Two in three of the SPD's rank and file voting in a make or break referendum backed a new partnership with Merkel's conservatives, heralding an end to the political stalemate that has plagued Europe's biggest economy since September's inconclusive elections.
But the chancellor, in power for 12 years, has had to pay a high price to coax the reluctant Social Democratic Party (SPD) back into another loveless "grand coalition".
Stung by their worst post-war results, the SPD had initially ruled out another four years under Merkel's shadow.
But after Merkel's attempt to cobble together a government with two smaller parties failed, the SPD relented.
With the party riven over its way forward, its leadership promised its more than 460,000 members the final say on any coalition deal.
"We now have clarity. The SPD will be in the next government," said SPD's caretaker chairman Olaf Scholz, adding his party plans to send three male and three female ministers to the cabinet.
"France and Germany will work together starting in the coming weeks to develop new initiatives for advancing the European project," Macron's office said.
In a nod to the the abbreviation "GroKo" as the grand right-left coalition is known in Germany, European Commission vice president Frans Timmermans wrote on Twitter: "GroGO! For solidarity in Germany and EU!"
Following the SPD's emphatic decision for a new partnership, Merkel is expected to launch her fourth government by mid-March.
Unlike in their previous partnership when Merkel's conservatives and the SPD enjoyed a crushing majority, this time they now have only a slim 56 per cent (399 out of total 709) of seats in parliament.
Both sides had been weakened as voters angry about the arrival of more than a million asylum seekers in Germany since 2015 turned to the far-right party Alternative for Germany (AfD).
Noting that it would be the biggest opposition party now that the SPD has joined the government, the AfD's parliamentary group leader Alice Weidel promised that "the bill will come at the latest in 2021."
Dissenting voices in the SPD also promise to keep the long-time partners on their toes.
The SPD's youth chief Kevin Kuehnert, who ran an impassioned campaign against the planned coalition known as "GroKo", expressed disappointment at today's vote result.
"When criticism is necessary, then it will come from us," he vowed, adding that young Social Democrats won't rest until there is a "fundamental renewal" in the party.
Opponents of her liberal refugee policy have grown more outspoken, while the conservative wing of her party is seething at having lost control of the powerful finance ministry to the Social Democrats as part of the coalition deal.
For the chancellor,who is under pressure within her party to rejuvenate her ranks, the clock is essentially ticking to groom her successor.
In a bid to tamp down criticism, Merkel has brought one of her most outspoken CDU critics, Jens Spahn, into her next cabinet as health minister.
He has also advocated a sharp conservative shift in a bid to woo back voters from the AfD, which garnered nearly 13 per cent in the September election.
Announcing the new line-up, Merkel called Spahn "a representative of the younger generation" who would play a constructive role.
But crucially, at a congress this week, her party also formally appointed its new general secretary, Annegret Kramp-Karrenbauer, tapped by Merkel to kickstart the renewal process.
Sueddeutsche daily noted that "she is the one who has made it clear that the CDU is now no longer without a successor for Merkel".
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