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A "grand coalition"under the leadership of Angela Merkel is expected to take office before Christmas as the chancellor's conservative bloc and the center-left Social Democratic Party (SPD) have reached a deal to rule Europe's largest economy for the next four years.
Although the coalition agreement still has to be approved by the SPD's some 470,000 members who are scheduled to cast a ballot this month, the grand coalition is supported by most Germans and hailed by other countries as a boon for Europe.
Party leaders from both sides of the prospective coalition promised a European policy that secures a stable euro and the eurozone.
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.
Analysts said the eurozone debt crisis will remain the dominant issue among the new government's European agenda, though foreign policy took a back seat during the election and coalition talks. Meanwhile, upbeat economic readings of the European powerhouse bode well for the whole region in its way out of the crisis.
UNION OF STABILITY
"We will not develop a union of debt but a union of stability," said Merkel after her Christian Democratic Union (CDU) and its Bavarian sister party Christian Social Union (CSU) signed the agreement with the SPD on forming a coalition.
SPD leader Sigmar Gabriel, the future vice chancellor of the coalition government, 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 including the introduction of a nationwide minimum wage and dual citizenship, 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 future coalition government also agreed to stick to structural reforms in troubled European Union (EU) 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 as 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 on Nov. 27, the same day when the German coalition deal was clinched.
Hollande praised the move to introduce a minimum wage because of the "competitive distortions that can exist in some industries, especially agriculture."
He added that the planned boost for infrastructure investments would benefit Germany and the whole of Europe. Rajoy said the German promise of stability is good for the region.
GERMAN GROWTH MODEL UNDER ATTACK
The new German government's pledge of a national minimum wage and an additional 23 billion euros (31.2 billion dollars) spending by 2017 on investment in infrastructure, education, research and development is welcomed because it would spur domestic demand and provide stimulus to the sluggish economies of its European neighbors.
It is hoped that higher wages and more investment would make the economic growth be driven more by internal demand forces and Germany would import more goods and services from its neighbors.
The coalition partners'pledge came against the backdrop that Germany had been under fire from both the United States and the European Commission on charges that the country's economy is excessively export-oriented and it fails to stimulate domestic demand to help the eurozone emerge from its financial crisis.
The surplus in the Europe's largest economy, which stood at 45.9 billion euros (61.7 billion dollars) in the second quarter of this year, caused criticism from abroad, especially from crisis countries that called on Germany to spend more in order to stimulate economies in its European fellow countries.
Berlin's critics quoted statistics from the European Commission that Germany recorded a three-year average surplus of 6.5 percent of GDP, and the surplus was expected to remain above the 6 percent threshold that the European Commission considers excessive until 2015.
Meanwhile, German official statistics have shown recently that trade surplus registered a record high in September, hitting 20.4 billion euros (27.3 billion dollars). German exports to other EU countries in the month had the largest increase of 5.4 percent.
The high level of surplus in Germany has sparked criticism from its EU peers, who urged Berlin to encourage wage growth and more spending at home to help growth in its European trade partners and the 17-country euro currency union as a whole.
The EU complained that exports of the bloc's biggest economy weighed on balance sheets of its neighboring countries and therefore has launched an investigation into whether Germany's huge trade surplus is threatening the rest of the bloc. The result of the "in-depth review" of the German economy will be published next spring.
Germany, meanwhile, has rejected such criticism, saying other countries should make their economies more competitive and Europe should focus on competing with other regions.
Merkel has defended her country's trade surplus, saying that it was "absurd" to suggest German companies should cut their production or that wages in the export sector should be higher to weaken their competitive strengths.
"This cannot be in the interests of a successful Europe," Merkel said at a conference with industry leaders in November, adding that Germany's current economic growth rate was almost entirely driven by domestic demand.
The German economy increased by 0.3 percent in the third quarter. Gross domestic product in the eurozone, Germany's biggest export market, rose by 0.1 percent during the same period.
The German government has forecast the Europe's largest economy to expand by 0.5 percent this year, and by 1.7 percent in the next, with domestic demand considered as the main driving engine.
Recent surveys have shown that German investors' confidence for the outlook of the country's economy and German consumer sentiment have both hit new highs, thanks to an improvement of the eurozone's economic outlook and a stable jobs market, while low interest rates make saving less attractive.
The GfK market research group said in a recent survey that German consumer sentiment rose to its highest in six years as the traditionally German savers are increasingly willing to spend. The German Council of Economic Experts also predicted in its annual report in November that German consumer spending will rise by 1 percent this year.
With Christmas around the corner, consulting firm Ernst & Young predicted that the average German will spend 273 euros on Christmas presents this year, 43 euros more than last year. It's good news for both Germany and Europe.
