Angela Merkel, the German chancellor, faces crucial talks on forming a new government on Sunday following last month’s damaging election losses. Immigration is set to dominate the agenda as Mrs Merkel meets with Horst Seehofer, the leader of her Bavarian sister party and an implacable opponent of her refugee policy. Mrs Merkel is trying to put together a new coalition with the pro-business Free Democrats (FDP) and the Green Party. Before she can begin negotiations, however, she has to put her own house in order. Mr Seehofer is threatening to pull his Christian Social Union party (CSU) out of any coalition unless Mrs Merkel agrees to an annual limit on the number of refugees allowed into Germany. But with both the FDP and the Greens opposed to any limit, it is a demand Mrs Merkel can ill afford to give in to. German election results Complicating matters still futher for the chancellor, she needs the CSU’s 46 MPs for a coalition to command a majority in parliament. The CSU has been in an almost continuous alliance with Mrs Merkel’s Christian Democrats (CDU) since 1949, and its participation in any CDU-led coalition is usually automatic. But Mr Seehofer said this week discussions with the CDU following the election have been “the most difficult since 1976”, when the two parties briefly split for a few months. The CSU suffered damaging losses in last month’s elections, and Mr Seehofer’s position as party leader is hanging by a thread. He has made no secret of the fact he blames Mrs Merkel’s “open-door” refugee policy for the losses. “The election was not lost in Bavaria, but in Berlin,” he was reported to have said recently. German Chancellor Angela Merkel Credit: AP Mr Seehofer opposed Mrs Merkel’s refugee policy from the start and his party has long demanded an annual limit of 200,000 refugees a year. “We will not budge on the upper limit,” Manfred Weber, a senior MEP said this week, while Alexander Dobrindt, the outgoing transport minister, described it as “non-negotiable”. But even if Mrs Merkel were prepared to back down over the issue, her putative coalition partners in the FDP and the Green party are just as adamant they will not agree to an upper limit. Angela Merkel wins fourth term in German elections 01:03 The talks could also cause Mrs Merkel a few headaches over European Union reform. The CSU opposes any German funding for French leader Emmanuel Macron’s proposed new joint Eurozone budget, while Mrs Merkel is keen to offer Mr Macron some support over reforms. Mr Seehofer is facing calls to resign as CSU leader over the election losses, and will not want to return to Munich empty-handed. But equally pulling the CSU out of coalition would almost certainly lead to new elections — which could lead to further losses for the party. Mrs Merkel will not want to force Mr Seehofer into a corner — not least because his likely successor as CSU leader, Markus Söder, is considerably more hardline. Instead, most analysts agree she will try to find a compromise formula that will allow Mr Seehofer to claim victory in the talks, while still keeping herself a free hand in the negotiations with the FDP and Greens. One possibility that is being talked about is the CDU agreeing to a “guideline” upper limit that would not be binding on the government. “We will surely find a wording of penetrating beauty and Horst Seehofer will say it’s the upper limit,” Wolfgang Bosbach, a senior CDU politician said this week.