According to 177-page agreement struck after two months of talks, the three parties want to accelerate public investment in green technology and digitalisation while returning to strict debt limits from 2023 onwards.

The deal will install Germany's first federal coalition between the Social Democrats (SPD), libertarian Free Democrats (FDP) and the ecologist Greens, and end 16 years of Merkel-led conservative government, marking a new era for relations with Europe and the rest of the world.

"We want to dare to make more progress," Scholz told a news conference in Berlin, flanked by the FDP and Greens leaders.

"We will massively invest in Germany to keep it at the forefront."

He vowed to bring about "politics with high impact," hailing plans to increase the minimum wage and more ambitious climate goals, among other things.

Merkel leaves big shoes to fill.

She has navigated Germany and Europe through multiple crises and been a champion of liberal democracy.

Her critics say she has managed rather than solved problems and leaves her successor tough decisions on many fronts.

The alliance - named a traffic light coalition after the three parties' respective colours - has a majority in the lower house of parliament and hopes the government will be sworn in early next month after the parties ratify the coalition pact.

It faces immediate challenges, with Germany tackling its worst COVID-19 surge yet and the European Union grappling with the fallout from Brexit and a crisis on the bloc's border with Belarus.

with DPA

Australian Associated Press