BERLIN, June 17 (Reuters) - Chancellor Angela Merkel's government has intervened to limit the impact of Germany's deepest post-war recession, but how will a new coalition in Berlin cope with rising unemployment and a soaring deficit?
Below are key issues for investors in the country:
ELECTION
Merkel's conservatives lead the centre-left Social Democrats (SPD) by double digits in recent opinion polls, but will have to score well in elections on Sept. 27 to avoid another "grand coalition" and form a centre-right government with their preferred partners, the business-friendly Free Democrats (FDP).
A centre-right coalition would be more likely to rein in spending to curb a rising budget deficit and would probably scrap plans to phase out nuclear energy, while pushing through at least modest tax cuts.
On the other hand, another "grand coalition" government could lean towards tax hikes, rather than spending cuts, to bring public finances back in order.
An early indication of how voters are leaning will come on Aug. 30, when three regional elections take place in the states of Saarland, Saxony and Thuringia.
UNEMPLOYMENT
After declining steadily for three and a half years, unemployment began to rise at the end of 2008 and some economists fear that next year it could approach the post-war highs of over 5 million seen in early 2005.
Merkel's coalition has extended "Kurzarbeit" subsidies that encourage firms to reduce worker hours rather than resort to layoffs. Rising joblessness could put pressure on a new government to soften elements of the "Agenda 2010" labour market reforms put in place by SPD Chancellor Gerhard Schroeder.
The Bundesbank forecast this month that the unemployment rate would rise to 8.4 percent this year and 10.5 percent in 2010, from 7.8 percent in 2008.
BANK LENDING
The German government is introducing legislation that would allow banks to get toxic assets off their books, a step designed to restore confidence in the sector and to encourage banks to increase lending again.
Even before the "bad bank" plan becomes law, however, there are worries that German banks may not make use of it because of the conditions attached to it.
With an election looming, the government has been loath to place the burden of supporting the banks directly on taxpayers, but if lending does not pick up, a new government might be forced to reconsider this plan.
WAGES AND COMPETITIVENESS
Corporate restructuring and wage restraint from labour unions in past years turned Germany into one of the most competitive advanced economies in the world, but signs are emerging that it could be losing its edge.
Labour costs rose by 5.8 percent in the first quarter of 2009, the biggest rise since Germany started calculating the data in 1997. In the manufacturing sector, costs per hour surged by 11.2 percent year-on-year in the first three months of 2009.
The SPD wants to extend the minimum wage to new sectors of the economy, and its election programme designates 7.50 euros per hour as a sensible level.
STATE AID
Germany's economy minister has said he expects requests for state aid from companies to pick up over coming months, and how the government reacts will be crucial for investors.
Berlin came to the rescue of carmaker Opel last month but rejected requests for aid from troubled retailer Arcandor.
Merkel said this week that politicians needed to consider whether to help struggling chipmakers such as Qimonda, and signalled that Berlin could not close its eyes to the support being offered to rival firms in other countries.
(Compiled by Noah Barkin; Editing by Janet McBride and Andrew Torchia)