"We are in agreement in principle and in detail," Sarkozy told reporters after meeting Merkel in the northern German city of Hanover.
The leaders have agreed that the planed Mediterranean Union, which will include North African nations for regional cooperation, will also be open to all EU nations.
Merkel, who was previously opposed to such a plan, said cooperation with the Mediterranean nations has strategic importance.
Germany had feared that such a new bloc would undermine, or even divide the European Union.
The leaders will reveal the details of the proposal in the upcoming EU summit in Brussels later this month.
The project are expected to be officially launched during an EU summit in Paris in July when France will take over the rotating EU presidency.
Earlier, Merkel said cooperation between Germany and France is important for the well-functioning of the European Union as a whole.
Sarkozy agreed that the two countries should expand their cooperation and settle their disputes.
"Europe can not afford to bear disparity between Germany and France," he said.
Still, disputes between Germany and France remain over the independent role of the European Central Bank as well as use of nuclear power as major energy sources.
Merkel and Sarkozy abruptly canceled their planned summit last week, which raised concerns over a diplomatic spat between the two major EU nations.
Last Mod: 04 Mart 2008, 17:37