On Friday the CDU, its sister party, Horst Seehofer's Christian Social Union, and Martin Schulz’s SDP produced a 28-page document that was presented as a “blueprint” for coalition talks.
If the three parties can agree on the details, talking points in the document would become policy in Merkel's fourth-term government to be sworn in by late March.
Here are the essential points:
- Germany, the EU's biggest economy, supports French President Emmanuel Macron's reform plans but the document is vague on the details.
On the economy:
- Germany will boost public investment while maintaining a balanced budget.
- There will be no tax increases, with the right-wingers fighting off an SPD proposal to raise them for the very rich.
- The SPD won some social welfare concessions, including in health insurance, but not as many as they wished.
On energy and the climate:
- Germany's carbon emission reduction goals will be maintained.
- A study of ways to eliminate dirty coal plants will be ordered at an unspecified date.
- The parties agreed to limit the numbers of refugees and migrants coming to Germany, following the arrival of more than one million asylum seekers since 2015.
- Germany will seek to limit the annual intake of people seeking safe haven to around 200,000. Some refugees with temporary status will be allowed to bring in their families but the number of refugees' relatives coming to Germany will not be allowed to be over 1,000 a month.
They will help the conservatives to keep their position as the number one party in the next four years.
The SPD "tried to get some successes in, for instance, health care insurance, in tax issues, in European affairs, social integration of Europe, [but their wishes were] not fulfilled," says Professor Gero Neugebauer, of the Freie Universität Berlin.
The Social Democrats failed to win new civil healthcare insurance or tax increases on higher incomes, Neugebauer points out, dubbing the agreement "more or less a letter of intent, rather than a real proposal that could that could change the system within the next four years”.
The coalition, if it is formed, will be a last resort.
The CDU/CSU and the SPD were big losers in September's elections: the Christian Democrats lost 8.6 percent compared to their results in the 2013 elections and the Socia Democrats 5.2 percent.
All the other parties that participated in the elections gained support, with the far-right wing AfD winning 7.9 percent and the FDP six percent.
But as the CDU/CSU remained the largest party with 32.9 percent, they were still entitled to try to form the government.
Protracted discussions with the Green Party and the FDP led to nothing and the AfD was never invited to talk. New elections were impossible.
“Talk of new elections is nonsense,” says Wolfgang Renzsch, a political scientist with the Magdeburg University. "The constitution has no direct way to new elections. The only way out would have been that the parliament changes the constitution.
“So both big parties, the Social Democrats and the Christan Democrats have a vital interest to come to a solution, regardless how it looks in detail.”
Welcomed across Europe
There were immedeate reactions from the rest of Europe
In France a government spokesperson said that the agreement would be “good for Germany, good for France and above all good for Europe".
European Commission president Jean-Claude Juncker also welcomed the news. And in Greece, where protesters demonstrated against a new labour law introduced as a condition for the EU- sponsored bailout program, there was some relief.
“I’m optimistic in the sense that we have don’t have a coalition where the FDP are participating,” says Charanbos Thardanibis, the director of the Institute for International Economic Relations in Athens, “because they were much more strict on austerity policy and some of them had some doubts about Greece’s participation in the monetary union.
“Now, because a new grand coalition is going to be formed, I think that this hesitation would not exist anymore. And it will be a new phase of how this new coalition would deal with matters, not only in Greece but in the EU."
Hard times ahead for SPD
The big question is: if this new GroKa, as the CDU-CSU/SPD “grand coalition” is called, is formed, how will it go down with Social Democrat voters, who have seen virtually nothing they voted for delivered?
The SPD "don’t have a long-term political programme and they didn’t have the time to develop themselves as an alternative to the conservatives," says Neugebauer.
"If they join the coalition now they will help the conservatives to keep their position as the number one party in the next four years and they won’t help themselves because what they’ve got is not good enough to cover all the deficits the party has."