Merkel Faces Test as Germany Hit by Political Paralysis

Germany's Chancellor Angela Merkel on Monday was scrambling to address the biggest political threat to her leadership in 12 years in office, after the collapse of talks to form a new government raised doubts about the stability of Europe's largest economy and a push for an ambitious eurozone overhaul.

The lack of progress in Berlin means Germany could stay politically rudderless for weeks to come, putting plans by French President Emmanuel Macron to reform the eurozone back on hold. Ms. Merkel and her party have signaled strong reservations about his plans -- which include a call for a common budget for countries that use the euro -- although the chancellor has avoided rebuffing the French leader.

Analysts said the collapse of coalition talks had inflicted heavy damage on Ms. Merkel's authority but noted that she remained without a credible contender in her party. Pundits will be watching opinion polls closely for signs that voters are rallying around -- or deserting -- Ms. Merkel, which could decide her future.

Ms. Merkel's conservative alliance had been negotiating for weeks with ideologically divergent parties after its failure to secure a decisive victory in September's election left it needing to form a coalition to govern. But in the early hours of Monday, the small pro-business Free Democratic Party broke off talks with her conservative camp and the center-left Greens, saying they had failed to bring the parties together.

Investors initially sold the euro and German stocks on the news, although markets later recovered.

Facing calls from business leaders for a political compromise to end the uncertainty, Ms. Merkel was meeting Monday with President Frank-Walter Steinmeier to chart out her next steps.

Under Germany's constitution, the collapse of coalition talks leaves a host of options that would be unpalatable to Ms. Merkel. It is up Mr. Steinmeier to start the process toward figuring out these options: chief among them a minority government -- a rarity in Germany -- that could struggle to pass legislation or new elections that would likely produce similarly muddled results as two months ago.

The Social Democrats, the previous coalition partner of Ms. Merkel's Christian Democratic Union, has ruled out being a coalition partner and reiterated that position on Monday.

Martin Schulz, the chairman of the Social Democrats, said the failed coalition partners had brought "Germany into a very difficult situation."

"We aren't afraid of snap elections," he added.

Under Germany's constitution, fresh elections would take weeks, or more likely months to organize, and they may not chart a way out of the impasse: Recent opinion polls suggest new elections would yield a similar result to those of two months ago.

Over the past four weeks, Ms. Merkel had tried to bridge longstanding divisions among the conservatives, the Greens and the pro-business Free Democrats on issues such as migration, climate and the environment. One of the key sticking points was the Greens' views on migration and the CSU's insistence on capping the influx.

The parties had also struggled to agree on greenhouse-gas emission targets ambitious enough to meet the goals set by the Paris accords on fighting climate change without burdening Germany's industry with excessive costs.

The Free Democrats, meanwhile, insisted on abolishing over the next four years the "solidarity tax" added in 1991 to help fund development in the former East Germany.

The Free Democrats said Monday the collapse of talks didn't necessary mean that Germany would be headed toward snap elections and that the party was willing to support a minority government.

"If there are good initiatives, we will be available," the party's parliamentary whip Marco Buschmann said. "We don't want fundamental opposition but want to weigh in constructively."

Some analysts say that another election could benefit the anti-immigration Alternative for Germany, which won its first seats in national parliament in September. The party's leader called for Ms. Merkel to step down.

"Ms. Merkel has failed and it's time for her to go as chancellor," said Alexander Gauland, the co-leader of the party's parliamentary group. "We believe that there is a conservative majority [in the lower house of parliament], but for this the Christian Democrats would have to change very much. We hope that Ms. Merkel's failure will prompt the Christian Democrats to rethink."

Ms. Merkel's conservative sister party, the Christian Social Union, has pushed for a move rightward, suggesting that her move to the center had left an opening for the anti-immigrant party among conservative voters.

Write to Andrea Thomas at andrea.thomas@wsj.com

(END) Dow Jones Newswires

November 20, 2017 09:21 ET (14:21 GMT)