Angela Merkel’s failure to secure a so-called Jamaica coalition between her Christian Democratic Union party, the Free Democrats and the Greens has thrown her future as Chancellor into doubt, and with it, the European Union’s biggest economy.
Ms Merkel has overseen a long period of economic stability for her nation over her three full terms as chancellor, and led the eurozone’s recovery efforts in the wake of the 2008 financial crisis.
But she now faces the prospect of new elections and a leadership challenge, which could spell the end of her 12-year stint at the top of European politics.
As news of the failed coalition talks broke, the euro fell overnight to $1.1720. It fell dramatically against the yen to 131.16 yen – its weakest since September 15.
Although the eurozone rallied later in the day, Germany’s domestic economy could struggle in the face of continued uncertainty.
Eric Schweitzer, president of Germany’s DIHK Chambers of Industry and Commerce, told Reuters: “There is the danger that work on major issues for the future of our country will be delayed for a prolonged period of time.
“German companies must now prepare for a possibly long period of uncertainty.
“This is always difficult for the economy.
Lee Hardman, a currency strategist at MUFG in London, said he he thought the initial selloff that took the euro to its lows was exaggerated.
Mr Hardman said: “There’s a bit of uncertainty – we don’t know what the next step is going to be, whether it’s going to be a minority government or fresh elections – but in terms of the bigger picture I don’t see any significant change in how you value the euro.”
Mrs Merkel herself has conceded she would rather hold fresh elections than try to rule as a minority government.
In saying so, the German chancellor could well be signing her own death warrant.
Ultimately, the decision will now fall to Germany’s president Frank-Walter Steinmeier, who has the power to dissolve parliament and call an election or encourage Mrs Merkel to carry on her negotiations.
A senior figure in Germany’s Greens said on Monday the country could be heading for a new general election “around Easter”, with millions forced to go back to the polls.