German shares slid 0.47 percent at the start of trading on Monday after talks to form a new government led by Chancellor Angela Merkel collapsed, plunging Europe's top economy into turmoil. Germany's blue-chip DAX 30 fell by 60.66 points to 12,932.81 as investors woke up to the news, keeping the index below the psychologically important 13,000 barrier.

The index, however, recouped its losses and managed to close 0.5 percent higher. The European single currency also edged up to $1,1793 by that time, recovering from an 0.5 percent drop to the US dollar in Asian trading on Monday.

The decision by the pro-business Free Democrats (FDP) to pull out of coalition talks with the conservatives and the Greens means that Merkel will either seek to form a minority government with the Greens or a new election will be held.

"Early losses across the likes of Germany's DAX index and euro/dollar have been largely erased, but the prospect of another election in Europe's biggest economy could see political uncertainty weighing on the euro going forward," said Joshua Mahony, market analyst at IG trading group.

Dieter Kempf, the president of the Federation of German Industrialists (BDI) also warned of uncertainty in the wake of the German political stalemate. He called on all political parties to live up to their responsibility.

"All parties must be ready for compromise to foster growth, welfare and employment in Germany," he urged, adding that the collapse of coalition talks was "completely unsatisfactory" and that simply a caretaker government wasn't enough to meet the challenges facing Germany.

 

No big deal?

Analysts in Germany have shrugged off political developments, generally saying that the German economy will weather the political upset. Holger Schmieding, economist at Berenberg bank said the economic consequences are likely to be limited.

"The economy is in such good shape. Businesses will not curtail investment growth by much, growth can rumble even in a political limbo," the told the news agency Reuters.

Marcel Fratzscher, the head of the German Institute for Economic Research (DIW) in Berlin said the collapse of the talks was not surprising. "The process was no more than drawing red lines and looking for the lowest common denominator. The parties must try a new start, since they all know they don't stand to benefit from fresh elections," he added.

But Thomas Altmann, portfolio manager at QC Partners, believes stock markets will suffer in the wake of growing political uncertainty in Germany. "For the markets, it's time for a hangover instead of a year-end rally. Uncertainty is now greater than after the elections," he said.

He added that fresh German elections would be the biggest single risk factor for financial markets in Europe at the moment because the country would be politically paralyzed for a long time. "That's bad news, not just for Germany but for the whole eurozone and the whole of the EU."

uhe/aos (Reuters, dpa, AFP)