Mrs Merkel had provided "steadfast moral leadership in a world where it is in short supply", editor Nancy Gibbs wrote.
Islamic State (ISIS) leader Abu Bakr al-Baghdadi, Republican US presidential candidate Donald Trump, America's Black Lives Matter activists campaigning against inequality and Iranian president Hassan Rouhani were named by Time as runners up.
"For asking more of her country than most politicians would dare, for standing firm against tyranny as well as expedience and for providing steadfast moral leadership in a world where it is in short supply, Angela Merkel is 'Time's Person of the Year'," asdded Gibbs.
Describing her as de-facto leader of the European Union, Gibbs said "Each time Merkel stepped in. Germany would bail Greece out, on her strict terms. It would welcome refugees as casualties of radical Islamist savagery, not carriers of it.