Management and workers in harmony: Ulrich Dase of Volkswagen (left) with Jurgen Peters of the IG Metall engineering union as VW, Europe's biggest car maker, yesterday struck a crucial deal with its workers - marking another relaxation of the rigid rules that govern Germany's labour relations, write Steve Crawshaw in Bonn and Russell Hotten.

In return for greater flexibility, VW has agreed a 4 per cent pay rise and two-year guarantee that safeguards 100,000 jobs in the west German plants.German industrial workers remain the world's highest paid, and many big companies are moving production overseas.

Klaus Zwickel, head of the IG Metall engineering union, said the VW accord showed that the union recognised that modern manufacturing required new labour pacts. The working week will average 29 hours - with a maximum of 39 hours.

The German economics minister, Gunter Rexrodt, praised the deal as an "appropriate solution". VW will introduce the 4 per cent pay rise from the start of next year. It is less than the 6 per cent the unions had demanded, but above the rate of inflation. Ferdinand Piech, the chairman of Volkswagen, declared: "We wanted to settle for less. The compromise was difficult for us - but we are glad to have achieved it." Photograph: AFP

By the standards of other west European countries, the deal is far

from tough. Special holiday money - in effect, a summer bonus - is doubled, to around pounds 700. The Christmas bonus is also to be raised, to around pounds 900.