As talks between Chancellor Merkel's conservatives and the business-friendly FDP near completion, German media say top cabinet posts have been filled. The key finance ministry will be headed by Wolfgang Schaueble.
German public broadcaster ARD said on Friday that the conservative bloc - made up of Chancellor Angela Merkel's Christian Democrats (CDU) and the Christian Social Union (CSU) - and the FDP had reached agreement on key ministry posts.
The most significant appointment is that of Wolfgang Schaueble as the next finance minister. Germany is emerging from its worst recession since World War II and the finance ministry is seen as a crucial post in the new government.
The 67-year-old Schaueble served as Merkel's interior minister for the past four years and has a reputation for being a hardliner on domestic security.
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.
His likely appointment sparked mixed reactions in Germany on Friday.
"He's an unknown entity when it comes to financial issues," Dennis Snower, head of the Kiel-based Institute for Economic Research told news agency Reuters. "You can't make any predictions about his future financial policy based on what he's done so far."
Schaueble, who is confined to a wheelchair since a 1990 assassination attempt, is considered a law-and-order hardliner
"I think he's a tough cookie and this is what will be needed," Carsten Brzeski, senior economist at ING Financial Markets told news agency Reuters. "He is someone who would not be afraid of ruining his public image due to unpopular decision-making."
Schaueble, who is confined to a wheelchair since a 1990 assassination attempt, opposed Merkel's plans to offer 15 billion euros ($23 billion) in tax cuts citing Germany's strained finances.
Merkel's conservatives and the business-friendly FDP won a parliamentary majority in last month's election. The two sides are struggling to reconcile their promises of tax cuts with pledges to get Germany's budget deficit under control in order to take office next week as planned.
The business-friendly FDP, led by Guido Westerwelle, promised in its election campaign 35 billion euros ($53 billion dollar) worth of tax cuts and to scale back government spending.
Several policy directions are already known, such as scrapping a 2000 decision to phase out Germany's nuclear power program by 2020. The life of some reactors will be extended. The two sides also want to increase spending on education by 3 billion euros ($4.5 billion) annually.
The two sides are expected to continue horse-trading over key posts and policies until a Saturday deadline.
First Asian-born cabinet minister
The post of foreign minister, however, seems certain to go to FDP leader Guido Westerwelle. The 47-year-old is the first openly gay leader of a mainstream political party in Germany. He has no foreign policy or government experience.
Rainer Bruederle, the FDP's economics spokesman in the parliament for a decade, is set to become the economy minister.
Another key appointment is that of Theodor von zu Guttenberg, Germany's most popular and media-savvy politician, who will give up his job as economy minister to head the defense ministry. The 37-year-old, who is a member of the Bavarian-only CSU party, would have to tackle the Afghanistan mission which is deeply unpopular in Germany.
Roesler is considered a surprise pick
German media reports said the new health minister would be Phillip Roesler - a surprise pick. The 36-year-old, a rising star in the FDP, is currently the economy minister in the state of Lower Saxony and is reported to have led coalition negotiations on healthcare.
Born in Vietnam, Roesler becomes Germany's first Asian-born cabinet minister.
Thomas de Maiziere, Merkel's trusted lieutenant as her chief of staff, would be interior minister.
Merkel, Germany's first woman chancellor, is set to be sworn in next week for a second term as chancellor.
One of the most pressing domestic challenges facing the new government is making up an estimated deficit of millions facing Germany's health insurance system.
All in all, Germany is facing a shortfall of 50 billion euros ($75 billion) or more in health and unemployment insurance programs.
The parties had floated the idea of passing a supplementary or "shadow" budget for 2009 to plug the hole, but abandoned the plan after legal experts said it might violate the country's constitution known as the "Basic Law."
"Evidently the FDP and CDU/CSU have realized in time that it is better not to establish the new government on the basis of lies and deception," the conservative Frankfurter Allgemeine daily said in an editorial on Friday.
Editor: Andreas Illmer