BERLIN — Coalition negotiations between the CDU/CSU and the SPD collapsed late Saturday night after the two parties failed to reach agreement on a defense spending package that would have committed Germany to sustaining military expenditures above 3% of GDP through 2030. Chancellor-designate Friedrich Merz addressed reporters outside the Bundestag on Sunday morning, calling the breakdown "deeply regrettable" but insisting that Germany's security obligations could not be compromised.

The talks, which had been ongoing since January following the federal elections, foundered on the SPD's insistence that any increase in defense spending be paired with equivalent investments in social infrastructure and a firm rejection of cuts to pension guarantees. SPD leader Lars Klingbeil said his party had shown "extraordinary flexibility" but could not accept a deal that asked ordinary Germans to bear the cost of rearmament without reciprocal commitments to the welfare state.

The collapse plunges Germany into its second period of political uncertainty in less than two years. President Frank-Walter Steinmeier is expected to consult with party leaders in the coming days to determine whether an alternative coalition is viable. Political analysts suggest that Merz may attempt to court the Greens or the FDP, though both parties have signaled reluctance to enter negotiations without significant policy concessions.

The impasse has sent ripples through European capitals, where leaders had been counting on a stable German government to anchor the EU's evolving defense posture amid ongoing tensions with Russia and growing American pressure for European allies to shoulder more of their own security burden. French President Emmanuel Macron reportedly spoke with Merz by phone Sunday afternoon, urging a swift resolution.

Markets are expected to react sharply when trading opens Monday, with the euro already weakening in Asian pre-markets. German 10-year bund yields ticked higher as investors priced in the prospect of prolonged political paralysis in Europe's largest economy. Economists warned that continued uncertainty could delay critical infrastructure and energy investments that Germany's industrial sector has been urgently seeking.

If no coalition can be formed in the coming weeks, Germany may face new elections as early as May — a scenario that polls suggest could further strengthen the AfD, which has been capitalizing on public frustration with mainstream parties' inability to govern effectively.