After German coalition talks fail, Merkel looks for a way forward

German Chancellor Angela Merkel's failure to forge a three-way coalition government has plunged Europe's largest economy into uncharted waters, raising pressure on the three-term conservative chancellor to maintain stability.

The pro-business Free Democrats (FDP) abruptly pulled out after more than four weeks of negotiations with Ms. Merkel's conservative bloc and the ecologist Greens, citing irreconcilable differences.

The euro recovered from a two-month low on Monday as investors brushed off the broader political risks.

But Germany now faces a prolonged period of political wrangling and uncertainty. The path to a new election would be difficult and involve more than one vote in parliament.

Many fear a new election could further strengthen the far-right Alternative for Germany (AfD) party that surged into parliament in the Sept. 24 election after winning nearly 13 percent of the vote. AfD leaders have pushed for new elections for weeks as the coalition talks failed to reach agreement.

Current opinion polls predict little change compared to the September vote. A Forsa poll released last week showed conservatives on 32 percent, the Social Democrats on 20 percent, the FDP 12 percent, the Greens 10 percent and the AfD 12 percent. It was not immediately clear what impact the latest development would have on the parties' support.

Leaders of the other parties expressed shock about the FDP's move since negotiators had been on the cusp of an agreement. The Greens accused the FDP of a pre-meditated move to oust Merkel.

Here's what could happen next, and possible scenarios for the coming weeks:

President appeals for resumed coalition talks:

The political crisis hands significant power to German President Frank-Walter Steinmeier, a member of the Social Democrats (SPD) and a former foreign minister under Merkel who assumed the normally ceremonial post in February.

Merkel was to meet with Mr. Steinmeier on Monday to discuss the most serious political crisis to confront Germany in the post-war era.

Steinmeier had already urged negotiators on Saturday to uphold their civic responsibilities and avoid new elections. He is expected to repeat that message in a statement later Monday, according to the RND newspaper chain.

Steinmeier could push the FDP and its leader Christian Lindner to return to the negotiating table. But political experts say it would be difficult to rebuild any sense of trust among the would-be coalition partners after Sunday's events.

Merkel looks into continuation of "Grand Coalition":

Merkel is likely to approach the SPD, which served for four years as junior partner in her "grand coalition," but SPD leaders have vowed to return to opposition after the party's worst election result since 1933.

Labour Minister Andrea Nahles reaffirmed that view in an interview with broadcaster ZDF on Monday, saying voters had clearly voted against a further tie-up of Germany's two largest parties.

If they agreed to talks, the SPD – which saw its support slide in the September election after it lost stature as junior partner in the often awkward coalition dominated by Merkel – would probably insist on her departure, according to party insiders.

"The SPD is in a much stronger negotiating position now," said Tyson Barker at the Aspen Institute. "But I just don't see the incentives there for the SPD. The grand coalition is just teetering on a majority."

New elections:

If coalition talks fail, the only way to trigger a new election under the German constitution would be for Steinmeier to suggest a parliamentary vote on Merkel as chancellor.

If Merkel wins a majority in such a vote, he would name her as chancellor. If she doesn't raise a majority, parliament can vote again within 14 days.

If she again misses the majority, parliament votes again and the candidate with the most votes wins.

Then Steinmeier could name Merkel – or whoever wins the most votes – as chancellor, but is not required to do so. If he refrains, he would dissolve parliament and new elections must be held within 60 days.

Minority government:

If she is elected as chancellor, Merkel could form a minority government with a variety of partners, including just the Christian Social Union (CSU), the Bavarian sister party of her Christian Democrats, or among conservatives with the FDP.

She could also form a minority coalition with the Greens. Juergen Hardt, foreign policy spokesman for the conservative bloc, said such a tie-up was promising and could convince Steinmeier to agree to a minority government.

A minority government would require Merkel to find changing majorities for her policies, but it would allow the smaller parties to maintain an independent profile, said Christian Odendahl, chief economist at the Centre for European Reform.

He said that could be helpful for the CSU, which has said it needs to pursue a more hardline position on immigration and security as it gears up for state elections in September 2018, given massive losses to the far-right AfD on Sept. 24.

This story was reported by Reuters.