By Andreas Moeser
BERLIN (Reuters) - German Chancellor Angela Merkel looked set to name hard-nosed former rival Wolfgang Schaeuble finance minister on Friday as coalition talks between her conservatives and the Free Democrats (FDP) neared a conclusion.
With Germany emerging from its deepest recession since World War Two and the budget deficit set to soar, the finance ministry is seen as a crucial post in the new government and Merkel seems determined that her Christian Democrats (CDU) should control it.
Conservative sources said she wanted Schaeuble, 67, a former protege of Helmut Kohl who has served as Merkel's interior minister for the past four years, in the job as haggling over the cabinet and policy agenda reached a climax.
Merkel's conservatives and the business-friendly FDP won a parliamentary majority in last month's election. They must forge compromises on the cabinet and divisive issues like tax policy in order to take office next week as planned.
"It's all pointing to Schaeuble," a party source involved in coalition talks told Reuters. "He has been a strong voice on financial policy in the coalition negotiations."
Schaeuble succeeded former Chancellor Kohl as head of the CDU but Merkel was instrumental in pushing him out of the post after a party funding scandal in 2000.
Confined to a wheelchair since a 1990 assassination attempt, he has patched up relations with Merkel and as her interior minister has earned a reputation as a pugnacious hardliner on domestic security.
"TOUGH COOKIE"
"I think he's a tough cookie and this is what will be needed," said Carsten Brzeski, senior economist at ING Financial Markets. "He is someone who would not be afraid of ruining his public image due to unpopular decision-making."
Before the vote, Schaeuble indirectly criticised Merkel's plans to offer 15 billion euros in tax cuts, saying there was little room for them given Germany's strained finances.
Horse-trading between Merkel's conservatives and the FDP could bring last-minute changes in the make-up of the cabinet. The post of foreign minister, however, seems certain to go to FDP leader Guido Westerwelle.
Bavarian rising star Karl-Theodor zu Guttenberg, 37, who took over as economy minister in February, looks set to become defence minister, conservative party sources said. In that role, the country's most popular politician would have to tackle the divisive issue of Germany's role in Afghanistan.
Merkel wants to be sworn in next week and senior figures say they expect a final coalition deal late on Friday or early Saturday.
The new government will end Merkel's awkward four-year coalition with the Social Democrats (SPD), giving her the centre-right government she wanted but failed to get in 2005.
But there is no sign she will abandon her cautious policy approach and press for radical reforms with the FDP, who are free market proponents.
The parties have already forged compromises on issues from nuclear energy to foreign policy and healthcare. But they must still find a way to reconcile their promise of tax cuts with a separate pledge to bring the budget deficit under control.
Merkel must find an estimated 50 billion euros to plug a hole in the budget and deliver tax relief that is expected to total about 20 billion euros.
(Additional reporting by Paul Carrel; writing by Madeline Chambers; editing by Noah Barkin)
