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FILE PHOTO: French President Emmanuel Macron (L) and German Chancellor Angela Merkel attend a news conference following talks on European Union integration, defence and migration at the Elysee Palace in Paris, France August 28, 2017. REUTERS/Charles Platiau/File Photo(reuters_tickers)
By Noah Barkin
BERLIN (Reuters) - Half a year ago, the political stars seemed perfectly aligned for a deep reform of the European Union and its euro currency.
Emmanuel Macron had won the French presidency on a promise to relaunch Europe. And Angela Merkel, on track to win a fourth term as German chancellor, looked ready to embrace his bold vision, telling an audience in Bavaria that it was time for Europe to take its fate into its own hands.
Following the collapse of German coalition talks, however, the prospects for a meaningful leap forward in European cooperation, driven by newly minted governments in Berlin and Paris, look dimmer than ever.
"Political uncertainty has crossed the Rhine," said Jean Pisani-Ferry, an economist and academic who helped write Macron's election programme. "Europe has gotten used to having a strong German government with clear positions. That is something we may not have for some time."
Germany now faces months of political limbo which will narrow an already tight window for agreeing reforms of euro zone governance and EU defence and asylum policies.
Should Germany be forced to hold new elections, its partners may have to wait until next summer for a government to take form. By then, Europe will be entering crunch time in its Brexit negotiations with Britain, preparing for sensitive discussions on a long-term EU budget and gearing up for the election of a new European Parliament.
Euro zone leaders were due to begin a six-month discussion on closer integration of their 19-nation currency bloc next month at a special summit in Brussels.
Now that debate seems likely to be delayed and officials say the chances of reaching any conclusions by June 2018, as proposed by European Council President Donald Tusk, are slim.
"Things will go on hold until there is a formal acting German government," one euro zone official said. "At this stage I don't see what steps the leaders could take in December or June for deepening euro zone integration when there is a German government without a mandate."
Another casualty could be the completion of an EU pact on closer defence cooperation, known as PESCO. Berlin and Paris had hoped to sign it into law at a regular EU summit next month. Now diplomats involved in EU foreign policy say that may be overly ambitious.
Germany has also been a driving force behind EU efforts to reform its asylum policies in the wake of the 2015 refugee crisis. Those discussions, pitting countries like Italy and Greece against Poland and Hungary, were already bogged down. Without a new government in Berlin, there is next to no hope of a breakthrough.
"We have so many things we need to do urgently that slowing us down is not good for Europe as a whole," Frans Timmermans, a former Dutch foreign minister who is deputy head of the European Commission, told CNN.
He played down the risks, however, saying: "It might slow us down a little bit but I don't think it would take Europe off course, whatever happens."
Perhaps the only pressing issue which will not be significantly affected by the political uncertainty in Germany is Brexit, where there is a broad political consensus among German parties.
That means that Merkel, who will remain in place in a caretaker capacity until a new coalition is formed, should have sufficient room to manoeuvre in talks that, in any case, are being led by the European Commission and its chief negotiator Michel Barnier.
Still, hopes that the two political earthquakes of 2016 -- Britain's decision to leave the EU and the election of U.S. President Donald Trump -- might shock European capitals into bold reforms, once elections in the Netherlands, France, Germany and Austria were out of the way, are fading.
Even before the liberal Free Democrats (FDP) walked out of coalition negotiations with Merkel's conservatives and the Greens in the early hours of Monday, doubts were rising about whether she would have the flexibility to meet Macron halfway as head of an awkward three-way "Jamaica" alliance.
Now that those talks have collapsed, she would appear to have three options: convince the Social Democrats (SPD) to enter another right-left "grand coalition"; form a minority government with the Greens or the FDP; or take the risk of new elections.
So far the SPD leadership has shown no signs that it will go back on its pledge to go into opposition. On Monday, Merkel appeared to rule out a minority government. So unless something changes, a new election could be the only way forward.
That would probably not take place before March or April, around the same time that Italy is due to hold elections which could also result in a hung parliament.
Crucially, polls suggest that a new German election would not give Merkel more coalition options than she had coming out of the Sept. 24 vote.
Indeed, if voters blamed her conservatives for failing to form a government the first time around, she could emerge even weaker than she is now.
That would be a further blow to German political stability and to Macron's European ambitions.
(Additional reporting by Jan Strupczewski, Robin Emmott, Gabriela Baczynska, Alastair Macdonald in Brussels, Yves Clarisse in Paris; Editing by Gareth Jones)