STABLE EUROPEAN POLICIES

Merkel is expected to continue championing painful structural reforms and spending cuts by indebted countries, despite the SPD's call for more pro-growth measures during the election campaign.

"We will not develop a union of debt but a union of stability," said Merkel last month after her bloc signed the agreement with the SPD on forming a coalition.

SPD leader Sigmar Gabriel also said that preserving the eurozone will be a key policy of the new German government, whose European policy will secure the "stabilization of the euro and the eurozone".

Although the coalition talks mainly focused on domestic issues, both sides reached consensus on European issues as the agreement notes that "Germany can only go well if Europe had a good future."

The coalition partners agreed on pushing for a European level financial transaction tax despite very different views among the 11 supporting nations. The proposed tax consists of a rate of 0.1 percent on the trading of bonds and shares and 0.01 percent for derivatives deals.

Put forward by the European Commission in September 2011, the introduction of such a tax could raise as much as 35 billion euros (45 billion U.S. dollars) a year. But the proposal has to be approved by all the nations that agree to participate before it becomes law.

The coalition agreement emphasized Germany's opposition to any mutualization of eurozone countries' debt, including the eurobonds, and stressed the principle of solidarity and responsibility.

On plans for a European banking union, the coalition partners rejected the idea that taxpayers have to directly shoulder banks' risks, making it clear that eurozone member states have primary responsibility for dealing with their troubled banks and can only use taxpayer-financed European fund as the last resort.

In addition, the coalition partners also agreed to stick to structural reforms in troubled European Union member states in order to improve their competitiveness and growth.

In fact, Merkel's domestic popularity owes much to sticking to principles in dealing with the eurozone debt crisis, including pressing indebted eurozone members to carry out austerity measures and reforms. She has said it was her responsibility as chancellor to keep the reform pressure on Greece.

The grand coalition is welcomed by other European countries. French President Francois Hollande and Spanish Prime Minister Mariano Rajoy hailed the coalition deal as a boon for Europe in a bilateral meeting in Madrid last month.