By Noah Barkin
BERLIN (Reuters) - Angela Merkel's conservatives and the Social Democrats (SPD) head into a decisive week of German coalition talks on track to form a government but under fire from their own members for a series of policy compromises.
The chancellor's Christian Democratic Union (CDU) beat the SPD in an election two months ago, but failed to secure a parliamentary majority, forcing her into talks with her arch-rivals.
Negotiations have dragged on, leaving Merkel's outgoing center-right coalition in charge but unable to move on urgent European policy decisions.
The parties are expected to overcome their remaining differences and divide up cabinets posts this week.
But complaints within the CDU about policy compromises have grown louder in recent weeks as the SPD has demanded and won concessions from Merkel on a minimum wage and other measures conservatives fear could hurt the economy.
"The news from the coalition talks is setting off alarm bells in industry," Kurt Lauck, president of a business lobby within the CDU, wrote to Merkel in a letter published in German newspapers at the weekend.
Meanwhile, SPD leader Sigmar Gabriel faces a major challenge in convincing the grassroots of his party to back a coalition deal that may not contain the big public spending boost they had called for in the German election campaign.
Der Spiegel magazine reported at the weekend that scepticism about entering what would be the second "grand coalition" with Merkel in less than a decade was high in local SPD chapters ahead of a high-stakes party referendum in early December, where 470,000 rank-and-file members will get to vote on the coalition.
Were they to veto the deal, which still seems unlikely, Germany could face many more months of political uncertainty, and possibly even new elections.
"We really need to pull together to bring the party along. This is not a done deal by any means," said Martin Schulz, the president of the European Parliament and a top negotiator for the SPD in the talks.
Some of the critical rhetoric from both camps is posturing. By taking a sceptical line, both the SPD and CDU are sending the message to each other that they can live without a deal.
They may be hoping this will help them wring last-minute concessions from the other side in a final round of negotiations that is scheduled for Tuesday and likely to spill into the early morning hours of Wednesday.
But the mood is clearly different than it was in 2005, when Merkel won a narrow victory over the SPD, and was forced to form the first right-left coalition of Germany's big "Volksparteien", or people's parties, since the 1960s.
Back then, the CDU was happy to be returning to government after seven years in opposition, and the SPD was glad to have thwarted Merkel's goal of a center-right government.
This time around, there is a much deeper sense of ambivalence in both camps, like an estranged couple that has agreed to live under one roof for the good of the children -- or in this case the country.
Berlin's European partners also have reason to be disappointed. Some had hoped the center-left SPD would push Merkel towards a more growth-friendly vision for Europe.
Instead, the future of the crisis-plagued single currency bloc has played only a minor role in the talks, and a deal on the most pressing European issue -- the creation of a new body to wind down stricken banks -- has proved elusive.
Anti-euro voices within the Bavarian Christian Social Union (CSU), sister party to Merkel's CDU, also appear to be growing louder.
Over the weekend, the CSU's most prominent eurosceptic Peter Gauweiler was elected to the post of deputy party leader. And Alexander Dobrindt, a CSU politician who repeatedly called for Greece to leave the euro at the height of the crisis, is expected to win a top position in Merkel's new cabinet.
"The talks have been very disappointing for those who had hoped the SPD would push hard on the European themes it stressed during the campaign," said Ulrike Guerot of the Open Society Initiative.
On the domestic policy front, Merkel's CDU appears to have quashed the SPD's demand for tax hikes on the rich in order to fund a boost in public spending on infrastructure, education and research. But it is unclear where the money for such investments, which all the parties support, will now come from.
The SPD looks to have got its way on the introduction of a nationwide minimum wage of 8.50 euros an hour and the loosening of a ban on dual citizenship for the children of immigrants born in Germany.
But grassroots members are complaining that Gabriel has failed to secure victories on big-money issues. They are also angry that the Bavarian CSU may succeed in its push for a motorway toll targeting foreigners that Merkel herself had ruled out during the campaign.
Cabinets posts are expected to be divided up in talks this week. Wolfgang Schaeuble is expected to remain finance minister, with Frank-Walter Steinmeier of the SPD returning as foreign minister, a post he held in the first "grand coalition" from 2005-2009.
Whether Gabriel joins the cabinet, perhaps as head of a trumped up economy and energy ministry, or takes Steinmeier's post as parliamentary leader of the SPD is unclear.
Regardless, prominent German commentators are already denouncing the deal, even before it has been unveiled, as an ugly mix of lowest-common-denominator policies that fail to address the country's most pressing challenges -- from an ageing population to a costly shift out of nuclear power.
Polls show that many Germans agree. Last week a poll for public broadcaster ARD showed that 55 percent of respondents still favour a "grand coalition", but that was down from 66 percent only one month before.
A minority of 43 percent see new elections as a viable option. In October, it was only 31 percent.
(Additional reporting by Michelle Martin; editing by Anna Willard)