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Chancellor Angela Merkel won a famous victory for her centre-right coalition in Sunday's German elections. But there is less in this result than meets the eye – and more too.

First, Ms. Merkel's victory was clear, but quite narrow. Her popular majority over the left opposition parties amounts to a few percentage points. How big a mandate for change does she have?

Second, there will almost certainly be changes in policy as a result of the change of government. But how important will those changes be? And how will the voters react to them?

Third, the result has the seeds of major political realignments in future German politics – realignments that may not be to the advantage of Ms. Merkel. And those realignments will be determined largely by the success or failure of the new coalition of the Christian Democratic Union and the Free Democratic Party.

Let's begin with what will change hardly or not at all: German foreign policy. All parties agree that Germany should exercise joint leadership of Europe alongside France, enjoy a strategic political and economic partnership with Russia and become America's most important friend in Europe – though not necessarily America's best friend there.

Ukraine, Georgia, Eastern and Central Europe and dissidents throughout the post-Soviet space will be wary of what these priorities mean for them. A close Russo-German relationship may mean a Europe that ignores threats to their security.

But the current U.S. administration should be fairly comfortable with these approaches – especially since the tone of the CDU-FDP foreign policy will be more pro-American and more energetic.

It is on economic, financial and budgetary matters that policies are likely to change most plainly – and long-term political risks are likely to be taken.

With the economically conservative Free Democrats as her junior partner, Ms. Merkel now has the coalition for market reforms and greater business efficiency that she has always said she wanted. But it may be more market- and business-minded than she ever intended.

Because the Free Democrats won almost 15 per cent of the popular vote – far higher than anyone expected – they may not remain junior. They will have more power to insist on the reductions in taxes and regulations on which they campaigned.

But the economic picture is still very mixed – indeed, it is confusing.

Germany is emerging from the recession quite well. Its export markets are recovering. Germans seem confident that the worst of the economic crisis is over and that their banks and money are safe. On the other hand, joblessness is likely to rise as special measures to combat it come to an end. And the budget deficit already stands at 6 per cent of gross domestic product – high for Germany and worrying to inflation-conscious Germans.

The needs of the federal Treasury, it seems, conflict with those of the German economy. What the Treasury needs is either cuts in spending or increases in taxes. What the economy needs is tax cuts (and deregulation) to boost domestic demand in line with increased export demand. This vicious circle can be squared only by quite large cuts in public spending. Yet the combination of tax cuts and spending cuts would be very risky politically.

Which way do the voters want Ms. Merkel to jump? Most commentators assume that Germans are risk-averse economically: They have it good and they don't want to lose it. In particular, they want to keep their generous health and welfare benefits, their long holidays, their cozily regulated work environment.

That seems plausible. But the Social Democrats bet heavily on this cautiously conservative option – defending the social market economy in its entirety – and they suffered their worst defeat since 1945.

Whether or not they are risk-averse economically, voters are certainly not risk-averse politically. They are redrawing the entire political spectrum.

Consider these statistics: Germany's two major parties between them got a bare 57 per cent of the total vote. More than four in 10 voters chose other parties – the Free Democrats (14.6 per cent), the Greens (10.7 per cent), the unreconstructed neo-communist Left Party (11.9 per cent) and handful of also-rans. None of the three “major minors” reached as high as 10 per cent four years ago.

As the European elections showed on a continent-wide basis four months ago, the centre-left is shrinking badly, the centre-right is barely holding its own and the parties on the misnamed “fringe” are steadily gaining ground.

Ms. Merkel herself is an ambiguous figure. Since the last election, she has presented herself as the prisoner of the consensus, constrained by her Social Democratic governing partners in the “grand coalition.” In this election, she campaigned overtly for an alliance with the Free Democrats. Since the victory, she has used coded language to suggest she will not let them upset the social balance with radical policies.

Soon, however, she will have to choose: tax cuts or tax hikes, market reforms or continued overregulation. Both courses have dangers for her personally. If she takes risks with market radicalism, she may drive voters into the hands of a still-powerful left and lose the next election heavily. If she merely tinkers with the social market, she may alienate not only the Free Democrats but also those Christian Democrats who blame their disappointing result on her earlier timidity – and lose power before the next election.

Whatever she decides, we will finally learn whether Angela Merkel really is Germany's Margaret Thatcher.

John O'Sullivan is senior fellow at the Hudson Institute.