring the AfD is out, and Linke is an incompatible partner for the CDU/CSU.

Outgoing Chancellor Olaf Scholz's Social Democrats (SPD) fell to around 16.5 percent, but are the most viable, though tricky, "grand coalition" partner for Merz.

Together they would likely be able to form a small majority, avoiding the additional tensions of a three-party government. On external issues, such as the Ukraine crisis, defense and the future of Europe, their platforms are compatible, but significant flexibility would be needed on the economy and migration.

Merz has a hardline approach on immigration, a key issue in the election, with promises of permanent border controls and blocks on asylum seekers. The SPD has argued such moves would be impossible under current law, and wants more nuanced solutions.

On the economy, the SPD has called for a loosening of Germany's strict debt rules, an area in which Merz has softened over the course of the campaign but his party has traditionally been stridently against.

The Greens are also potential coalition partners, but the even starker divergence in positions on immigration between the party and Merz will make a sustainable deal difficult to strike.

The Free Democrats, more natural bedfellows for Merz, failed to win the 5 percent of the vote needed to take seats in the Bundestag. The populist Sahra Wagenknecht Alliance also fell narrowly short of the 5 percent threshold to enter parliament.

With five parties in the 630-seat parliament and 316 seats needed for a majority, another "grand coalition" between the two historically main groupings, the CDU/CSU and the SPD, looks the most likely result. However, negotiators will have to overcome policy differences and campaign tensions to strike a workable deal.

With Scholz to remain in position as caretaker chancellor until a deal is agreed, and growing concerns in Europe over the policies of the United States—whom Merz made sharp remarks about post-election—the likely new leader will be eager to avoid leaving a vacuum at the top for long.