By Michael Shields
VIENNA (Reuters) - Austrian Chancellor Werner Faymann's Social Democrats (SPO) got the tough task of forming a new government on Wednesday and hoped to rebuild their alliance with the conservatives to stave off the eurosceptic far right.
President Heinz Fischer asked Faymann as head of the SPO - weakened after September 29 elections but still the biggest party in parliament - to forge a new coalition, opening the door for formal talks with the People's Party (OVP), its ally since 2006.
At stake is the credibility of the two big pro-Europe parties that have dominated post-war politics but struggled to find common ground on reforming the tax, education and pension systems to preserve Austria's enviable standard of living.
Punished by voters tired of political squabbling and policy paralysis, both parties stumbled to their worst electoral results since World War Two while the anti-immigrant Freedom Party (FPO) got more than a fifth of the seats in parliament.
The results spawned widespread grumbling about prospects for five more years of an unhappy marriage, but the reluctant partners face few options other than joining forces once again.
Faymann wants to extend the "grand coalition" with the center-right OVP led by Foreign Minister Michael Spindelegger, who instead has insisted on talking to all potential partners.
The OVP is toying with the idea of forming a right-leaning coalition with the FPO and a new party led by Austro-Canadian industrialist Frank Stronach, even though both want to break up the euro and end bailouts of euro zone stragglers like Greece.
President Fischer, who has made clear he wants to see the two big parties join up again, told Faymann to draw the proper conclusions from the election.
"This concerns the style of the government's work as well as its ability to implement important reform projects," he wrote in a letter released by his office, alluding to past wrangling.
The new government has to be ready and willing to promote European integration, the president added.
With car parts billionaire Stronach back in Canada, his party has plunged into internecine warfare after it suffered a blow to its ambitions by winning just 6 percent of the vote, raising doubts over whether it is stable enough to help govern.
Stronach told Canada's Globe and Mail newspaper this week he would consider joining a coalition with parties that agreed with him on reforming government and parliament, balancing budgets and simplifying taxes.
He suggested he could set aside his campaign against the euro currency in any coalition talks.
"I think the euro will self-destruct," he was quoted as saying. "We will still work on (pulling Austria out of the euro) but it's not a primary goal."
FPO leader Heinz-Christian Strache has said he would join a coalition only if Austrians get to vote on quitting the European Stability Mechanism bailout fund for ailing euro zone members, a key component of ending the region's debt crisis.
Analysts expect the two big parties, the SPO and OVP, to finally form a new government after a sufficient period of playing hard to get, but the mood is already sour.
Finance Minister Maria Fekter of the OVP angered the Social Democrats this week by proposing the caretaker government adopt a provisional 2014 budget that largely rolls over the 2013 spending plan to avert what she called U.S.-style budget chaos.
The SPO accused her of barging ahead without consultations, saying a stopgap budget automatically kicks in if no government is in place in time to pass one soon.
(Editing by Gareth Jones)
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