The parties negotiating Germany's next coalition government have reached an agreement in their exploratory talks, conservative bloc leader Friedrich Merz said on Saturday. 

Merz's Christian Democratic Union (CDU) and its Bavaria-only sister party, the Christian Social Union (CSU) will now move to formal negotiations to form a government with the center-left Social Democrats (SPD) of outgoing chancellor Olaf Scholz, the parties agreed.

Merz is expected to be Germany's next chancellor and has previously spoken of plans to revive Europe's top economy and its armed forces after US President Donald Trump rocked trans-Atlantic relations by casting doubt on the future strength of the NATO alliance.

Speaking at a news conference in Berlin with Lars Klingbeil, co-leader and parliamentary group leader of the SPD, and other leaders, Merz said agreement had been reached on a whole range of substantive issues.

They include a plan to turn away people undocumented migrants and asylum seekers at the land borders, in coordination with neighboring countries.

Klingbeil said that the SPD was able to ensure that the recent reform of Germany's citizenship law, allowing shorter eligibility timeframes, would remain in place.

The exploratory talks also focused in part on tax policy, with plans to reduce the burden on middle-class households, cuts to energy bills and a permanent reduction in the Value Added Tax (VAT) on food in restaurants.

Klingbeil said his party had won assurances on key demands, such as a €15 ($16) per-hour minimum wage and stable pensions.

Merz added that a joint paper should be the basis for formal coalition negotiations, which could begin next week if necessary. 

He said both sides shared "the conviction that we have a great task ahead of us, that we will soon need a new government in Germany with a parliamentary majority."

Referring to Trump's threatened tariffs on imports from the EU and intense pressure on Ukraine to reach a peace deal with Russia, Merz said both sides were "aware of the great challenge we are facing — above all the international situation."

Merz has set the goal of concluding negotiations by Easter.

In Germany, coalition governments are typically formed in two phases, with parties first holding exploratory talks and then entering into formal coalition talks.

The two parties were, meanwhile, racing for a preliminary deal before next week when they hope to push a loosening of Germany's borrowing limits through parliament to revive growth in Europe's largest economy and boost military spending.

Felix Banaszak, the co-leader of Germany's Green Party, whose approval for the huge spending hike is needed, warned that agreement was now further away as a result of Saturday's announcement.

The CDU/CSU won the parliamentary elections on February 23 with 28.5%. The SPD came in third with 16.4%, behind the far-right Alternative for Germany (AfD), which took 20.8%. All parties have ruled out working with the AfD.