By Stephen Brown
BERLIN (Reuters) - Conservative allies of Germany's Angela Merkel said on Wednesday they might agree to raise taxes to help lure the defeated center-left Social Democrats into a grand coalition that would keep the chancellor in power.
Their overtures came in media interviews ahead of a meeting of SPD leaders in Berlin on Friday, where the opposition will try to chart its new course after losing a third parliamentary election to Merkel and her Christian Democrats (CDU) on Sunday.
Both the SPD and the Greens, Merkel's potential coalition partners following the failure of her previous allies, the pro-business Free Democrats, to win any seats, have been playing hard to get by suggesting they do want to join her government.
The Social Democrats saw their support crumble during Merkel's previous left-right grand coalition in 2005-2009 and so may drive a high price for their support.
Tax policy is one area where the Christian Democrats could now give some ground - in a negotiating process that could keep Germans, the rest of Europe and investors guessing for months.
"I could imagine raising the top tax rates in exchange for tax cuts at the bottom," Norbert Barthle, a senior member of parliament for the CDU, told the Rheinische Post newspaper.
His message was echoed by deputy leader Armin Laschet in another paper. And, in a third interview, even hardline Finance Minister Wolfgang Schaeuble refused to rule out tax increases that his party had rejected during the election campaign.
"Let's wait and see how the talks go," Schaeuble said.
The CDU had campaigned against any tax increases on high incomes; the SPD had said higher taxes were needed for education and infrastructure. It may yet shun any CDU offers. Many in the center-left party say they would prefer to stay in opposition.
Some SPD leaders want to put any proposed coalition deal to a vote by the party's 472,000 members, an unwieldy process.
The chancellor increased her own party's share of the vote on Sunday but fell just short of an absolute majority. And with the Free Democrats just falling short of the 5 percent needed to take seats in parliament, she looks likely to form a government with one of three other parties who made it into parliament.
MERKEL'S OPTIONS LIMITED
The radical Left party is out of the question as a partner for her conservatives, leaving only the SPD and Greens. Both have begun the bargaining season by saying they would rather stay in opposition than help Merkel rule for a third term.
The SPD remains the most likely partner in the long run. Even after a second consecutive disastrous election, it is the biggest party after the conservatives and will ask a high price.
The SPD leadership will discuss strategies and the proposed membership vote on Friday. Grassroots supporters find the idea of being Merkel's junior partner again distasteful and it is far from certain that SPD members would back a grand coalition.
"At the end of such a process, our members must have the last word," said Nils Schmid, SPD leader in Baden-Wuerttemberg who wants any coalition deal put to a vote. His supporters, he said, had "no interest in always saving Frau Merkel's bacon".
But given that Merkel's options other than a coalition are an unstable minority government or new elections, political scientist Hans Vorlaender said the likely ultimate outcome was "a more Social Democratic" country.
"The advantage is that it would ensure greater political stability and there would be no blockades by the Bundesrat," said the Dresden University professor, noting Social Democrat control in the upper house of parliament.
The Greens are purging their leadership after an election that relegated them to being the smallest party in parliament.
Katrin Goering-Eckardt, one of the few Greens leaders left standing, said differences with the conservatives were too wide for the two parties to work effectively together in government.
"It would have no credibility and would not help a stable government, after the views expressed in this campaign," said Goering-Eckardt, who like Merkel is an east German close to the Lutheran church, though she is 12 years younger at 47.
Right-wingers in the Merkel camp, such as Bavarian state premier Horst Seehofer, find the Greens hard to stomach but even his objections are not set in concrete.
First ruling out any contact, he softened this to rejecting "Greens leaders who played a role in the election campaign" and appeared to leave a door open to the likes of Goering-Eckardt.
More significantly still, finance minister Schaeuble said he could work with pragmatists like Winfried Kretschmann in Baden-Wuerttemberg, who is the Greens' first state premier.
Asked by Die Zeit weekly if the Greens were a coalition option, Schaeuble said: "It depends which Greens we're talking about." The minister, who is himself from Baden-Wuerttemberg, urged rapid negotiations "given some important European policy decisions we are faced with, for example on banking union".
Progress on pressing euro zone issues, including creating a banking union to restore confidence in the bloc's financial system, slowed in the months before the election as Merkel avoided agreeing anything that might upset German voters.
(Additional reporting by Michelle Martin and Erik Kirschbaum; Editing by David Stamp and Alastair Macdonald)