German parties navigate bumpy road to 'grand coalition'

By Noah Barkin and Holger Hansen

BERLIN (Reuters) - The Social Democrats (SPD) bemoaned a lack of concessions from Angela Merkel, while her conservative allies accused the SPD of trying to dictate policy despite losing last month's election.

Still, after eight long hours of talks on Monday between the chancellor and her centre-left rivals, it was not the partisan posturing that was most telling, but the readiness of both sides to talk again.

Despite lingering differences over tax hikes and a minimum wage, as well as opposition among grassroots SPD members to partnering with Merkel for the second time in a decade, the odds that Germany will end up with a 'grand coalition' before Christmas remain high.

On Tuesday, hours after SPD leaders like Andrea Nahles went out of their way to make clear they could still say no to Merkel, other senior party members were striking a more conciliatory tone in private.

"I still believe we'll have a grand coalition," one member of the SPD's 35-strong executive board told Reuters on condition of anonymity.

Another SPD board member said that as long as exploratory talks with Merkel did not collapse in acrimony, the party had little choice but to enter full-blown coalition negotiations with the chancellor in the weeks ahead.

If the party balked at that, the official said, Merkel would be forced into a deal with the environmentalist Greens, a move that could end up relegating the SPD to the opposition benches for many years.

"Even if some people expected more from the talks on Monday, the bottom line remains the same -- it would be a huge surprise if we don't get a grand coalition in the end," said Frank Decker, a political scientist at Bonn University.

SUCCESSFUL PRECEDENT

Later on Tuesday, Merkel's conservatives -- her Christian Democratic Union (CDU) and the Bavarian Christian Social Union (CSU) -- will follow up the SPD meeting with a second round of preliminary talks with the Greens.

Ahead of that session, some Greens leaders were sounding more open to the idea of a coalition with Merkel.

"I'm curious to see how the second round of talks go, and of course I'm open to possible surprises," said Katrin Goering-Eckardt, the party's parliamentary leader.

But there are numerous reasons why the pragmatic Merkel would prefer to work with the SPD.

For one, that combination was tried before in her first term and was broadly successful.

Together with the SPD, Merkel extended the retirement age and shielded Germany from the worst of the global financial crisis by introducing incentives for companies to avert layoffs. A cash-for-clunkers scheme boosted demand for German cars.

With the Greens, Merkel would be entering unchartered territory. The parties have been sworn enemies ever since the environmentalists emerged as a political force in the 1980s.

Even if new moderate Greens leaders such as Goering-Eckardt -- a protestant from the former East Germany, like Merkel -- chose to overlook that and do a deal with the CDU/CSU, they may face a rebellion from below.

"The problem with the Greens is the fear among party leaders of how the grassroots would react," a senior CDU official said on Tuesday.

A so-called "Black-Green" coalition would also struggle to get legislation through the Bundesrat upper house of parliament, where the SPD is dominant.

That would make it extremely difficult for Merkel to tackle priority reforms, like overhauling Germany's cumbersome federal structure and its fragmented educational system.

MINIMAL DIFFERENCES

The policy divide with the SPD also looks to be smaller.

The centre-left party has already signalled it could stop insisting on tax hikes if Merkel's camp can come up with other ways to pay for more investment in infrastructure, education and research, which all the mainstream parties agree is necessary.

The big sticking point is a minimum wage. In the talks on Monday, the SPD made clear it would not compromise on its demand for a nationwide wage floor of 8.50 euros per hour.

But even here, the divide between the parties is more about method than substance. Merkel agrees in principle to the idea of a wage floor, but wants this to be negotiated sector by sector, rather than imposed from above.

On a range of other issues, from how to tackle Europe's economic and financial woes to completing Germany's shift from nuclear to renewable energy, the differences are minimal.

Still, the path to an eventual grand coalition won't be smooth. SPD leaders must take care not to appear overly eager for a deal with Merkel given deep scepticism among the rank and file.

On Thursday, Merkel and the SPD will talk again. By Friday it should finally be clear who Merkel wants to govern with. But only on Sunday, when some 200 senior SPD members come together to vote on whether to continue coalition talks, will the outcome be written in stone.

(Writing by Noah Barkin; Additional reporting by Andreas Rinke and Madeline Chambers; Editing by Stephen Brown and Janet McBride)