Martin Schulz made the appeal at a party gathering in Berlin Thursday to discuss talks with Merkel's center-right bloc composed of the Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU).
SPD was in a "grand coalition" under Merkel from 2005 to 2009 and again from 2013 until present but the the coalition between the left and right dealt a heavy blow to both parties which suffered poor election results, prompting Schulz to persuade his party to go into opposition.
However, after Merkel's talks with two smaller parties collapsed last month, Germany’s President Frank-Walter Steinmeier advised Schulz to reverse course.
In his address, Schulz listed center-left priorities such as equal treatment for men and women in the labor market and a relatively liberal approach to immigration, rejecting the idea of a cap on the number of refugees allowed into the country.
He also demanded a eurozone budget be approved to boost investment and growth in Europe, and a European finance minister who would curb "tax dumping."
The former European Parliament president called for a federal "United States of Europe" by 2025, and argued that countries that don't want to sign up to a treaty establishing a federal setup should exit the European Union.
Some members of SPD, including the party's youth wing, are opposed to a coalition with Merkel, leaving only a minority government, or a new election as the only options left.
"The renewal of the Social Democratic Party will happen outside a 'grand coalition,' or it won't happen," said the leader of its youth wing, Kevin Kuehnert.
Merkel has said she is "very skeptical" about leading a minority government, which hasn't yet been tried in post-World War II Germany, and advised the president to call for snap elections if no agreement is reached.