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The protracted struggle to form a new German government under the leadership of Angela Merkel collapsed on Sunday night, plunging Europe’s biggest economy into political uncertainty and raising the prospect of new elections.

After another tense day of negotiations in Berlin, the centrist Free Democrats announced shortly before midnight that they were pulling out of the talks with Ms Merkel’s conservative bloc and the leftwing Green party.

Christian Lindner, the FDP leader, said the parties had been unable to bridge their differences on policy, but had also failed to develop “a basis for trust and a shared idea”. He added: “It is better not to govern than to govern badly.”

Ms Merkel and the other party leaders insisted, however, that a coalition deal would have been possible, suggesting that the FDP was largely to blame for the failure of the talks.

“We tried everything to find a solution,” the chancellor said in the early hours of Monday. “We think we were on a path were we could have reached an agreement.”

Cem Ozdemir, the co-leader of the Greens, said the parties had been close to a deal even on highly sensitive issues such as asylum and refugee policy. “The only possible democratic constellation [for a government] was unfortunately scuppered by the FDP.”

Unless Ms Merkel can entice the FDP back to the table in the days ahead, Germany’s veteran chancellor is left with only three options: she can either try to renew her coalition deal with the centre-left Social Democrats, an option the SPD has ruled out repeatedly, or govern at the helm of a minority government. A third option would be to force a new election.

The deadlock marks a striking departure for a country that had long prided itself on its postwar record of government stability and political consensus.

A repeat election, in particular, would send shockwaves through the system, amid widespread concern that the rightwing Alternative for Germany could score an even better result than the 13 per cent it won two months ago.

Ms Merkel, who has governed Germany since 2005, led her alliance of Christian Democrat Union and Bavaria’s Christian Social Union to another election victory on September 24, but with a majority that was sharply reduced from previous contests.

13%

Proportion of vote for Alternative for Germany in election in September

Crucially, to form a new government, the chancellor needed the support of two ideologically disparate parties, the pro-business Free Democrats and the leftwing Green party.

The personal and political fissures between the three sides broke out repeatedly in the five weeks of exploratory coalition talks, with negotiators frequently attacking each other in public.

The talks on Sunday came about after an initial deadline of Thursday to agree a basic deal came and went without a breakthrough. Party leaders from all sides made clear that they were going into the Sunday session with critical disagreements still unresolved.

Among the core differences was the issue of refugee and asylum policy and, in particular, the issue of whether refugees should be allowed to bring their families to Germany.

In 2016, at the height of the Syrian refugee crisis, Berlin suspended that right. But the freeze on family reunifications runs out next year, raising the prospect of a spike in new arrivals.

The Bavarian CSU, the sister party of Ms Merkel’s CDU, was determined to prolong the suspension, broadly backed by the CDU and the FDP. The Greens, in contrast, insisted that refugees must be allowed to bring their spouses and children into the country, citing humanitarian reasons.

Other areas of disagreement were Germany’s response to climate change and the Green demand to shut down a significant number of coal-fired power plants, which are among the biggest producers of carbon dioxide emissions.

Tax policy, too, was a bone of contention, with the FDP demanding a rapid phase-out of the so-called solidarity tax that is raised to fund the economic development in eastern Germany.

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