"This agreement can be the foundation of a good and stable government, which our country needs and which many around the world expect of us", Merkel said.
Merkel, Europe's most experienced leader, has seen her standing at home and overseas weakened by the longest stretch of coalition-building in the country's postwar history.
Merkel's fate now lies in the hands of the SPD, as Schulz has promised to give his party's 460,000 members the final say on whether to accept the coalition pact.
Germany has been stuck in political limbo since September's inconclusive general election saw mainstream parties bleed support to the far-right AfD, which tapped into anger over Merkel's liberal refugee policy.
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Indeed, should Nahles convince a majority of the SPD rank-and-file to back the coalition deal, it could help to set her on the road to becoming the party's chancellor-candidate at the next national election in 2021.
Schulz responded by abandoning his post-election vow to renew the party in opposition- a U-turn that angered many. It remains to be seen if they will be persuaded by his response that the SPD will control top ministries including finance, foreign affairs and labor.
Her appointment comes 18 years after the SPD's regular political rivals, the conservative Christian Democrats, elected its first female leader: Angela Merkel. Scholz, the Mayor of Hamburg, will become a powerful figure as both finance minister and vice-chancellor. A campaign is underway inside the SPD, led by its youth wing, to block another grand coalition.
Angela Merkel was facing anger from within her own party on Thursday over the terms of a new coalition agreement. Spain's La Vanguardia wrote: "The SPD seizes power from Merkel in Germany's new grand coalition". The results from that are due in early March, and that vote is now looking too close to call either way.