German Coalition Talks Fail in Blow to Merkel Leadership

Negotiations to form the German government broke down, dealing a blow to Chancellor Angela Merkel and throwing the leadership and direction of Europe’s largest economy into doubt.

Late Sunday, Christian Lindner, chairman of the small, pro-business Free Democratic Party, broke off talks with Ms. Merkel’s conservative camp and the center-left Greens, saying four weeks of discussions and extended deadlines had failed to yield the vision and necessary trust to build a government among the three partners.

The collapse of talks leaves Germany with a caretaker government and Ms. Merkel without a majority in Parliament almost two months after a general election that gave her Christian Democratic Union its worst result since 1949.

The political gridlock—a novelty in a country long used to ruling coalitions, compromise-making and consensus-building—has thrown Ms. Merkel’s fourth term into question, although analysts said none of Germany’s parties had an obvious contender to assume her mantle.

Speaking after Mr. Lindner’s departure, Ms. Merkel said, “I assure you: As German chancellor, as acting chancellor I will do all I can to ensure this country is led well through the difficult weeks ahead.”

Both the conservatives and the Greens said a deal had been within reach, regretting the Free Democrats’ decision to pull out.

“This will be blamed on Ms. Merkel—among others—because her negotiating skills weren’t good enough for the first time,” said Jürgen W. Falter, a retired politics professor. “But this won’t yet automatically be her end.…There is nobody else in the conservative party who could be nominated.”

Without a fallback alliance, Ms. Merkel is running out of options to form a stable government despite her winning the September election, albeit with an underwhelming result. These options could include trying to woo back a reluctant center-left Social Democratic Party. The SPD was Ms. Merkel’s ruling partner in the departing government, but it has refused to extend the alliance and is now in opposition.

The chancellor could also try to lead the country’s first postwar minority government, which would have to negotiate every bill in Parliament with opposition parties.

A third option would be snap elections, which would involve a lengthy constitutional process led by the country’s president, Social Democrat Frank-Walter Steinmeier.

Ms. Merkel said she would meet with Mr. Steinmeier on Monday to discuss the situation.

Recent opinion polls, however, suggest a fresh ballot may not break the country’s political gridlock, with all parties polling about the same as they did two months ago. Some analysts say they think the collapse of the coalition negotiations could benefit the anti-immigration Alternative for Germany, which entered Parliament for the first time in September.

Mr. Steinmeier told weekly Welt am Sonntag before the collapse of the talks the negotiating parties should “be aware of their responsibility…and assuming this responsibility also means not giving the [electoral] mandate back to the voters.”

Germany’s DIHK Chambers of Commerce sharply criticized the decision to break off the talks.

“The failure of the exploratory talks is a disappointment for German businesses,” DIHK President Eric Schweitzer said, adding that companies now have to brace themselves for a possible longer period of uncertainty.

The news sent the euro lower in early Asian trading on Monday.

Over the past four weeks, Ms. Merkel had tried to bridge long-standing divisions among the conservatives, the Greens and the pro-business Free Democrats on issues such as migration, climate and the environment.

But the negotiators couldn’t agree on the Greens’ demands that war refugees, who are subject to limited protection in Germany compared with dissidents and victims of persecution, be allowed to bring family members into the country. Other controversial issues included efforts to reduce greenhouse gas emissions and the size and beneficiaries of planned tax breaks.

Bringing together Ms. Merkel’s Bavarian allies, gathered in the regional Christian Social Union, and the Green Party’s left wing had proven particularly difficult. The arch-conservative CSU, which scored poorly in the September election, faces a crucial regional ballot next year and is in the midst of a leadership contest, leaving it in no mood to compromise.

“We were elected to bring about change, but we haven’t achieved this,” Mr. Lindner, whose party got 10.7% in the Sept. 24 ballot, said after pulling out of the talks. “It’s better not to govern than to govern wrongly.”

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 targets 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,” a 5.5% income-tax surcharge added in 1991 to help fund development in the former East Germany, which would cost roughly €20 billion ($23.5 billion) annually and leave no leeway for other projects.