The euro dived in global trading late last night after talks to form a new German government collapsed.
Crunch coalition negotiations between Angela Merkel’s Christian Democrats, the Greens, and the pro-business Free Democrats (FDP) broke down around 11pm GMT when the FDP walked away, citing irreconcilable differences.
“There was no progress but rather there were setbacks because targeted compromises were questioned,” FDP leader Christian Lindner said.
He added: “It’s better not to govern than to govern badly.”
Europe’s single currency fell from close to $1.18 to $1.173 last night, as foreign exchange traders absorbed the news.
The failure to secure a deal risks a period of intense political uncertainty for the Eurozone’s biggest economy.
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German leaders are keen to avoid a repeat election amid fears that the far-right Alternative for Germany (AfD) party could gain support.
The AfD gained 94 seats in September’s election following a surge of support, especially in eastern parts of the country. Some of Merkel’s colleagues were adamant a new government should commit to a cap on immigration, in a bid to stop more voters drifting towards the AfD.
However, the cap, unpopular with both the FDP and the Greens, became a sticking point during talks.
“To us it is about humanity. It is about making family reunions possible,” top Greens negotiator Michael Kellner said at the weekend, prior to the negotiations collapsing. “And we will fight for those issues.”
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Chancellor Merkel could attempt to proceed with a minority government. A grand coalition with the centre-left SPD also remains possible, although this was previously ruled out by its leader Martin Schulz.
Speaking in the early hours of this morning, Merkel said she regretted the breakdown in talks and reiterated her belief that a deal would have strengthened Germany.
The German Chambers of Commerce and Industry said the collapsed talks were a disappointment and “a missed opportunity to transcend ideological lines and find practical solutions.”
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