Chancellor Angela Merkel led her conservatives to their best result in over two decades in a German election on September 22 but needs to find a coalition partner to secure a third term.
She held preliminary talks with the Social Democrats (SPD) last Friday and they agreed to more talks on October 14. She meets the Greens on Thursday to assess whether there is enough common ground to enter formal coalition negotiations with either party.
Merkel and SPD chief Sigmar Gabriel signaled readiness at the weekend to make the compromises necessary to form a "grand coalition" after months of campaigning against one another.
In her weekly podcast, Merkel said a priority was more investment in education, a key campaign promise of the SPD. Gabriel said his party's pledge of tax hikes was not an end in itself as long as there was money to finance investments.
Below are key coalition-related quotes from senior officials, as well as areas of potential compromise on policy and personnel.
SIGMAR GABRIEL (SPD)
"For us, tax hikes are not an end in itself. From the view of the SPD, we must combine two contradictory tasks: we must on the one hand reduce debt, on the other hand spend more on education, infrastructure and on our cities and municipalities. In the election campaign we said very honestly that we would need to raise the taxes of very wealthy citizens slightly in order to do this. If the CDU/CSU does not want this, they must explain what alternative there is to finance these tasks."
HERMANN GROEHE (OF MERKEL'S CDU)
"The outcome is still open, but it makes sense to speak just as seriously with the Greens as with the SPD."
PETER ALTMAIER (CDU)
"The chances of a coalition with the Greens have risen in recent days from 'theoretical' to 'conceivable'... The tax issue will be very central."
POTENTIAL POLICY COMPROMISES
TAXES - The SPD wants to raise tax rates on incomes above 100,000 euros to 49 from 42 percent but Merkel's conservatives have ruled out tax hikes. One compromise would be to target more revenues by stepping up a crackdown on tax evasion and closing tax loopholes for big companies. There is also a chance the CDU/CSU would agree to a symbolic increase on top earners in exchange for off-setting tax relief at the lower end.
WAGES - The SPD is expected to make a nationwide minimum wage, a key plank of their campaign platform, a condition for a coalition. The CDU/CSU only supports "wage floors" on a regional or sectoral basis. It may have to accept a blanket minimum wage but it might be lower than the 8.50 euros the SPD wants.
EUROPE - No insurmountable differences. The SPD would seek symbolic steps to promote growth in struggling euro zone states, but is unlikely to press for more German taxpayer money to be used for this purpose. It will push for a financial transactions tax and faster movement towards a banking union, where banks themselves shoulder the costs of restructuring. The SPD is not expected to push hard for debt mutualisation, despite having backed the idea of a debt redemption fund during its campaign.
ENERGY - The SPD and CDU/CSU could reach a compromise on scaling back subsidies for renewable energy. The Greens, however, would be a more difficult partner for the conservatives as they oppose lower renewables incentives.
PUBLIC INVESTMENT - The SPD wants to use tax revenues generated by its planned hikes for top earners to ramp up spending on education, infrastructure and R&D. The CDU/CSU can probably live with public spending increases in these areas, but will resist financing them with tax hikes or higher debt.
BARGAINING FOR CABINET POSTS
* Finance minister Wolfgang Schaeuble has signaled a desire to stay in his post and is said to have the support of Merkel. Unless the SPD or Greens insist on the ministry as a condition for a coalition with Merkel, Schaeuble has a good chance of continuing in his current position.
* For the SPD, much will depend on Gabriel, whose name has been linked to various ministries including foreign, finance and labor. He could decide to opt out of government to lead the SPD in parliament, though this could meet resistance from the party and incumbent Frank-Walter Steinmeier who is keen to stay put.
* If Gabriel is not in the cabinet, Steinmeier is seen as a candidate for the top SPD ministry, which could end up being foreign, finance or a new energy and infrastructure ministry. SPD parliamentary whip Thomas Oppermann has also been mentioned for the finance brief, though he is more likely to end up with interior or defense. Chancellor candidate Peer Steinbrueck has made clear he will not have a role in a Merkel cabinet.
* Were the SPD to claim the finance ministry, one source said, Merkel might want to shift Schaeuble to the foreign ministry. But the extensive travel involved in this post may be too much of a burden for the wheelchair-bound Schaeuble.
(Reporting by Stephen Brown, Erik Kirschbaum and Noah Barkin; editing by Tom Pfeiffer)