ANGELA MERKEL, the German conservative leader, met Gerhard Schröder, the Chancellor, yesterday to thrash out the shape of a possible grand coalition government to tackle unpopular economic and social reforms. After a cautious round of talks, the contours of a reforming German government were at last taking shape.

“We need clarity,” Frau Merkel, the Christian Democrat leader, who intends to become Chancellor next month, said.

“Only when the full scope of Germany’s problems is set out in detail can we win popular legitimacy for a government made up of the two largest parties.”

The Christian Democrats emerged from the general election on September 18 a nose ahead of Herr Schröder’s Social Democrats and, after being rebuffed by the Greens, are trying to shape a coalition with the Chancellor’s party. The parties have been locked in stalemate for the past ten days because the results gave no clear mandate.

The negotiating teams tried to put aside the question of who would lead Germany — Frau Merkel, as the election winner, or the incumbent Chancellor — and concentrate on the future.

“There are four great challenges for a grand coalition,” Norbert Röttgen, a Christian Democrat ally of Frau Merkel, said. “We have to sort out the budget, which means a joint commitment to overhauling health insurance. Then there is reform of the federal system, tax reform and deregulation.”

Frau Merkel’s idea, put forward yesterday, is that the coalition focus on these four pillars. The immediate aim would be to reduce unemployment and make Germany more flexible. But before common policies could be worked out, the Christian Democrats had to know the depth of Germany’s state financing problems.

The mood was different from that of the first meeting last week, when neither Herr Schröder nor Frau Merkel was willing to give ground, each claiming to be the popular choice as German leader.

The Chancellor’s calculation was that Frau Merkel’s support within her party would crumble. Instead, his own supporters are melting away.

One open suggestion from the ranks of the Social Democrats was that he should become Foreign Minister. Franz Müntefering, the chairman of the Social Democrats, is tipped to become deputy leader in a government led by Frau Merkel. The challenge for both parties is to find a face-saving way for the Chancellor to step down.

One option would be for him to resign shortly after election results are released on Sunday in a Dresden constituency. This is the one part of Germany that did not vote in the general election and, although the result there will not change the balance of power, it will signal the formal end of the election.

The betting is that the search for a government will accelerate next week. If Frau Merkel is to be Chancellor, she must find an absolute majority by October 18, when the new parliament convenes.

Even if things go according to her plan, it is still likely to take until the end of next month before a coalition agreement is fully worked out.

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