By Thomas Escritt
BERLIN (Reuters) - Germany's Social Democrats (SPD) voted on Thursday to hold talks with Chancellor Angela Merkel's conservatives on forming a government after their leader made an impassioned plea for a free hand to work for a social "United States of Europe".
The vote clears the way for talks that could resolve the impasse into which Europe's economic powerhouse was plunged after Merkel and the SPD shed support in a September election, greatly complicating the parliamentary arithmetic.
Martin Schulz urged reluctant centre-left SPD members to be open to Merkel's overtures to renew the coalition that has governed for the past four years, saying the party had a responsibility to revive social democracy in Germany.
A new "grand coalition" with the reluctant SPD is Merkel's best hope of extending her 12 years in power after talks with two smaller parties failed, giving the smaller SPD greater leverage in any negotiations.
"The question isn't grand coalition or no grand coalition," he said in a speech to his party's biennial congress, "Nor minority government or fresh elections. No - it's about how we exercise our responsibility, including to the next generation."
Schulz said the party would only recover if it could offer a clear vision of a Germany and a Europe that worked for their citizens, calling for deeper European integration and a "United States of Europe" by 2025.
"Europe does not always work for its people, rather too often for the big companies," he said, outlining a populist vision that goes well beyond Merkel's own openness to limited structural reforms and bureaucratic streamlining.
Talks between the two parties are expected to begin in earnest in the new year. A special congress will have to be convened at which party members will vote on whether to support a final agreement, which could fall short of a formal coalition, and could include tolerating a minority government.
Stephan Weil, the influential premier of the state of Lower Saxony, said the SPD would want to see its policies reflected in return for supporting any government.
"I think the majority of the delegates see themselves as a European party and they expect that Germany becomes a driving force in Europe again," he said of Schulz's proposals regarding the European Union.
Schulz's proposals were received more cautiously by Merkel.
"The (EU's) ability to act should be at the forefront now," she said at a Berlin press conference. "So I will concentrate on more cooperation in defence by 2025 and on other issues," including employment and innovation.
Outside the congress hall, SPD youth activists, many of whom want the party to chart a distinctive course after spending eight of the past 12 years in centrist coalitions, handed out red cards reading "No Grand Coalition".
"Merkel leads this country without direction," said one speaker addressing the conference. "She has no plan for Europe, she leads the country from week to week. We need a strong social democracy in this country."
Schulz, who initially said his party should go into opposition after being punished for participating in the previous grand coalition under Merkel, apologised for his party's disastrous electoral result.
UNITED STATES OF EUROPE
Schulz attacked European moves to support big banks while doing little to counter high youth unemployment.
"When states can't balance their budgets they face draconian sanctions from Brussels. If we can mobilise billions for bank rescues but have to fight for paltry sums to support jobs for young people, then this is definitely not my Europe."
He struck a tone that was more critical of big companies than French President Emmanuel Macron, who is pushing for deeper euro zone integration and pro-business reforms under a euro zone finance minister.
He took aim at U.S. technology firms Apple, Facebook and Google, saying a strong Europe was needed to make them stick to the rules and protect the rights of workers in a changing economy.
"We don't want an app-directed service society but we want digitalisation to lead to more individual freedom," he said to applause, calling for steps to protect the digital economy's self-employed from becoming "self-exploiters".
On the issue of immigration, one of the main reasons for the collapse of Merkel's first attempt at a coalition, the SPD opposes a conservative plan to extend a ban on the right to family reunions for some accepted asylum seekers.
"There can be no upper limit to the right to protection from war and persecution," Schulz told delegates, rejecting conservative demands for a ceiling of 200,000 immigrants a year.
(Additional reporting by Emma Thomasson; Editing by Kevin Liffey and Toby Chopra)