However, Schulz, a former president of the European Parliament, said any new government needed to "strengthen Europe".
The anti-immigration Alternative for Germany capitalised on voter anger over the issue to score 12.6 per cent in the general election, a record for a far-right party in the post-war period. If that happens, it could still take several more months before a new government would be in place.
However that will likely depend on whether she can build on the policy document agreed on Friday over the coming months and forges what would be her third "grand coalition" with the SPD.
Merkel ally Michael Grosse-Broemer told reporters in the evening that negotiators had made significant progress, but there was still a lot of work to do before party leaders could discuss a joint and comprehensive policy paper on Thursday.
However, he has been forced to wait for months for a concrete response from Merkel, who has come under mounting criticism at home and overseas for her plodding reaction to Macron, aggravated by her struggle to form a new government.
According to the Reuters news agency, citing the German coalition paper, CDU/CSU bloc and the SPD party have agreed to boost the country's contribution to the European Union budget, devoting specific funds for economic stabilization, social convergence and structural reform support in the Eurozone.
Hopes for a new government in Germany sent the euro and markets higher Friday on relief that the Europe's biggest economy might soon get stable leadership.
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.
"We want to ensure economic and political power for Germany is put towards creating a stronger Europe", he added.
USA working to ensure India is in NSG: Envoy
Talking about the Indo-Pacific region, the envoy said that the US National Security Strategy recognises India as a leading power in region and beyond.
The talks between Merkel's Christian Democrats (CDU), Bavaria's Christian Social Union (CSU) and SPD are due to conclude on Thursday, before SPD leaders recommend to their members whether they should shift into official negotiations. Her rapidly diminishing political stock threatens to leave a void not only in Germany but also across the West, just as she had emerged as the most robust internationalist counterpoint to Trump-style nativism.
On Friday, he defended his and other SPD leaders' 180-degree turn.
The SPD's youth wing chief Kevin Kuehnert has said he would embark on a national tour to press his case against a new grand coalition, known as "GroKo" in German political shorthand.
Political observers also judge that Merkel, damaged by the poor election outcome, is now in the twilight phase of her reign.
Talks focused mainly on differences over tax and migration.
The leader of the SPD's more radical Berlin branch, Michael Mueller, said commitments on affordable housing were inadequate.
"If that doesn t happen, then Martin Schulz will have great difficulties.to convince party members of the necessity of this grand coalition", he said.
The three parties didn't officially give up Germany's target of a 40 percent cut in carbon dioxide emissions by 2020 compared with 1990, which a draft earlier this week had suggested they would.