Germany finds itself in a political crisis today as Chancellor Angela Merkel has failed to create a coalition government that would give her a majority in parliament. 

The Free Democratic party, a minor pro-business party but vital to Merkel's efforts at coalition-building, pulled out of talks to form a government, leaving the chancellor with few good options.

Merkel's Christian Democrats (CDU), Bavarian sister party the Christian Social Union (CSU), and the Greens failed to reach a compromise with Christian Linder, chairman of the FDP, who said after the talks collapsed, "It is better not to govern than to govern wrongly."

Deutsche Welle:

While Merkel will remain acting chancellor, it remains unclear where this leaves her prospects of forming a new government.

Her conservatives could choose to enter talks with just the Greens to form a minority government.

The Social Democrats (SPD), who were the second-biggest party in the September election, ruled out forming a second consecutive grand coaltion later on Monday. SPD leader Martin Schulz said his party is "not available" for another coalition with Merkel and the SPD is not afraid of new elections.  

After suffering a humiliating election loss in September, the SPD has repeatedly reaffirmed that its role in the upcoming Bundestag will be in opposition.

Merkel said she would inform President Frank-Walter Steinmeier, who has the power to call new elections, on Monday afternoon of the failure of the coalition talks.

This suggests that a minority government with the Greens may be out of the question and the country could be heading for a new election.  

Meanwhile, the third largest party in Germany, the nationalist Alternative for Germany party, finds itself on the outside looking in.  Both major parties have said they will not ask the AFP to enter a coalition government.

This leaves Merkel in a bind.  Heading up a minority government would be tricky, as she would need to form different majority coalitions in parliament for almost every bill she wants to pass.  That's why many observers believe there will be new elections.

Bloomberg:

Merkel will consult with German President Frank-Walter Steinmeier on Monday on what comes next. The ultimate move might be new elections that come as soon as this spring. This could be the popular choice with a majority of Germans in favor of heading to the polls again, according to a survey by ZDF television. The risk is that nothing changes, leaving the German parliament just as splintered as it is now, with six blocs and the anti-immigration Alternative for Germany as the third-biggest party.

There is also a risk that the AfD could become even stronger, forcing Merkel to seriously consider bringing them into the government. Indeed, now that the AfD is seated in parliament, millions of ordinary Germans who swallowed the anti-AfD propaganda that a vote for the nationalists was a vote for fascism see that Germany has not turned into the 4th Reich. That can only work in the AfD's favor.

Merkel is faced with a situation where there are no good options.  But she's an experienced, canny politician and shouldn't be underestimated.