Kohl warned by unions over attack on benefits

In an effort to revive the country's economy and make it fit for European Monetary Union, the German government yesterday launched a concerted attack on the welfare state, targeting social expenditure and workers' rights in one swoop.

By signing up for the most stringent austerity programme since the Second World War, the parties in Chancellor Helmut Kohl's centre-right coalition declared open season on the country's sacred cows. Sick pay, unemployment benefit and pensions will bear the brunt of cuts in the social safety net; the burgeoning government bureaucracy can look forward to massive redundancies and no pay rises for the survivors.

The package, greeted with caution by the business world and howls of derision from the unions, marks the beginning of the end for Germany's much-vaunted consensus politics. The unions are contemplating strikes and threatening to consume no more beer and sandwiches with Mr Kohl. The opposition Social Democrats have warned of gridlock when the measures reach the upper chamber of parliament.

The Chancellor has hit back by putting his case directly to the people, in a letter to the mass-circulation Bild Zeitung. "If we don't act now, then more jobs will be lost," he wrote. "Our social welfare state would no longer be affordable."

The government needs to slash 75bn German marks (pounds 34bn) from next year's public expenditure in order to bring the deficit below the 3 per cent of GDP dictated by the Maastricht Treaty. Under the "Programme for more growth and employment", to be submitted to the Bundestag today, savings will come in equal measure from the federal budget, the regional and local authorities and the complex system of social insurance.

The latter is the most contentious. In taking a swing at sick pay, the Chancellor has rekindled the nation's deep-seated fears about illness and poverty. Under the present system, workers on sick leave are entitled to full pay, overtime included. This has frequently enabled them to earn in their sick beds more than their basic pay. The new rules will guarantee only 80 per cent of basic pay in the first six weeks of sick leave, although in-house agreements in larger corporations are likely to remain more generous. For employees of small outfits, however, a new age will dawn on 1 January.

The national pension funds will also make substantial savings, following the decision to raise the pension age for women from 60 by at least three years, for men from 63 to 65, and to curtail early retirement schemes which amount to state-subsidised redundancy. A planned 10-per-cent increase in child benefit, now DM200 per month, is to be postponed. The growing ranks of the unemployed will be hit by a shrinking dole.

"The right direction but not the right pace," commented the head of the National Employers' Federation, Hans-Olaf Henkel. The unions were lessguarded. "The catalogue of horrors demanded by the employers and planned by parts of the coalition is completely misguided," said Dieter Schulte, Chairman of the German Labour Federation. "It would not create a single job."

The unions fear, with some justification, that Mr Kohl is harnessing the crisis to rebuild the foundations of Germany's economic model. Among the government measures is a plan to loosen the rigid laws on dismissals, bringing Germany closer to the hire-and-fire climate of Britain and the US. Under the new law, employees of small companies will have no protection against dismissal.

The Chancellor also intends to cut companies' wage burdens, which are boosted by vast social security contributions. The cost of German labour is the highest in the world, forcing companies to relocate abroad.

If it was cut, business leaders argue, German industry could again compete on the world stage. Next year will see a new wave of cuts and the start of the long-awaited overhaul of the impenetrable tax system.

The unions are not going to take it lying down. "We will stop this drift to unbridled capitalism," pledged Klaus Zwickel, leader of the largest union, IG-Metall. It is doubtful he will succeed. Union membership is falling and with more than 4 million workers on the dole, militancy is in decline.