Grand coalition is only option for Merkel

The introduction of a minimum wage in all sectors of the economy is a key demand of the Social Democrats (SPD).

So far Merkel has opposed the idea, but on Wednesday the leader of her Bavarian sister party, Horst Seehofer, indicated that a compromise can be worked out.

In an interview with Sueddeutsche Zeitung, Seehofer said he is ready to accept a €8.5/hour minimum wage as long as the SPD drops its other demands for higher taxes and is "flexible" about the deadline for the introduction of the minimum wage.

"For me it's crucial: No tax increases and no new debt. This is very important for economic growth and for jobs," Seehofer said.

A compromise on the minimum wage may be enough of a precondition for the Social Democrats to agree at a party congress on Sunday to enter into real coalition talks with Merkel.

The new parliament will have its first session next week, with Merkel's outgoing cabinet entering into caretaker mode afterwards.

There is no legal deadline for a new government to be formed, with SPD deputy Andrea Nahles suggesting talks could drag on until January.

Finance minister Wolfgang Schaeuble, however, who is tipped to become foreign minister if the SPD gets the finance ministry, said he is confident a new government will be in place by next month.

"I think we will have a coalition by mid-November," he said last weekend while in Washington.