Merkel has embraced the idea of a separate growth initiative alongside the EU's new treaty enshrining fiscal discipline in order to help secure support from opposition politicians that her center-right coalition needs to get the pact passed in Parliament.
The coalition's draft proposal also calls for the European Investment Bank's capital to be increased by (EURO)10 billion ($12 billion) to boost its overall lending capacity for projects fostering growth by about (EURO)80 billion.
But the largely cost-neutral proposal falls short of the German opposition's demands, which include a program to fight high unemployment in southern Europe's struggling nations and a new financial transaction tax.
"All experience shows: sustainable growth cannot be achieved through higher deficits, government meddling, nor through an expansive monetary policy," the government coalition states in its draft, stressing the need for reforming the economy instead.
"Experience in Germany shows: Courageous structural labor market reforms are essential to create more jobs and increase the economy's flexibility," it read.
Led by Merkel, 25 EU nations last year agreed to the treaty which limits the countries' ability to pile up more debt, binding them to strict fiscal and deficit targets as a way to stabilize the continent's finances and regain investors' trust.
But the political tide in Europe has since shifted away from austerity measures to calls for a growth initiative as the bloc is on the brink of a recession, with southern European nations particularly hard hit.
Top coalition and opposition leaders met last week, and agreed to set up two working groups to discuss growth and a financial transaction tax. Another round of top-level negotiations at Merkel's office is scheduled for Wednesday next week.
The Social Democrats and the Greens, Germany's main opposition parties, reject Merkel's focus on austerity and demand instead "a European recovery and investment program for sustainable growth and employment to avoid a downward spiral."
The opposition also proposes a so-called debt redemption fund that would see European nations pooling some of their debt, which would introduce a joint liability and lower borrowing costs for troubled eurozone nations such as Greece, Portugal, Italy or Spain.
The German Chancellor has fiercely opposed pooling debt as a solution for the coming years. But she has softened her stance in recent months on a financial transaction tax, hinting that it could be introduced even if some European nations don't adopt it.
Merkel's government wants to pass the legislation for the fiscal pact on a tight timetable together with a bill for Europe's new permanent rescue fund by the end of June. The legislation for the new firewall, the European Stability Mechanism, must pass by late next month because the ESM is set to start operating in July.
The opposition has said that it will vote for the ESM on time, but threatened to block the fiscal pact unless Merkel makes concessions.