Piu Piu won't get stronger, no matter what you do, he's just not a fighter!
Merline is a child, she's not strong. She is a very valuable team member regardless. She's extremely fast and evades most hits. And with the right weapon she is quite useful.
As for levelling up - no need to do that unless you don't get along in the game and need them to be stronger. Your levels won't carry over to the next game though, so don't waste your time.