Germany set for tough coalition talks after election gridlock: Here's what happens next

• 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.

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."

All to play for

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, such as the Green Party and the FDP.

The CDU and CSU have been governing with the SPD as a junior partner in a coalition in recent years, but the latter has signaled it would like to see the conservative bloc in opposition. The process of coalition forming could take weeks, or even months, according to Germany experts like Holger Schmieding, chief economist at Berenberg Bank.

He 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.

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."

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