The FDP is pushing a neo-liberal agenda, pledging tax cuts, health and labour market reforms.
After 11 years in opposition, the FDP is desperate to get back into government.
The FDP is the closest and longest-standing representative of pro-market liberalism in German politics.
Whether Mr Westerwelle will take the rap for the FDP's electoral setbacks is also unclear.
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The FDP would sweep away a thicket of tax rates, leaving just three: 10%, 25% and 35%.
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Furthermore, the realities of German coalition building means that the FDP's political leverage will be fairly limited.
The FDP took in only 1.8% of the votes, dipping from 7.6% in the last election in 2006.
In both states the FDP risks falling short of the 5% threshold needed to remain in the legislature.
But the FDP's shellacking in Berlin is a setback for the anti-bail-out camp.
The FDP, which reluctantly gave up the idea of further tax cuts, vetoed increases in income and consumption taxes.
But on January 18th the FDP came close, taking 16.2% of the vote in a state election in Hesse.
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Up to a point, Mrs Merkel may welcome them: the FDP's 2009 triumph came largely at the CDU's expense.
Greater trauma awaits the FDP, which may be so weakened that it can no longer furnish coalitions with majorities.
Worried about losing votes, some conservative politicians are already promising to defend the current system's basic structure against the FDP's agenda.
If the CDU and the FDP jointly fall short of a majority, the Volksparteien could be forced into another grand coalition.
The CDU remains the strongest party but its coalition partner, the FDP, might not win enough votes to re-enter the legislature.
Before the election results forced her into a grand coalition with the Social Democrats, she even campaigned together with the FDP.
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It was also what happened to Helmut Schmidt in 1982, when the FDP broke away from its coalition with his SPD.
Germany's greying argues for encouraging individuals to rely less on state-funded pensions and more on their own savings, as the FDP advocates.
The FDP is stepping up pressure for tax cuts, joined by the CSU, which is almost as nervous about its own future.
"This clearly makes the FDP the third power among the parties in Germany, " the party's secretary-general Guido Westerwelle said after the vote.
If they are disastrous for the FDP, he could be tossed overboard.
That could create a huge headache for Merkel, who may find it hard to form a workable majority in parliament without the FDP.
The FDP did well partly because the CDU, which barely raised its share of the vote in Hesse, has wavered over such principles.
ECONOMIST: The Free Democrats have done unexpectedly well in Hesse
The coalition agreement rejects a minimum wage, but the FDP may do a deal if the CDU accepts other priorities, including tax cuts.
"It's not impossible that this new party could sap half a percent from the FDP and thereby kick them out of parliament, " said Niedermayer.
As promising as the FDP's current rise is, by next year, supply siders and "locusts" may have a much harder time again in Germany.
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The FDP, the liberal party that is part of the ruling coalition in Berlin, has proposed renegotiating with the Swiss to toughen the agreement.
The upstart Pirate Party, champions of internet freedom and privacy, got nearly five times that and will take the FDP's place in the city legislature.
But even Mr Lindemann realises that the FDP must tread carefully.
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