BERLIN (BLOOMBERG) - German Chancellor Angela Merkel took a conciliatory tone toward the Social Democrats, or SPD, on Monday (Nov 27) as she invited them to begin talks on securing a stable government capable of tackling the challenges facing Europe's biggest economy.

Speaking at the headquarters of her Christian Democratic Union party in Berlin, Merkel lobbied for the reluctant SPD to renew an alliance. To underscore the need for a government with a majority in the Bundestag, she rattled off a series of urgent issues including Brexit, European integration proposals from French President Emmanuel Macron as well as strained relations with Russia and the United States.

"People expect their problems to be solved, and we believe that the best way to achieve that is by forming a stable government," Merkel said at a press conference on Monday. "That's why we are ready to begin talks with the SPD. We of course know that such talks require compromise."

A political stalemate in Europe's biggest economy is showing signs of easing as the SPD abandon their strict rejection of a revival of the alliance that underpinned two of Merkel's three terms. Even before talks have officially started, the SPD and Merkel's conservative bloc have begun laying out positions.

SPD DEMANDS

Merkel earlier made it clear that her coalition partner would have to support a balanced budget and broadly pro-business policies. The list of demands from the SPD includes higher pensions and income tax cuts for low earners. Merkel and SPD head Martin Schulz, her defeated election challenger, are due to meet on Thursday at the invitation of German President Frank-Walter Steinmeier, who is urging party leaders to find a way to avoid new elections. Schulz will brief reporters later on Monday.

The SPD had opened the door to a re-run of the grand coalition a week after talks with the Free Democrats and Greens broke down. The impasse raised concerns over German stability as Europe faces risks posed by Brexit and a rising tide of nationalist populism. But reaching a deal won't be quick or easy, with the Dec 7 Social Democratic convention key.

The SPD, which had initially rejected a role in government after slumping to its worst election results since World War II in September, is seeking to gain leverage with the condition that any deal be subject to approval by the left-leaning party's members.

GROWING SUPPORT

"We'll see what comes out of the talks with the other parties, but you can't expect the SPD to just jump straight into a grand coalition," Ralf Stegner, a deputy SPD leader, said in an interview Monday with ARD television. "We need to discuss this calmly and then our members will decide whether, and in what form, we take part in government."

Part of convincing SPD members to accept a coalition deal is by arguing that the alternatives could be even worse. New elections could lead to poorer results for the SPD, while a minority government might mean the party ends up supporting CDU policies without having a say in the process.

As the likelihood of another grand coalition increases, so does support for the parties involved. In an Emnid poll for the Bild am Sonntag newspaper, backing for Merkel's Christian Democrat-led bloc rose two percentage points to 33 per cent while support for the SPD climbed one point to 22 per cent, with 52 per cent of respondents in favour of a formal alliance between the two parties and 39 per cent opposed. Emnid interviewed 1,225 people on Nov; 20-23, no margin of error was given.

The Social Democrats in North Rhine-Westphalia, the party's heartland, backed away from their refusal to support a grand coalition in a letter to the SPD's leadership, calling for the party's election program to form the basis of possible coalition talks with Merkel, Sueddeutsche Zeitung reported. In its program, the SPD called for a revamp of Germany's healthcare system that would eliminate private insurance, demanded more taxpayer money for the pay-as-you-go pension system and higher taxes on wealthy individuals.

While some CDU leaders warned the SPD from asking for too much, Merkel signaled she's ready to listen. "An offer for talks is on the table, and we mean it seriously," she said.