Europe News

Four more years: Merkel's unlikely government steps up

John MacDougall | AFP | Getty Images

Germany's parliament formally handed Angela Merkel a third term as Chancellor on Tuesday, leading an unlikely alliance of conservatives and socialists into four years of government.

Merkel is taking office three months after winning the September 22 election after the left-wing Social Democrats (SPD) voted in favor of joining her conservative alliance in a "grand coalition" at the weekend.

Irwin Collier, Professor of Economics at the Freie Universitaet in Berlin, told CNBC Merkel "needed the coalition to work."

"Angela Merkel needs continuity to keep her job. The voters wanted and got a grand coalition and at least for the economy they got a Hippocratic oath of 'do no damage,' so there's going to be a lot of continuity between what we've seen and what we're going to see," he told CNBC Europe's "Squawk Box" on Tuesday.

"As long as she shows this continuity and the German economy doesn't experience some sort of policy-induced shock, she's doing fine."

(Read more: Merkel III: Will the euro area be third time lucky?)

"Continuity" might be the buzzword for this new government but it is nevertheless an awkward fusion of Merkel's Christian Democrats (CDU) and their Bavarian sister party, the Christian Social Union (CSU) with their leftist rivals, the SPD -- that has only come about after protracted coalition negotiations.

The winners and losers of Germany's coalition

In return for their support, the SPD has extracted concessions from Merkel and her party that Germany will introduce the country's first ever minimum wage and six SPD politicians have been put in prominent cabinet positions. The SPD's leader, Sigmar Gabriel, will serve both as deputy chancellor and the newly created position of minister for economics and energy, for example.

(Read more: Five more years? Merkel's election pledge key for Europe)

The Deputy Chairman of the CDU/CSU-Parliamentary Group, Michael Meister, who will also become deputy finance minister in the new government, was keen to stress that Germany was not about to embark upon any radical changes, however, He told CNBC that Germany would continue to consolidate its budget -- and expected its euro zone neighbors to do the same.

"We will keep the consolidation of the budgets in Germany and in other euro zone countries, I think it's very important to show the markets we have that aim," he said.

Speaking to CNBC in Berlin, he said it was important that individual countries within the euro zone showed they could walk on their own two feet with respect to the safeguarding of their banking industries.

Germany has been dug in its heels over plans to create a European banking union as it is keen to avoid its taxpayers sharing the financial liability for other countries' banks. "The taxpayer shouldn't pay for the financial industry. We need a financial industry that doesn't have too many accidents and if an accident happens then the financial industry and the players need to be responsible for it and pay for it," Meister said.

There is a 'deficit of competitiveness' in Europe: German lawmaker

Germany, the euro zone's largest economy grew 0.6 percent from the same period a year ago and purchasing managers' index (PMI) data released on Monday showed business activity in the country was expanding. Its unemployment rate is also one of the 28-nation European Union's lowest.

(Read more: French economy struggles as Germany strides ahead)

Reflecting growing optimism over the economy, Germany's central bank, the Bundesbank said in its monthly report on Monday that it expected industrial production, consumer and business sentiment to continue to grow and that the wider economy would "expand strongly" in the fourth quarter.

Meister said it was important that the Germany government did not introduce any policies which could harm growth or business, German savers or the pension system.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt