Monday p.m. 10 May
The Conservatives do need an arrangement with the LibDems.
Not only is this necessary to have reasonable expectation of passing financial and deficit reduction measures in parliament: it is also necessary to provide electoral legitimacy to the government, which a minority government wouldn't have.
The LibDems do not need an arrangement with the Conservatives, unless they can be offered sufficient agreement on support for crucial LibDem policies.
The Conservatives would also benefit from a power sharing agreement by diluting the poison in the debt reduction chalice and spreading the electoral consequences.
The LibDems could suffer electorally by being party to severe measures. But they could gain from the statesmanship shown by enabling government to proceed and the rise in media profile provided by participation in government.
The Conservatives cannot deliver substantial voting reform. This could only be achieved legitimately—in public and political eyes—through a national referendum. Holding a referendum would need to be agreed by parliament. Only a decision to present this option to parliament and a contribution on the options to be presented to the public would be in Conservative hands. However, the Conservatives could offer other political reforms—such as Lords elections by PR, re-sizing constituencies, recall of politicians and a smaller parliament.
Going too far in supporting electoral reform in exchange for parliamentary support would be unacceptable for the Tory party. Creating a full coalition without substantial support for electoral reform would be unacceptable to many LibDems.
The best solution for both parties therefore seems to be a mid-way house that presents neither full coalition nor full independence.
Detailed agreements could be reached on a range of Conservative policies that LibDems would support, perhaps in modified form. And a number of LibDem policies could be introduced without party political difficulty. These agreements would be published to reassure both parties.
LibDems would not take cabinet posts, could retain their independence, and continue to provide criticism of Conservative government policy outside the areas of support.
Of course, LibDems could still opt to partner with Labour. But I don't think it's excessively party political to say this would be a shameful election result.