By Thomas Escritt
BERLIN (Reuters) - German Chancellor Angela Merkel opened what promised to be marathon coalition talks on Friday, hoping to bring three opposing political camps into a stable government despite signs there would be less money to paper over differences.
Merkel said she was optimistic as she entered talks between her conservative bloc, the pro-business Free Democrats (FDP) and the Greens, despite an assessment by her own party that the next government would have less fiscal room than expected.
The outcome of the talks is keenly awaited both at home and across Europe, with many fretting that the European Union could be rudderless with the bloc's longest-serving leader too busy to grapple with crucial issues like euro zone governance reform.
Highlighting the challenge, a report by Merkel's Christian Democrats (CDU) found that there would be only 30 billion euros free for new projects over the next four years if parties stuck to their commitment to taking on no new debts.
The shortfall will make all the more difficult the tricky three-way pact, dubbed a "Jamaica" coalition because the three parties' colors - black, yellow and green - match those of the Jamaican flag, which is untried at national level.
Higher EU contributions as a result of Brexit and lower central bank profits might reduce spending room by some 15 billion euros, according to calculations seen by Reuters, an obstacle to the FDP's demands for tax cuts or the Greens' hope for environmental and infrastructure spending.
The talks between Merkel's conservative bloc, the pro-business Free Democrats (FDP) and the Greens are styled as "exploratory", but negotiators aim to get down to details of tax and budget policy in their first full meeting together.
"There will be many differences," she said on her arrival at the Berlin talks, adding: "There is readiness on my side to think about this creatively."
Party delegations each made five-minute presentations before breaking ahead of further discussions due on Tuesday.
FDP chief Christian Lindner had earlier said that no matter how good the "atmosphere and seriousness" the parties were far apart on 85 percent of the material to be discussed. After, FDP secretary-general Nicola Beer said she continued to believe there was a "50:50" chance of a Jamaica coalition resulting.
Merkel, weakened by a surging far-right in last month's national election, needs to make the awkward alliance fly as her previous "grand coalition" partners - the center-left Social Democrats (SPD) - say they want to rebuild in opposition after their worst election result in more than half a century.
Merkel has been able to steer Europe through its euro zone and refugee crises in part due to her dominance at home. Now that dominance is waning - her conservatives last month had their weakest election showing since 1949.
"Voters have given these parties the task of governing," wrote newspaper Die Welt. "These possible partners should not be giving the impression that they are inching warily toward each other like strangers in a crammed lift."
An Infratest Dimap poll for ARD showed 83 percent of Germans wanted the parties to find a compromise deal.
Merkel, 63, has suffered two further setbacks since the national election: the CDU was defeated in a regional election in Lower Saxony on Sunday, and the party's premier in the eastern state of Saxony resigned on Wednesday, saying younger, fresher leadership was needed to revitalize the conservatives.
Should the three party groups fail to form a coalition, some in their ranks fear this could lead to public disenchantment and fuel further support for the far-right Alternative for Germany (AfD), which entered parliament for the first time last month.
If she cannot clinch a three-way coalition pact, Merkel could try to form a minority government, or else call fresh elections - an unprecedented scenario.
Alternatively, she could try to team up again with the SPD. The Social Democrats reject that option, though senior party official Thomas Oppermann has indicated they could reconsider on one condition: Merkel steps aside.
(Additional reporting by Paul Carrel, Andreas Rinke and Michael Nienaber; editing by Ralph Boulton)