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 Friday, 10 January, 2003, 12:25 GMT
Pay deal averts German strike threat
Otto Schily, German Interior Minister
Otto Schily agreed deal with union chiefs
Germany has been spared a damaging strike by 3 million public sector workers, after union and government officials hammered out an agreement on wages.

Interior Minister Otto Schily and the Verdi union agreed to pay firefighters, garbage collectors, nurses and other public sector workers a 2.4% pay rise this year, plus two 1% increases in 2004.

The union had threatened industrial action which economists warned would have plunged Germany into recession. On Friday, union officials formally approved the deal.

The agreement was reached on Thursday night after 31-hour marathon talks. But some uncertainty still hangs over the deal, after several local and regional government officials warned they could not afford it.

A failure of the deal would be a further blow to the government's damaged credibility on labour issues.

An official report on Thursday showed that unemployment last month hit a four-year high.

Protracted talks

While Verdi, which represents some 2.8 million public sector workers, had been holding out for pay rises of at least 3%, federal, state and local government officials warned that a large rise could force lay-offs.

Employers on Monday rejected a compromise proposal for a 3% wage increase to be introduced in two stages.

The new deal now promises 4.4% more money over 27 months.

German Chancellor Gerhard Schroeder called the deal "highly sensible" but "just barely affordable" for public budgets.

But Lutz Truemper, mayor of Magdeburg in eastern Germany, warned his city might have to lay off hundreds workers over the next few years to pay for the deal.

And some economists predict that the pay deal will make it even more difficult for Germany to keep below the eurozone's 3% ceiling on its public budget deficit.

East-West equality

Another key point of the deal is the promise of equal wages for public sector workers in the West and the once communist East of the country.

Pay in the East will be brought to Western standards by 2009, two years later than demanded by the union.

The country's last major public sector strike, for 12 days in 1992, saw bus, tram and train services halted, airports and nurseries close, and mail deliveries cease.

Jobless total rises

News of the provisional agreement followed the release of Federal Labour Office data showing that the number of Germans looking for work hit 4.225 million, or 10.1% of the workforce, last month.

While December often sees the number of workers fall, the number of jobless was higher last month than in November even after seasonal factors were taken into account.

The office blamed the increase largely on difficult economic conditions.

"The economy is so weak that industry is able to function with fewer people," said Federal Labour Office head Florian Gerster.

Gloomy outlook

Both Mr Gerster and economists warned of higher unemployment figures to come.

"The figures will remain unsatisfactory in the first six months [of 2003].

"Just how unsatisfactory will depend on the weather and the international environment."

Holger Fahrinkrug, senior economist at UBS Warburg, forecast "further substantial increases" in unemployment, as the strengthening euro and tax reforms took an economic toll.

Manuella Preuschle, senior economist at Deutsche Bank Global Market Research, forecast that the number of Germans out of work could hit 4.5 million by March.

"I think we'll have to wait until next year before we can say there is a turnaround in the labour market," she said.

  Hans Olaf Henkel, BDI industry association
"This is much more than the German government, communities, cities and states can afford"
  The BBC's Tristana Moore reports from Berlin
"There was a lot at stake"
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