German Chancellor Angela Merkel's centre-right coalition moved to end months of discord by agreeing to a batch of welfare measures, which the government also hopes will win it support in next year's national elections.
The measures, which include boosting child benefits and abolishing the deeply unpopular 10-euro charge for doctors' visits, could also help underpin consumer confidence in the country at a time when global economic certainty threatens its export machine and growth.
Under the deal, which was hammered out at a marathon meeting stretching into early Monday, the government also earmarked a modest 750 million euros for infrastructure projects as well as helping to guarantee pension entitlements to low-income earners.
The raft of reforms unveiled Monday followed the government's plan to cut compulsory contributions to pension schemes by 6.4 billion euros (8.2 billion dollars), which it pushed through parliament last month. Pension contributions will be cut from 19.6 to 18.9 per cent of pay packets.
The changes meant that the coalition could close ranks and even avoid a possible collapse as it gears up for elections set for September 2013.
For the last few months, Merkel's three-party coalition government has been dogged by tensions as the pro-business Free Democrats (FDP) have attempted to arrest a decline in their electoral support by campaigning to scrap the quarterly charge for doctors' visits.
In return, the Bavarian-based conservative Christian Social Union (CSU) secured FDP backing for a monthly allowance for parents who want to care for their children at home. The CSU is also facing a state election next year.
ING Bank economist Carsten Brzeski said the slew of measures, which involve very little in terms of government spending, are also likely to send a message to Germany's embattled neighbours in the debt-hit eurozone.
With five of the eurozone's 17 members now in recession, the region's leaders had been hoping that another solid performance by Europe's biggest economy might help to boost flagging growth across the currency bloc.
However, Brzeski said: "I think it is a signal to the rest of the eurozone that they should not expect a significant fiscal stimulus from Germany next year.
"The overarching consideration is that Germany signs off on a balanced budget in 2014."
As the debt crisis emerged, over the past three years Merkel has attempted to secure agreement for European states to cut back high debt-and-deficit levels on a permanent basis, including by balancing their budgets.
Most analysts expect Merkel will be returned to power for a third term with her Christian Democrats and CSU consistently holding a strong lead in opinion polls. But the shape of the new government is far from clear.
Polls have cast doubt on whether the FDP will be able to garner the necessary 5 per cent of the national vote to return to parliament.
Analysts believe this could force Merkel to again forge a coalition with the opposition Social Democrats (SDP). Merkel formed a so-called grand coalition with the SDP in 2005 for her first term as chancellor.
Germany had until recently managed to weather the economic fallout from the debt crisis.
But there are signs that the austerity and recession gripping the eurozone as well as the slowdown in the global economy have been catching up with Germany.
This raises the risks of the campaign for the election being held against the backdrop of slowing national economic growth and moves by employers to cut jobs.
The government has already slashed its growth outlook for next year.
At the same time, it remains unclear how the euro debt crisis will unfold in the coming months. This includes whether Spain might be forced to tap the European bailout fund or whether Greece will need more help - each of which the German parliament is likely to have to agree to.
The welfare measures the Merkel's coalition have agreed to could also end up helping to soften the bailout-weary German public, in case parliament has to vote again on another package of aid for one of the eurozone states at the centre of the debt crisis.
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