FFmpeg merge image with video looses quality
Looks like you're aiming for DVD-spec output. By default, FFmpeg encodes to MPEG-1 video into a MPEG-1 program stream, when the output extension is .mpg. You can force MPEG-2 DVD by specifying -f dvd. And for a standard like PAL, set -target pal-dvd

Try

ffmpeg -i background.mpg -i Menu.png -filter_complex "[0:v][1:v] overlay=25:25:enable='between(t,0,30)'" -pix_fmt yuv420p -target pal-dvd -f dvd merge1.mpg