Can Angela Merkel still thrive as 'Mrs World'?

A rock band pumped out "With a little help from my friends" and Germany's first woman leader stepped up on to a floodlit stage surrounded by more than 5,000 of her cheering supporters. Behind her the words "In Times Like These – Stability, Competence and Trust" flashed up in huge letters on a blue-tinted cinema screen.

The venue was Frankfurt's so-called "Century Hall" and the occasion was in effect the opening shot in Chancellor Angela Merkel's campaign to remain in power after a first term that has lasted nearly four years.

On Sunday, Ms Merkel's conservative Christian Democrats (CDU) face a key state election in the central German state of Hesse, the first in a series of similar state polls which will culminate in a general election on 27 September. A little over a year ago she was being feted as "Mrs World" in the German media and had won a reputation as Germany's most popular post-war leader with an approval rating of more than 60 per cent. Her popularity was almost entirely due to her unassuming style, her successes in improving US-German relations, mediating EU summits and brokering CO2 emissions targets in Europe and at the G8.

The credit crunch has shocked Germany, a country that was congratulating itself on an unprecedented export boom, falling unemployment and gradually improving living standards in the once-impoverished east. All that enabled Ms Merkel to look to Europe and further abroad for kudos during most of her first term.

Her party had planned to fight this year's general election on controversial issues such as a plan to end Germany's commitment to abandoning nuclear power. But however unpleasant it may be for Germans, the credit crunch has come as an electoral godsend for Ms Merkel. Only days after unveiling a €50bn (£44.7bn) stimulus package to stave off the ravages of recession, Germany's most popular leader is now able to portray her party to voters as a bastion of social stability and financial prudence in troubled times.

If the opinion polls are right, the CDU will romp home in Hesse and form a coalition government in the state with the pro-market liberal Free Democrats. Ms Merkel has already said she wants such an alliance to replace her present grand coalition of conservatives and Social Democrats, at national level if she wins in September.

At last night's Frankfurt rally, the Christian Democrats' campaign slogans almost groaned under the weight of the Finanz Krise (the financial crisis) and so did the Chancellor's address to the party faithful. "We must join forces in our land to find our way out of this crisis," she said. "We want to act in this tradition so that we come out of the crisis stronger. We must turn the crisis into a chance."

For the CDU in Hesse, tomorrow's election is a resurrection. Headed by the state's right-wing prime minister, Roland Koch, the party campaigned for re-election only last year on a virulently anti-foreigner platform. The campaign backfired and gave the Social Democrats a wafer-thin victory, not enough to give them a parliamentary majority.

The Hesse SPD insisted they would not try to form a coalition with Germany's Left Party, heirs to the East German Communist Party, and promptly tried to do just that to form a government. They were denounced as "cheats" and as a party "in bed" with the heirs to East German communism. The state faced a political deadlock for most of last year. Fresh elections were called but the SPD's popularity in the state dropped 10 per cent.

Tomorrow's Hesse election may be a foretaste of Germany's September poll. But if, as seems likely, it results in the liberal Free Democrats forming a coalition with the conservatives, Ms Merkel's €50bn stimulus package may become partially unstuck.

Such a result would increase the liberal share of votes in Germany's upper house of parliament, the Bundesrat, and enable them to prevent elements of the package from becoming law. The liberals have already said that they want much bigger tax cuts to help kickstart the economy.