Since the September 24 federal elections Germany has not yet formed a new government so that Merkel's caretaker government could not make major policy changes on any issues.
Christian Democratic lawmakers greeted their leader with a round of applause when she outlined the arrangement, which pledged closer cooperation with France to strengthen the euro zone and a crackdown on arms sales to countries in conflict zones.
While the main issues were refugees, climate goals, social security, and the relationship with Europe, taxes and the ability to pay for new programs appear to have been the sticking point overnight.
European Commission president Jean-Claude Juncker said the deal was "significant" and "positive" for the EU's future, while French President Emmanuel Macron said he was "satisfied and happy" that the deadlock was broken.
France said it too welcomed the deal struck between the German Chancellor and Social Democrat (SPD) rivals to open power-sharing talks and revive a "grand coalition".
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The draft pact will form the basis of formal talks aimed at creating a new coalition government, which the CDU/CSU and SPD hope to form by April.
"The world will not wait for us", a weary-looking Merkel said Friday morning after 25 hours of talks, which yielded a deal opening the way to formal negotiations on the details.
Before the next round of talks to revive the "grand coalition" that has governed since 2013 can take place, the SPD must give the go-ahead at a special party conference planned for January 21.
Commenting on the current political situation in the country, German President Frank-Walter Steinmeier said that "we are now facing a situation that has never happened before in the history of the Federal Republic of Germany, that is for nearly 70 years".
If talks fail, Merkel's only remaining options will be to form a minority government or hold new elections. But those talks collapsed and the long-time chancellor turned to the SPD to renew their alliance.
Bradley appointed as NI secretary
A successor to Mr Brokenshire has yet to be named but Culture Secretary Karen Bradley has been tipped as a favourite to take over. After undergoing several tests, Mr Brokenshire has been informed that he has a lesion in his lung which needs to be removed.
"It would be the end for all three if this coalition does not come about", said Karl-Rudolf Korte of Duisburg-Essen University.
SPD Secretary General Lars Klingbeil told party members in a video message the party was striving for improvements in labour, health, education and family policy, and on Europe.
The paper backs the idea of transforming the ESM bailout fund to a European Monetary Fund, but makes no reference to the proposal for a euro finance minister.
The left-leaning party suffered its worst election setback since the post-war era in September, and its leader Martin Schulz vowed to head into opposition in the hopes of increasing the party's voter appeal.
The two parties also stress Europe's role in peace and global responsibility in the document, clearly rejecting protectionism, isolationism and nationalism and calling for more worldwide cooperation.
Power Blackout at Las Vegas Convention Center Impacts CES
At the International Consumer Electronics Show (CES ) in Las Vegas Wednesday, the unthinkable happened: There was a power outage. Swift, from the perspective of someone what was in the Central Hall during the outage, might be a bit of an overstatement.
Opinion polls suggest most Germans are less than enthusiastic about a GroKo, with a Focus magazine survey giving it just 30 percent support.