Merkel sworn in as chancellor for a third term

But the CDU held its ground as the parties agreed there should be no tax rises. The SPD had demanded to raise taxes on incomes above 100,000 euros to 49 percent from 42 percent. Merkel has said such tax hike plans would risk spoiling the good situation of the country's economy.

According to the coalition agreement, the new government will spend an additional 23 billion euros by 2017 without tax increases. The government will also not undertake new borrowing from 2015. The additional money will be invested in areas including infrastructure, education, research and development.

A combination picture shows German Chancellor Angela Merkel with German president Horst Koehler, November 22, 2005 and October 28, 2009, and Joachim Gauck, December 16, 2013, (L to R), during ceremonies appointing her as chancellor in Berlin. Angela Merkel was elected to a third term as chancellor in a vote in the German lower house of parliament on December 17, 2013 paving the way for her new "grand coalition" government to be sworn in and formally take power later in the day. [Photo/Agencies]

Other agreed policies included lower retirement age from 67 to 63 for those who made pension contribution for 45 years, and reforms of the current Renewable Energy Act.

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 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.