Just when you thought the world couldn’t take more upheaval, came the news that German coalition government negotiations have broken down

Just when you thought the world – and markets – couldn’t take more upheaval, came the news on Monday that German coalition government negotiations have broken down.

The impact on the Euro was less damaging that might have been expected. But Europe is pretty used to coalitions. Strong and stable single party governments are, for the most part, a uniquely British phenomenon. Equities markets, however, took a gloomier view of events.

There are lots reasons why the collapse of negotiations between German Chancellor Angela Merkel’s Christian Democratic Union (CDU) and the Free Democratic Party (FDP) nearly two months after the federal election are troubling, not least of which is the prospect of fresh elections.

Mrs Merkel, if she is forced to call a snap election, will have to turn her focus to her own domestic agenda in hopes of defending it, to stay in power.

The Socialist Democratic Party (SDP) appears adamant it will not return to another grand coalition with the CDU and Christian Social Union (CSU), preferring to rebuild in opposition instead.

And with talks having broken down with the FDP, Mrs Merkel faces the unpalatable prospect of entering negotiations with the Far Right party, Alternative fur Deutschland (AFD), which counts among its MEPs, Beatrix von Storch, the granddaughter of Adolf Hitler’s finance minister, Lutz Graf Schwerin von Krosigk, who last year reportedly called for weapons be used against asylum seekers trying to cross European borders.

Little wonder that equities markets opened lower on Monday. Markets hate political instability and this could be the first time a German election has failed to produce a government since the end of World War 2.

While Mrs Merkel could form a minority government, it’s not a likely option. But there is danger in holding further elections too. The CDU suffered its worst election result since 1949. The SDP and FDP could also suffer losses if another election were held.

The danger is another election opens the door to the AFD, a prospect many German politicians would be unwilling to contemplate.

The reason all this matters, of course, is Germany’s position as the largest economy in Europe and its leadership role within the Eurozone.

Should Mrs Merkel gamble on another election, or have one forced upon her by German president Frank-Walter Steinmeier, it is entirely possible Germany will have a new Chancellor in the new year. What that might mean for Europe is anyone’s guess.

With Mrs Merkel distracted by the need to secure her own position and a government, Britain will have much to worry about, too. Much of the lack of progress in Brexit negotiations between Britain and the European Union between March and October was the result of both France and Germany being distracted by their own domestic elections.

Further distractions of this nature are not what Britain needs ahead of Brexit talks in just under two weeks’ time.

Then there is the deeply troubling possibility that Mrs Merkel is forced into another election and loses it. If that happens everyone may have a much bigger headache to deal with in 2018.