After marathon talks Monday, negotiators from Merkel's CDU party, her Bavarian CSU ally and the Social Democratic Party (SPD) are to reconvene in Berlin at 10:00 am (0900 GMT) for one last push to clinch an agreement on a renewed “grand coalition”.
Despite the protracted haggling — the talks were initially supposed to end at the weekend — the parties sounded upbeat on meeting Tuesday's self-imposed deadline.
“I remain optimistic,” said Daniel Günther, the CDU premier of the northern state of Schleswig-Holstein.
Party sources said the main sticking points were disagreements over healthcare, labour policy and defence spending.
Julia Klöckner, deputy of Merkel's CDU party, said she expected talks to once again run into the night Tuesday, meaning it could take until Wednesday for a coalition treaty to be formally presented.
Merkel, in power for over 12 years, has pinned her hopes for a fourth term on a repeat alliance with the SPD after September's inconclusive election left her without a ruling majority.
But commentators have already dubbed the tie-up a “coalition of losers” after both parties slumped to their worst results in decades in the polls, while the far-right Alternative for Germany (AfD) took nearly 13 percent of the vote.
SPD to have final say
Merkel initially sought to form a three-way alliance with the Greens and the liberals, but those talks broke down in acrimony in November.
Faced with the option of snap polls that could further boost the AfD or the prospect of heading an unstable minority government, Merkel opted to woo back the SPD — her junior partner for two of her three terms since 2005.
After at first ruling out another four years in Merkel's shadow, SPD leader Martin Schulz backtracked — a U-turn that angered many grassroots SPD supporters who hoped to reinvent the party from the opposition benches.
At a special congress in January, SPD delegates narrowly voted to pursue coalition talks.
But even if both sides end up signing a coalition agreement that lays out the next government's policies, a new Merkel-led government is not yet guaranteed.
Schulz has promised to put any coalition accord to a yes-or-no referendum by the SPD's 440,000 rank-and-file members.
Observers expect the vote to be tight, with the SPD's left and youth wings fiercely opposed to another “GroKo”, as the grand coalition is known in German.
The SPD referendum result is expected in early March. If all goes well for Merkel, a new government could be in place by the end of next month.
Often described as Europe's most powerful woman, Merkel's struggles to form a government have harmed her political standing at home and abroad.
Germany's European partners in particular are eager for an end to the gridlock in Berlin that has held up decision-making at a time when French
President Emmanuel Macron is pushing for major EU reforms.
Although Merkel and the SPD are open to the French plans for deeper eurozone integration, the SPD is more enthusiastic about some of Macron's more ambitious proposals such as a joint eurozone budget and finance minister.
In a message to party members Monday, Schulz said the would-be coalition partners had successfully finished the European chapter of their talks.
While details remained vague, the former European Parliament chief said they had agreed to invest more in the eurozone, support a eurozone investment budget and end “the austerity diktat”.
But they are still at loggerheads about the SPD's demands to ban short-term work contracts and overhaul Germany's two-tier healthcare system.
They also remain at odds on boosting defence spending, party sources told DPA news agency.
While Merkel's conservatives want to increase spending to bring it closer to NATO targets, as demanded by US President Donald Trump, the SPD is known to be sceptical.
A new survey for Bild newspaper Tuesday found that the lengthy coalition wrangling has hurt both mainstream parties.
Support for the CDU/CSU fell from 33 to 30.5 percent in the Insa poll, while the SPD slumped from September's historic low of 20.5 percent to 17 percent — leaving the “GroKo” hopefuls without a combined majority.
The AfD meanwhile scored a record 15 percent.