With Blair and Chirac in lame-duck decline, by the time Angela Merkel takes over the EU presidency in January she will command more authority than the leaders of the continent’s other big states.

It is an amazing perspective for someone who looked close to breakdown on election night after throwing away a commanding poll lead and snatching victory by only four seats.

But Merkel toughed it out, formed a coalition with the defeated Social Democrats and, with a 72% popularity rating, now enjoys the best score of any chancellor for half a century.

Her surge in support rests on a modest turnaround in the economy, which is set to grow by just under 2% this year (thanks to international factors rather than any measures she has taken), as well as on the contrast with her predecessor Gerhard Schroeder.

Her low-key straight-talking sounds good after his confrontational arrogance – which he compounded within three weeks of losing power by rushing to join the board of the Russian energy giant Gazprom.

Everyone assumes she will be in power for four years. The doubts centre on what this allegedly strong government will achieve and whether it has already started to drift. Commentators argue over which party has made the most concessions.

Some Christian Democrat leaders are angry that Merkel wants to expand an equal-rights bill to outlaw discrimination by gender, age and religion rather than only by ethnic origin.

On the other flank, the Social Democrats who fiercely campaigned against Merkel’s plan to raise VAT next year now go along with it, even though she is raising it by three percentage points instead of the 2% she promised.

The government plans to keep the tax money partly to finance massive reforms in Germany’s creaking health system. If Britain’s NHS is in simmering revolt, in Germany thousands of doctors are out on strike.

The government also wants the higher VAT income so as to cut Germany’s budget deficit and bring it within the EU’s required limit of 3% of gross domestic product.

“It’s not right for us to violate the stability pact for the third, fourth, fifth time because we don’t meet our own obligations,” Merkel said in typically stern style on Thursday, in what was her government’s first declaration on Europe.

Merkel did not go that far yesterday. For her the current priority is to have more VAT so as to show she can put a lid on budget deficits like a good European.

In the same spirit, she refused on Thursday to say that the European constitution was dead, in spite of its rejection in France and the Netherlands last year.

Merkel’s trademark line throughout her career has been to “advance with small steps”. She is enough of a realist to know there is no chance of redrafting the constitution before next spring’s elections in France and the Netherlands.

Jose Manuel Barroso, the European commission president, has proposed that EU leaders sign a declaration of intent at next year’s 50th anniversary of the Treaty of Rome, which launched the Common Market.

This would get strong support in Germany where the Bundestag’s corridors are abuzz with speculation about mechanisms to implement parts of the constitution.

Jurgen Klimke, of the Christian Democrats (CDU), talks of a “shortened constitution” or “a common charter like the Ten Commandments”, which would stress Europe’s identity, and institutional changes such as the creation of a European foreign minister.

After Schroeder’s close friendship with Putin and his opposition to the US invasion of Iraq, Merkel is back on track with the Bush administration.

Her foreign minister has called for direct talks between Iran and the US, but the chancellor did not make the same point publicly during her trip to Washington last week, apparently not wanting to embarrass Bush.

It was already her second visit to the White House as chancellor. So friendly is their relationship that the US president quickly accepted her invitation to her Stralsund constituency in eastern Germany on his way to the G8 summit in Russia.

The Left party – Germany’s new and still uneasy coalition of western trade unionists and eastern socialists – which is a junior partner in Stralsund’s regional government, wants to promote anti-Bush demonstrations that are at least as good as, if not better than, those in Mainz.

In the Bundestag elections the Left party won more seats than Germany’s Greens. Its MPs plan to turn what was a last-minute poll alliance into a full-scale new party next year so as to escape their eastern image.

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