BERLIN (Reuters) - German parties exploring a coalition government have dealt an early blow to French President Emmanuel Macron’s hopes for more expansive fiscal policies from Berlin, backing a balanced budget and rejecting the idea of a separate pot of cash for the euro zone.

Leader of the German Green Party Cem Ozdemir leaves the venue after the second day of the exploratory talks with CDU/CSU about forming a new coalition government in Berlin, Germany, October 19, 2017. REUTERS/Axel Schmidt

The Greens, seen as closest to Macron on economic policy and Europe, appeared to have caved in to demands by Chancellor Angela Merkel’s conservatives and the Free Democrats (FDP) that a new government continue down a path of fiscal discipline.

Merkel, whose conservatives placed first but lost seats in an election last month, is trying to forge a coalition with the pro-business FDP and the Greens, which requires bridging disagreements on taxes, immigration and foreign policy.

In a joint paper agreed after late-night talks on Tuesday, the parties said they all supported a balanced budget. A senior Greens politician who participated in the talks also told Reuters that the parties were united in opposing Macron’s idea for a euro zone budget.

“None of the participating parties support a euro zone budget,” said Reinhard Buetikofer, a member of the European Parliament.

The parties are expected to reconvene on Thursday to finalize a joint paper on Europe, after agreeing a rough blueprint for fiscal policy late on Tuesday.

That blueprint included a pledge to respect “debt brake” legislation enshrined in the constitution since 2009, which forces the federal government to virtually eliminate structural budget deficits, limiting them to 0.35 percent of GDP.

It also contained a commitment to provide relief to lower and middle income earners, dismantle the “solidarity tax” for poor eastern states and provide financial incentives to make German homes more energy efficient.

Cem Ozdemir, a leader of the Greens who is seen as a possible foreign minister in the new government, highlighted a decision to re-examine plans to raise defence spending by the outgoing “grand coalition” of Merkel’s conservatives and the Social Democrats (SPD), who are moving into opposition.

Tax relief and investment needs would be finalised once more details on tax revenues become available next month, Ozdemir said, suggesting that the balanced budget commitment was not final.

“CAVE IN”

The Greens politician also said that a new coalition would have to provide a “pro-European” answer to proposals from Macron and European Commission President Jean-Claude Juncker for closer cooperation in fiscal matters, defence and migration.

“There are a lot of differences to overcome. But I am hoping for a clear commitment to Europe,” said Ozdemir in a video posted on the Greens website.

Buetikofer said the Greens supported the idea of boosting investment within the framework of the existing EU budget.

But their rejection of Macron’s idea for a separate budget for the euro zone at such an early stage of the coalition talks was seen by some members of the party as an unnecessary “cave in” to Merkel’s conservatives and the FDP.

Macron has called for the creation of a euro zone budget of several hundred billions of euros to help the single currency bloc cope with economic shocks.

One FDP participant who requested anonymity suggested that the Greens may have given away too much in the talks on Tuesday night and expressed concern that the leadership of the party could be forced to change tack in the days ahead by angry grass roots members.

Former Chancellor Gerhard Schroeder, a Social Democrat who ruled with the Greens for seven years, accused the environmentalist party of “preparing Frau Merkel’s bed” in a desperate attempt to re-enter government.

Immigration could also be a contentious issue in the coalition talks as Merkel’s conservatives row back on the open-door policy towards refugees that she adopted in 2015. This will also be on the agenda on Thursday.