Markets rattled as German coalition talks collapse – business live

Our correspondent in Berlin, Philip Oltermann, says Merkel’s position as Germany’s leader is now under scrutiny, following the collapse of coalition talks.

He writes:

With talks now seemingly over, Merkel could seek to form a minority government, either with the FDP or the Greens, and gather support from other parties on individual policy votes.

The Social Democrat leader, Martin Schulz, whose party has played junior partner to Merkel in the German government for the past four years, ruled out the possibility of another grand coalition under his leadership. “The voter has rejected the grand coalition,” Schulz said at a party conference in Nuremberg on Sunday.

Once all other options are exhausted, Germany’s president, Frank-Walter Steinmeier, could dissolve the current parliament and call fresh elections. To get there, however, Steinmeier would need first to set into motion a complicated process that would involve a parliamentary vote on Merkel’s role as interim chancellor.

While the debate in Germany over the past few weeks has mainly focused on policy differences between the parties, it is likely to soon shift to the chancellor, and the question of whether or not she still commands sufficient power to hold together a strong government.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Oh Mutti! German politics has been plunged into new uncertainty overnight after Angela Merkel’s attempts to form a new coalition collapsed.

Overnight, the pro-market Free Democratic Party walked out of talks with Merkel’s CDU-CSU group, and the leftwing Green party. Despite weeks of talks, the FDP, the CDU and the Greens weren’t able to carve out an agreement on migration and climate change.

This seems to have scuppered Merkel’s hopes of building a ‘Jamaica coalition’, following September’s election.

Investors are watching with considerable interest to see how Merkel reacts. Will she try to lead a minority government, which could hamper her efforts to push through legislation on issues like refugees policy, or Brexit….

Alternatively, she could push for new elections. But that has risks too — embroiling Germany in a second campaign with no certainty that Merkel’s party would do any better than last time (when her majority fell sharply).

The financial markets have already reacted, sending the euro down almost half a cent against the US dollar to €1.175.

Dennis de Jong, managing director at UFX.com, says the FDP’s decision to quit coalition talks could have a “considerable impact” on European politics, and the markets.

“News emerging from Germany that Angela Merkel has failed to form a coalition within deadline has thrown the country into a state of political disarray for the time being, which could have a detrimental effect on the eurozone as a result.

“Germany is renowned for being the economic powerhouse of Europe in recent times, and has consistently contributed to its growth in the first three quarters of this year. Despite the single currency remaining strong for now and the eurozone stimulus programme going to plan, the ECB may choose to approach the situation in Germany with caution until political matters becomes clearer.

The German stock market is also expected to drop this morning, as traders in Frankfurt brace for more turmoil.

German politics may hog the spotlight today, as there’s not much else in the calendar. ECB president Mario Draghi will give his views on the state of the eurozone after lunch, when he appears before the European Parliament Committee on Economic and Monetary Affairs.

In the UK, we’ll be enjoying the build-up to Philip Hammond’s budget on Wednesday.

The agenda

2pm GMT: European Central Bank president Mario Draghi testifies to the European Parliament

6.30pm: Bank of England deputy governor David Ramsden gives a speech at King’s College London.