Sept. 29 (Bloomberg) -- Germany is nearing its first coalition government of Social Democrats and Christian Democrats since 1969 after Chancellor Gerhard Schroeder and opposition leader Angela Merkel held ``constructive'' talks to overcome an election stalemate.

Schroeder and Merkel agreed on a new round of talks on Oct. 5 after meeting for exploratory discussions. Social Democrat and CDU leaders yesterday discussed the country's budget deficit and the labor market, Merkel said at a briefing in Berlin.

``We agreed that, if there's a grand coalition, it needs to tackle big, significant projects,'' Merkel told reporters. Schroeder said ``it will be possible to form a stable constellation that will keep Germany on its reform path for four years.''

Schroeder and Merkel, who on election night both said they want to lead the next government after the inconclusive Sept. 18 vote, have yet to agree on who will be chancellor. The 2 1/2-hour talks yesterday avoided a discussion about the future head of government in Germany, where unemployment is near a post-World War II high.

Schroeder's SPD won 222 seats in parliament in the national elections, three fewer than Merkel's CDU and their Bavarian sister party, the Christian Social Union. Neither side has enough seats to form a coalition with their preferred partners, making the ``grand coalition'' the only alternative.

Budget and Labor

Merkel, 51, termed yesterday's preliminary discussions ``very constructive.'' She said both sides need to balance economic growth with social welfare needs.

Edmund Stoiber, leader of the CSU, said ``I got the impression that the SPD definitely seeks union with the CDU- CSU.''

Schroeder and Merkel met as DaimlerChrysler AG, based in Stuttgart, Germany, announced plans to eliminate 8,500 jobs at its Mercedes luxury-car unit. The country's jobless rate, adjusted for seasonal changes, rose this month by 39,000 people, to 11.7 percent, from 11.6 percent in August, the Federal Labor Agency said today.

``There's terrific pressure on the SPD and CDU to find union in talks,'' said Ingrid Reichart-Dreyer, a professor of politics at Berlin's Technical University, in an interview. ``The economy, including consumers and investors, can ill put up waiting for a new election. These talks are essential to the main parties.''

Germany's hourly wages are the highest in the 25-state European Union after Denmark. The first 42 cents of every euro earned by workers in Germany is spent on social insurances.

The country's 3.4 million small and medium-sized companies may scale back investment and hiring plans after the election led to deadlock, Deutsche Bank AG Chief Economist Norbert Walter told VDI Nachrichten.

Political Cooperation

Economists such as Frankfurt-based Bernd Weidensteiner of DZ Bank AG said expectations that the SPD and the CDU can't work together can be ``overdone.'' Merkel before the election praised Schroeder's Agenda 2010 program to revive the economy as ``a step in the right direction.''

Germany's biggest parties cooperated last year in an ``informal grand coalition'' in parliament to pass Germany's biggest ever welfare cuts, said Weidensteiner in a note to investors from Sept. 15.

The talks may gain a boost as polls show individual voters preferring the CDU-SPD alliance to other possibilities.

Forty-five percent of 1,345 voters surveyed on Sept. 20-22 by Mannheim University's polling unit FGW for ZDF television said they would find a coalition of the CDU and SPD ``good''. Germany was run by such an alliance once before between 1966 and 1969 after a cabinet rebellion of the CDU's partners, the FDP, over policies to revive a flagging economy.

To contact the reporter on this story: Brian Parkin in Berlin at at bparkin@bloomberg.net

Last Updated: September 29, 2005 05:03 EDT