Germany's political leaders appear to have reached an agreement to form a coalition government, ending four months of intense negotiations and securing a fourth term as Chancellor of Europe's biggest and most important economy for Angela Merkel.

The deal follows overnight talks in Berlin between Merkel's Christian Democrats and her Social Democratic rivals, who suffered their worst defeat in last September's national elections since 1949 but nonetheless emerged as the country's second-largest party in a fractured vote marred by the rise of far-right nationalists. SPD leader Martin Schulz, who at first rejected the idea of coalition talks, later relented in the face of party pressure and began negotiations with Merkel in December. 

"When we see the movements on the stock markets over the last hours, we live in turbulent times and what is expected of us as popular parties ... is that we form a government for the good of the people, one that brings stability," Merkel told reporters late Tuesday in Berlin. "Each of us will have to make painful compromises and I am ready for that."

The euro was marked modestly lower in early Wednesday trading following the report, falling 0.23% against the U.S. dollar to 1.2347 as Germany's Der Spiegel said the SPD had secured the right to appoint their preferred candidate to the position of Finance Minister, arguably one of the most important positions in European politics, replacing the incumbent Peter Altmaier. 

Government bond yields around the Eurozone periphery, which includes Italy, Spain and Portugal, fell sharply in the wake of the news as investors bet the deal would hasten European integration plans spearheaded by France's President, Emmanuel Macron.

Germany, Europe's biggest economy, has been consistently criticised for running a current account surplus, which swelled to a record $287 billion last year and is, by some measures, the largest in the world. Critics of the surplus, including the International Monetary Fund, say it prevents competing economies for selling goods to German consumers and stunts investment and trade growth in Europe and around the world.

Germany's Economy Minister, Brigitte Zypries, recently defended the position, saying it was more closely related to the country's ageing population, along with flat wages, that limited the government's ability to tackle it.

An SPD leader at the helm of the nation's finances could unlock some much-needed infrastructure investments, funded by small increases in the country's deficit, that would both ignite faster GDP growth and rising German government bond yields. 

Germany's economy is expected to grow by 2.7% this year, according to the DHK Chambers of Industry and Commerce, which raised its forecast Wednesday even as the country's statistics office said industrial production slowed modestly in December. 

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