Angela Merkel was poised Friday to become Germany's first female chancellor after her Christian Democrats sealed a deal with the Social Democrats to form a coalition government tasked with energizing Europe's largest economy and mending relations with the United States.

The agreement addresses unemployment and provides for tax increases. It came nearly two months after inconclusive elections forced the longtime opponents into talks on a "grand coalition" of Germany's biggest parties, the first such alliance since 1969.

"We want to make more of Germany and we, the two big parties, want with these policies to win back people's trust in the ability of politicians," said a beaming Merkel, 51, who will be the first chancellor from Germany's former communist east.

Outgoing Chancellor Gerhard Schroeder agreed in principle on Oct. 10 to form a coalition, on condition that his Social Democrats would have equal representation in Merkel's cabinet and key ministries such as foreign affairs and finance. That deal opened the way for drawn-out negotiations over joint policy that concluded Friday.

Part of the struggle was over how to plug a $41 billion budget deficit while boosting a chronically stagnant economy and reducing the country's 11 percent unemployment rate.

To that end, the two parties agreed to raise the retirement age, reduce a range of subsidies and loosen laws that make it difficult to fire workers, which industry says discourage hiring. The Christian Democrats fulfilled the Social Democrats' demand for a higher income tax for top earners, raising it to 45 percent from 42 percent.

The value-added tax is set to rise to 19 percent from 16 percent in 2007, in part to reduce a payroll levy for unemployment insurance paid jointly by firms and workers. However, much of the money will go to shore up the budget, and contributions to the state pension system also are to rise.