A crucial vote in Germany on Sunday has the potential to derail stability in Europe and send the euro tumbling.

The continent's largest economy has been without a formal government for four months with long-term chancellor Angela Merkel unable to secure a ruling coalition.

Last week, there appeared to be a breakthrough when it was announced that the hierarchy of the center-left Social Democrat Party (SPD) had agreed to a preliminary "grand coalition" with Merkel's center-right Christian Democratic Union (CDU) party.

In Bonn on Sunday, the SPD will ask its 600 delegates whether the party should begin full coalition talks. If that passes, the next step would be a postal vote for the SPD's 450,000 members.

The party's former leader, Sigmar Gabriel, who now acts as Germany's foreign minister, reportedly said last week that many around the world want a deal to be struck.

"It is no exaggeration. This coming Sunday it is not only Europe that is looking spellbound at the SPD party conference, but many people far further afield. The world will be watching Bonn on Sunday," he said.