Collapse of 3-way negotiations in Germany will have widespread economic consequences for Europe

With major issues facing Germany and the European Union at this critical juncture in history, it is critical that Germany maintains a stable economic outlook.

On Monday, German Chancellor Angela Merkel stated, her efforts at forming a three-way coalition has failed.

The development has plunged Germany, one of Europe’s largest economy, into a crisis with potentially deep reaching economic results.

The pro-business Free Democrats (FDP) has unexpectedly pulled out from negotations with Merkel’s conservative party and the ecologist Greens, citing irreconcilable differences.

As a result, the euro touched its two-month low against the yen.

Merkel has said she would continue as an acting chancellor and would enter into consultations with President Frank-Walter Steinmeier on ways to move forward.

She made it clear that a deal had been within reach.

“It is a day of deep reflection on how to go forward in Germany,” said Merkel. “As chancellor, I will do everything to ensure that this country is well managed in the difficult weeks to come.”

The collapse in the negotiations suggests that Germany is at a fork – while one road will lead to Merkel forming a minority government, the other will lead to the president calling for a new election, if no government is formed.

Merkel’s coalition partners, including the center-left Social Democrats (SPD), have ruled out a repeat alliance with her party. However, Jens Spahn, Merkel’s ally, said new elections are still away, which hints at the possibility of him teaming up with the SPD, with whom the conservatives still rule in a care taking capacity.

“We have a capable acting government, the necessary things can get done,” said Spahn. “There is no grounds for panic.”

He went on to add, “Some SPD ministers have made clear they want to govern. The SPD will have to… decide whether it is ready to take responsibility, for the biggest country in the middle of Europe.”

The German public has little appetite for new elections, with the main parties fearing that the AfD would add to the 13% vote it secured last September and made it the third largest party.

The failure to form a government has wide pread economic consequences and touches every aspect of life within Europe; from euro zone reforms, championed by French President Emmanuel Macron, to the shape the EU will take after Brexit.

As per the DIHK Chambers of Industry and Commerce, 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,” wrote DIHK President Eric Schweitzer in an email. “German companies must now prepare for a possibly long period of uncertainty. This is always difficult for the economy.”

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