The prospective partners have governed Germany together for the past four years but Schulz, Merkel's defeated challenger in Germany's September 24 election, initially said after the Social Democrats crashed to a disastrous result that they would go into opposition.
At the start of the final day of exploratory talks that could lead to formal negotiations, Merkel said it would be an arduous day but she recognised that Germans expected results.
French spokesman Benjamin Griveaux said: "Good news seems to be coming out of Germany".
But SPD leader Martin Schulz, a former president of the European Parliament, is pursuing a very different vision, calling for the creation of a United States of Europe by 2025 - seen as an expensive distraction by many conservatives.
Had the talks failed, Merkel's only options would have been to form a minority government or hold new elections.
Should the SPD party conference in Bonn approve the preliminary deal this month, the negotiating partners will embark on weeks of formal coalition talks to set the agenda of the new government.
Under the deal, the number of refugees with "limited protection status" who could bring their families to join them would be limited to 1000 per month, and the number of asylum seekers taken in altogether would be limited to 180,000 to 220,000 per year.
Despite the agreement, potential pitfalls remain, including upcoming votes by sceptical SPD delegates and members that could yet derail plans for another left-right "grand coalition" - the constellation that has ruled Germany for the past four years and remains in charge as a caretaker government. "Together we are determined to use Germany's strength, both economically and politically, to make Europe a great project again". But when those talks collapsed in November, she had to once more woo a reluctant SPD for a new power pact.
A 28-page blueprint pledged close co-operation with France to strengthen the euro zone.
The plan supports the creation of a European Monetary Fund that could lend to countries in economic crisis, but only pledges to study other Macron ideas, including a common eurozone budget and finance minister.
Scepticism is high after the SPD scored a humiliating 20.5 percent in the September ballot, its worst of the post-war era.
Prime Minister Boyko Borissov of Bulgaria, which now holds the bloc's rotating presidency, said the European Union was waiting "impatiently" for Merkel to reemerge, heading a new coalition: "for the benefit of all". In reality, the next "grand coalition" wouldn't be up and running before the beginning of April.
Another analyst, Lothar Probst of Bremen University, told the Handelsblatt business daily that the coalition could break up early in a fight, which would mean "the deck is reshuffled and Merkel's chancellorship could reach an early end".