Merkel fourth term in doubt as German coalition talks fail

Chancellor Angela Merkel's efforts to form a three-way coalition government that would secure herself a fourth term hit a major setback after a would-be coalition partner unexpectedly pulled out of talks, thrusting Germany into a political crisis.

Merkel, whose conservatives were weakened after an election they won with a reduced number of seats, said on Monday shortly after the pro-business Free Democrats (FDP) withdrew from the negotiations that she would inform the German president that she could not form a coalition.

The development left Germany with two unprecedented options in the post-World War Two era: Merkel forms a minority government with the Greens, or the president calls a new election after parties fail to form a government.

The centre-left Social Democrats (SPD), Merkel's current coalition partners who were the second-biggest party in the September election, have ruled out a repeat of a coalition with her conservatives.

"It is a day of deep reflection on how to go forward in Germany," a tired-looking Merkel told reporters. "As chancellor, I will do everything to ensure that this country is well managed in the difficult weeks to come."

The euro hit a two-month low against the yen soon after FDP leader Christian Lindner announced said before 23:00 GMT on Sunday that his party was withdrawing from the talks as it could not find common ground on key issues with the two other parties.

"Today there was no progress but rather there were setbacks because specific compromises were questioned," Lindner told reporters. "It is better not to rule than to rule falsely. Goodbye!"

The three unlikely would-be partners had tried for more than four weeks to bridge differences on immigration, climate and spending.

A major sticking point had been a demand by the conservatives for a cap on the number of asylum seekers that Germany accepts each year, a measure opposed by the Greens.

'No trust'

Lindner said that beyond the major sticking points, the three parties could not build enough mutual trust needed to ensure that the next government is stable for the whole four-year legislative period.

The DIHK Chambers of Industry and Commerce said a prolonged period of uncertainty would be bad for the economy.

"There is the danger that work on major issues for the future of our country will be delayed for a prolonged period of time," DIHK President Eric Schweitzer wrote in an email. "German companies must now prepare for a possibly long period of uncertainty. This is always difficult for the economy."

Merkel was weakened after the election as voters angry with her decision in 2015 to open Germany's borders to more than a million asylum seekers punished her conservatives by voting for the Alternative for Germany (AfD) far-right party.

There is little appetite for a second vote, especially as the main parties fear that the AfD would win more than the almost 13 percent of votes it secured in September.

Failure to form a government in Europe's largest economy could have implications for everything from euro zone reforms to European Union policy on Russia and Turkey.

Merkel, 63, and in office since 2005, has used her power to broker compromises on bailout aid for Greece within the single currency bloc and to keep in place EU sanctions against Russia over its backing of separatists in eastern Ukraine.