Nearly two months after Germany’s general election, talks aimed at forming a three-party coalition between Angela Merkel’s Christian Democrats (CDU/CSU), the Free Democratic party and the Greens have collapsed. The FDP walked out of a late-night round of negotiations on Sunday, saying it had been impossible to reach a compromise on migration and the environment. Unless the three-party deadlock is somehow ended, Germany could go one of three ways: Mrs Merkel might try to form a coalition with the opposition Social Democrats (SPD), which the SPD has ruled out; she might form a minority government, presumably with only one other party, which would be a new experience for postwar Germany; or, new elections might eventually be called.

This is an important moment. Each of these scenarios produces considerable political uncertainty in Europe’s powerhouse. The reverberations are sure to be felt not just in Germany itself, where the impact could be destabilising or could shock the country back together in some way. It is also certain to impact on the EU’s prospects of rebooting its project, at a time when the eurozone, security, migration, Vladimir Putin’s meddling, relations with Turkey, democratic backsliding in Poland and Hungary, and Brexit all need attending to. Monday’s nervous market reaction hinted at some of what is at stake.

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More than anything else, the political crisis that has emerged in Germany marks Mrs Merkel’s eroded domestic influence after 12 years in power. That decline was brought about by the 2015 refugee crisis, which shook her chancellorship. She came out weakened from the 24 September election, with 33% of the votes. Although her party was the clear leader, voters for the first time gave six parties enough support to sit in the Bundestag. Conservative voters, particularly in the east, shifted in large numbers to the far-right Alternative für Deutschland, which gained nearly 13% of the vote, enough to give it 94 seats in the Bundestag.

New elections, if they are eventually triggered, could open up the possibility – sooner rather than later – of a post-Merkel Germany, as it would be unclear whether the chancellor could stay on. As the talks in Berlin started running into difficulties, there was speculation that Mrs Merkel’s CDU party might seek to replace her as leader, though if there were a new election the identity of her successor is extremely unclear. Mrs Merkel was tight-lipped on Sunday night, saying she’d hoped for a compromise but that she would now ensure “the country is well governed in the difficult weeks ahead”.

Germany’s political fragmentation reflects a wider phenomenon at work across much of Europe. Traditional parties have come under challenge from new groups both on the left and the right, with polarisation growing in the aftermath of the 2010-11 banking collapse and eurozone crisis. But each national political scene has its own specific traits. Germany’s talks were made more complex by the fact a three-way coalition had never been attempted before at national level. The FDP liberals, who had been all but wiped out politically after being Mrs Merkel’s junior partner from 2009 to 2013, wanted to make sure this time that they wouldn’t sell themselves short. Their leader, Christian Lindner, walked away on Sunday saying: “It is better not to govern than to govern badly.”

As she looks for partners, Mrs Merkel in theory still has the possibility of seeking to prolong the outgoing “grand coalition” with the SPD. But that would require party leaders to either do a U-turn from their September promise that the SPD would remain in opposition, or for them to be replaced by leaders who favoured a coalition with the Christian Democrats. Neither seems likely.

The unpredictable German political scene means that the EU will struggle even more to address its key issues. In France, Emmanuel Macron can no longer be certain of building a strong Franco-German “engine” with Mrs Merkel to drive eurozone governance reform (this was a sticking point for the FDP). Although Germany’s main parties see eye to eye on the Brexit negotiations, the political uncertainty will divert attention from UK withdrawal still further. German policies have often been controversial in Europe, but Mrs Merkel’s role in finding solutions – whether with Turkey on migration or on Russia sanctions over Ukraine – has frequently been decisive. The weekend failure in Berlin could be the start of very difficult times.