German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) reached a deal early on Wednesday on forming a "grand coalition" after wrangling through the night, meaning she should be able to form a government by Christmas.

Two months after Merkel's landslide election victory and a month after negotiations began, Germany's two biggest political forces clinched a deal at about 5 a.m. (0400 GMT) that both sides said they could live with.

Martin Schulz, president of the European Parliament and a senior SPD negotiator, called it an "excellent result" for his party, whose participation in a Merkel government still depends, however, on a ballot among 474,000 card-carrying SPD members.

But details of policy compromises emerging in recent days show she has leveraged her landslide victory in September's vote to ensure her pragmatic brand of conservativism continues to dominate Europe's largest economy.

She has made concessions to the SPD on the economy, agreeing to a minimum wage of €8.50 per hour and tighter rules for employers and pension hikes, despite howls of protest from business. Just before dawn, the bargaining stalled on how to fund this without Merkel breaking a campaign promise not increase taxes or debt.

Polls suggest most people trust 59-year-old Merkel not to endanger an employment rate which is the envy of Europe. She is also trusted on the euro crisis, where she has demanded fiscal reforms from the likes of Greece in return for bailouts.

The last "grand coalition" suited Merkel but prompted SPD left-wingers, already bitter about labour reforms launched by the last SPD chancellor, Gerhard Schroeder, to leave in droves.

Some of those reforms are now being watered down but the members' ballot is still risky and a "no" vote could mean a new German election and a coalition between Merkel and the Greens.

Presented by Adam Justice

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