By Markus Wacket and Noah Barkin
BERLIN (Reuters) - German parties exploring a coalition government remain divided on the issues of a euro zone budget, Europe's banking union and its ESM bailout fund ahead of a meeting of party leaders later on Friday, according to a draft paper on Europe seen by Reuters.
The 1-1/2 page document, a blueprint for a new German government's stance on European issues, contains several bracketed sentences, reflecting ongoing areas of disagreement that must be resolved by Chancellor Angela Merkel and other party leaders at their meeting this afternoon.
"We reject [a separate euro zone budget as well as] the introduction of instruments that would lead to automatic transfers or a mutualization of debt," one passage reads, reflecting differences over whether to rule out French President Emmanuel Macron's idea for such a budget.
Macron sent his finance minister, Bruno Le Maire, to Berlin this week to talk with leaders of the German parties and try to persuade them not to reject his ideas for a reform of the euro zone in their coalition agreement.
In addition to Merkel's conservatives, the Greens and the liberal Free Democrats (FDP) are involved in the talks. The FDP has been particularly critical of Macron's ideas for a euro zone budget, fearful this would open the door to Germany subsidizing economically weak members of the 19-nation single currency bloc.
FUTURE OF ESM
The paper, which included footnotes spelling out where the different parties stood on the divisive issues, showed a degree of FDP isolation on key European issues.
But in an interview with German magazine Der Spiegel on Friday, FDP leader Christian Lindner signaled a readiness to compromise, notably on Europe's rescue fund, saying a party that won 11 percent of the vote in Germany could not dictate the path for all of Europe.
During the German election campaign, the FDP argued that the European Stability Mechanism (ESM) should be wound down, while the other parties argued it should be developed further into a European version of the International Monetary Fund.
"The ESM has built up a level of expertise in recent years on the surveillance of stability goals," Lindner said. "If it stays, it could be an instrument for more discipline."
The paper contained two alternate phrasings on Europe's banking union, one supported by Merkel's conservatives and the Greens, and a second with more hardline language backed by the FDP, according to the footnotes.
The first variation talks about the step-by-step completion of the banking union. The second FDP version says the banking union should focus on systemic risks, rather than those to individual banks.
The paper also includes passages agreed by all the German parties that will be welcomed by the French. It says Franco-German cooperation is of "particular importance" and acknowledges the need for member states and the EU to have an "appropriate capacity" to invest and counter asymmetric economic shocks.
(Reporting by Markus Wacket; Writing by Noah Barkin; editing by Ralph Boulton)