By Stephen Brown and Erik Kirschbaum
BERLIN (Reuters) - Chancellor Angela Merkel's conservatives and the center-left Social Democrats (SPD) clinched a coalition deal early on Wednesday that puts Germany on track to have a new government in place by Christmas.
The agreement was struck roughly two months after Merkel was the clear winner in national elections but fell short of a parliamentary majority, forcing her into talks with the arch-rival SPD, with whom she ruled in an awkward "grand coalition" during her first term as Chancellor from 2005-2009.
The deal, spelled out in a detailed 185-page policy document, will not be final until approved over the coming weeks by a postal ballot of the 474,000 card-carrying SPD members, many of them skeptical about partnering with Merkel again.
But the agreement will be greeted with a sigh of relief in other European capitals. The lengthy talks have delayed movement on major European reforms, including the creation of a "banking union", an ambitious project designed to prevent a recurrence of the euro zone's crippling debt crisis.
"The result is good for our country and has a conservative imprint," said Hermann Groehe, secretary general of Merkel's Christian Democrats (CDU). "No new taxes and no new debts."
Martin Schulz, president of the European Parliament and a senior SPD negotiator, called it an "excellent result" for his party.
Merkel and other party leaders will present details of the deal at a news conference at 12 p.m. (1100 GMT) on Wednesday. The allocation of cabinet posts is expected to be announced later.
To clinch the deal, Merkel agreed to SPD demands for a minimum wage of 8.50 euros per hour, which some economists have warned could push up unemployment, particularly in eastern Germany.
In order to prevent that, the wage will be phased in over a period of years, with sector-specific exceptions allowed until 2017, when the wage formally kicks in nationwide.
CONTINUITY IN EUROPE
On European policy, Merkel's insistence on painful economic reform in struggling euro states will continue, despite SPD promises during the election campaign to take a more pro-growth approach in a single currency bloc ravaged by high unemployment.
A closely watched compromise on banking union between the parties makes clear that the 17 member states have primary responsibility for dealing with their own stricken banks, and can only turn to a common taxpayer-financed European fund for help when all other avenues have been exhausted.
Carsten Nickel, a political analyst at Teneo Intelligence, said the SPD had realized, after flirting with the idea of common euro-zone bonds, "that the domestic political consensus does not reward any large-scale deviation from Merkel's path".
Although the cabinet posts have not yet been announced, Wolfgang Schaeuble, Merkel's trusted 71-year-old finance minister, is widely expected to keep his job.
Frank-Walter Steinmeier of the SPD may return as foreign minister after holding the post in the last "grand coalition" government. SPD chairman Sigmar Gabriel, who was also a member of that cabinet, could get a beefed-up economy ministry.
The SPD remains traumatized by its partnership with Merkel. Left-wingers in the party, already bitter about labor reforms launched by the last SPD chancellor, Gerhard Schroeder, abandoned the party in droves. In 2009, after four years of "grand coalition", the SPD scored its worst election result of the post-war era, winning just 23 percent.
Some of those reforms are now being watered down, but the SPD referendum on the coalition deal is still risky, with Alex White, an analyst at J.P. Morgan, estimating the chances of a "no" vote at up to 20 percent.
Were the party to reject the agreement, Merkel could seek a coalition with the environmentalist Greens. A new election is another possibility.
With the talks ending on the November 27 deadline set by Merkel, SPD leaders must now persuade members at over 30 rallies that a minimum wage is a victory for the working class.
"We will convince members," Steinmeier told reporters.
The ballot results are due on December 14. At an SPD congress in Leipzig, delegates said they would only decide after reading the coalition document. It shows a very German attention to detail, ranging from banking rules to plans for the 250th anniversary of Beethoven's birth in 2020.
If the majority are willing to overlook details like the SPD conceding on such a major campaign platform as tax hikes for the rich, and okay Germany's third "grand coalition" of the post-war era, Merkel can be sworn in the week before Christmas.
(Additional reporting by Andreas Rinke; Writing by Stephen Brown and Noah Barkin; Editing by Will Waterman)