For months, the Red-Green coalition had trailed behind the Christian Democrats (CDU) and forecasts had predicted a certain win for opposition candidate Edmund Stoiber. Then came the great floods in eastern Germany and the US' call for a war against Iraq. In an emotion-led finale to the election campaign, Schroeder promised the quick release of financial aid for flood victims and categorically rejected any German involvement in a military campaign against Saddam Hussein. The tactics worked.

A day after his election victory, the chancellor announced that he would use his second term to 'push forward with Germany's economic and ecological renewal, avoiding any social divisions'.

The push is much needed. The country is facing unprecedented challenges: rising unemployment, strained public finances and an ailing social welfare system are just some of the problems that need to be tackled. The government has announced that it expects economic growth to fall short of its earlier forecasts of 0.75 per cent and 2.5 per cent

for 2002 and 2003 respectively. Instead, it will be 0.5 per cent this year and 1.5 per cent next. The public deficit is reaching the EU-set limit of 3 per cent. The unemployment figure is well above the 4 million mark.

The question now being asked is whether the chancellor will be willing and able to use his mandate to introduce far-reaching reforms needed to kick-start the weak economy and to begin a painful, yet inevitable restructuring process. First indications are that he may not.

Despite the pledge made during the re-election campaign not to raise taxes, the issue is back on the agenda. In fact, the coalition partners seem to have agreed on tax increases already. Many economists and business leaders, who have warned against such a move on the grounds that the tax burden on households and companies is already too high, are shaking their heads in disbelief. In addition, the much-hailed 'Hartz concept' of labour market reform is being taken apart bit by bit.

The programme - named after Peter Hartz, the Volkswagen man who

earlier this year chaired the government's commission on the labour market reform project - was seen by many as the only way to break up rigid labour market structures.

On the foreign affairs front, at least, some issues appear closer to being resolved following the visit by Foreign Affairs Minister Joschka Fischer to Washington in early November. Relations between Germany and the US soured after Schroeder's outright opposition to a military strike against Iraq. They

worsened when reported remarks by the German justice minister appeared to

compare US President Bush with Adolf Hitler. The justice minister has since been replaced, but the unease caused by this incident is still apparent.

During his visit to the US, Fischer was not seen in the White House and was only received by Secretary of State Colin Powell, a clear affront. Fischer said the fact that the political mission took place at all was an important development in itself. But a full normalisation of ties has yet to be achieved.

This will be difficult, as fundamental differences between Berlin and Washington remain. A meeting between Bush and Schroeder during the NATO summit in Prague in late November could be a first step towards resolving these differences. Berlin's standpoint on Iraq is that a military strike is not the right approach to resolving the conflicts in the region and could dangerously destabilise the whole Middle East. Moreover, a military campaign could negatively affect crude oil supplies from the area.

'The key question is whether a war against Iraq is the right approach to introducing a new order in the Middle East, or whether the way towards achieving a peaceful solution between Israel and the Palestinians would be more appropriate,' Fischer said in September.

But different governments have different views on the way forward. Despite the unanimous vote by the UN Security Council on 8 November to give Baghdad one week to accept a new inspections regime, Berlin rules

out involvement - even under UN auspices. German forces will not be completely absent from the region, however. Chemical warfare specialist troops are based in Kuwait and the German marine force is patrolling in the Red Sea. Both units have been employed as part of the global fight against

terrorism.

Another argument against participation in a war on Iraq is that German military resources, the subject of repeated budget cuts over the past decade, would be severely overstretched. They are already heavily employed on the Isaf peace force in Afghanistan, as well as in the Balkans.

So Schroeder's second term looks set to face painful challenges both on the domestic and international front.

The next four years will show whether the chancellor is up to facing and resolving them.