- With no one party gaining a majority of the seats in the Bundestag, Germany's parliament, a coalition government is inevitable.
- Coalition negotiations could take weeks, or even months.
LONDON — Germans are waking up to political uncertainty on Monday after early results from the country's federal election indicate gridlock between the two main political forces in the country.
Preliminary results on Monday morning showed the center-left Social Democratic Party gaining the largest share of the vote with 25.7%. Angela Merkel's right-leaning bloc of the Christian Democratic Union and Christian Social Union was seen with 24.1% of the vote, Germany's federal returning officer said.
Merkel is stepping down after 16 years as chancellor and her conservative alliance is heading toward its worst election result since World War II.
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Looking at the early results for other parties in Germany, the Green Party was seen getting 14.8% of the vote. The liberal Free Democratic Party was seen with 11.5%, while the right-wing Alternative for Germany party was seen with 10.3%. The left-wing Die Linke party was expected to gain 4.9% of the vote.
With no one party gaining a majority of seats in the Bundestag, Germany's parliament, a coalition government is inevitable, but which party will lead a coalition government — and who will be Germany's next chancellor — is up in the air.
In German elections, the winning party does not automatically appoint the next chancellor as majorities are rare; instead, the chancellor is voted in by parliament after a coalition government has been formed.
The main contenders for chancellor — the SPD's Olaf Scholz and CDU-CSU's Armin Laschet — will now have to engage in negotiations with other parties in an attempt to form a coalition.
Commenting on the exit polls, Laschet conceded the result was disappointing and said it posed a "big challenge" for Germany, telling his supporters that "we cannot be satisfied with the results of the election."
For his part, the SPD's Scholz told his party that it needed to wait for the final result and then "get to work."
Imagining the unimaginable
Coalition building is not expected to be an easy process with compromises and concessions expected to be extracted from the main parties by smaller rivals, the Green Party and the FDP, during talks.
The CDU and CSU have governed with the SPD as a junior partner in a so-called "grand coalition" in recent years, but the latter has strongly signaled it would now like to see the conservative bloc in opposition.
Whatever the outcome, experts expect the negotiation process to take some time.
"I don't think we're going to get it done quickly. In all honesty I don't think we're going to get a new government quickly," Carsten Brzeski, chief economist at ING, told CNBC Monday.
He said Merkel could still be in office by Dec. 17, which would mean she beats the record held by Helmut Kohl as Germany's longest-serving chancellor.
"These coalition talks, if they even start, are becoming extremely complicated," Brzeski said, adding that there are "risks in how this all plays out."
"The risk remains that we end up with this grand coalition [again], which no one wants to see, or that we might even end up with snap elections if everything fails, which is unimaginable in Germany but you cannot rule it out completely," he added.
Holger Schmieding, chief economist at Berenberg Bank, said on Sunday that there are now two distinct possibilities when it comes to a coalition: a Scholz-led "traffic light" alliance of the "red" SPD with the Greens and the "yellow" liberal FDP, and a so-called "Jamaica" coalition of Laschet's "black" CDU-CSU with the Greens and the FDP.
Read more: Who’s who in Germany’s historic election
The "SPD and Greens, who are close, would likely extend an offer to the FDP whereas [the] CDU-CSU and FDP, who are also close, would try to get the Greens on board," Schmieding said in a research note Sunday evening, indicating that it is the Greens and FDP that stand to be courted the most in the coming days.
To get the Greens on board, however, the CDU-CSU could have to make concessions to the party in terms of greener policies, Schmieding noted.
Summing up the unusual situation Germany now finds itself in, one of the country's former deputy finance ministers, Jorg Asmussen, told CNBC that for the first time in two decades, "we do not know who will run this country."
He said there were two possible coalitions: the Jamaica coalition or the traffic light coalition, with two kingmakers: the Greens and the FDP, or liberals.
"It's a bit funny to say that the two parties, the Greens and the Liberals, very very likely will make it into government, but it's unclear about the two larger parties, the SPD and CDU," he told CNBC Monday.
FDP lawmaker Florian Toncar told CNBC's Annette Weisbach on Sunday night that the FDP, which finds itself now as a potential kingmaker when it comes to coalition talks, was "very happy and very satisfied with the result."
"We expect that we will be engaged in talks about a good government for Germany," he said, adding that the party sees that it has a "special responsibility" to be a part of government.
"We are looking forward to which way our country goes to form a government but at the same time the challenges are enormous. Many things in the last years of Angela Merkel we did not solve, we should have solved a long time ago already. We will face enormous pressure and challenges and have to bring Germany back on track."
European markets were trading higher on Monday morning despite the uncertainty created by the inconclusive election results. Germany's DAX was up 0.8% in early trading, although the euro was down 0.1% against the dollar.
Robin Bew, managing director of the EIU, said the market reaction was down to the CDU doing better than expected, however he believed that "we could be looking at a really, really drawn out coalition negotiation." He expects Merkel to still be in office at Christmas.
Business leaders were also reacting to the results on Monday, with Siemens Energy Chairman Joe Kaeser describing the result as "bittersweet" for the SPD. He noted that the party had lost some leverage in talks given its inability to form a left-wing coalition with the Greens and Die Linke, as the alliance would not have a majority of seats in parliament.
"Time will tell ... but it's actually the Greens and the Free Democrats that will be decisive," Kaeser told CNBC's Squawk Box Europe Monday.
"Clearly the Greens have favored the Social Democrats but [the FDP's candidate Christian] Lindner has said he would rather be with the Christian Democrats, so it's really going to be interesting."
There are some concerns that negotiations could drag on for too long while decisions need to be made in Germany, for example on digital infrastructure and addressing high corporate taxes, as well as the country's relationship with the rest of Europe and the U.S., according to Simone Menne, president of the American Chamber of Commerce in Germany.
"The point is that it's a very tight result and it's very important that we are fast, that they are fast, with the negotiations because we need to make important decisions and Germany has to go forward and not stop because of months of negotiations," she told CNBC Monday.