The euro briefly touched a two-month low against currencies like Japan’s yen early Monday, after German Chancellor Angela Merkel failed to form a three-way coalition government, introducing the prospect of a new election.
Over the weekend, Germany's pro-business Free Democrats unexpectedly announced that they had decided to withdraw from negotiations with Ms Merkel’s conservative bloc and the Green party, saying that they had been unable to find common ground on key issues.
Ms Merkel subsequently insisted that she would stay on as Chancellor and would consult with Germany’s President on how to move forward.
She won a fourth term in the country's general election in September, but garnered less support than many had expected.
“It is a day of deep reflection on how to go forward in Germany,” Ms Merkel told reporters. “As chancellor, I will do everything to ensure that this country is well managed in the difficult weeks to come.”
The euro sold off immediately after the FDP's announcement, hitting its lowest level against Japan’s yen in around eight weeks, before recovering slightly. It also fell against the Swiss franc and the pound.
“Angela Merkel has been the glue that has held the European Union together for the past 12 years, a stable force in turbulent times,” said Rebecca O’Keeffe, head of investing at Interactive Investor, an investment platform. “Markets will want Germany to find a quick solution, preferably one that leaves Mrs Merkel in situ,” she added.
Tomasz Wieladek, an economist at Barclays, agreed that the break down on negotiations introduces uncertainty. He said that one of the most likely outcomes now is a new election.
