Kohl buys peace by caving in to unions

Germany averted a summer of strikes in the public sector yesterday, but at a price that looks set to bust its budget ahead of European Monetary Union.

After a series of warning strikes, a huge trade union demonstration and rebellion within government ranks, Chancellor Helmut Kohl's budget has become significantly less austere than was intended. Economists calculate that in 1997, the year when applicants must bring their budget deficits to within three per cent of GDP to qualify for monetary union, Germany's deficit will be about 3.5 per cent.

The final blow against Mr Kohl's "savings package" was struck yesterday by the public employees' trade union, OTV, which settled for a 1.3 per cent pay rise for next year, on top of a one-off payment of 300 German marks (pounds 130) each. The government had offered no pay increase for two years, but caved in after a month of well-coordinated strikes, which paralysed different towns on different days.

The cost of its retreat is a cool DM4.1bn, but Mr Kohl has also been rowing back on welfare cuts. The pension age for women will not, after all, be raised to 65, sick pay might not be cut by 20 per cent, and child benefits will increase by 10 per cent next year. Thus, the original budget cuts of DM50bn have been whittled down to about DM35bn.

Beside money, the unions have forced Mr Kohl to abandon plans to abolish protection for workers in firms with less than 10 employees. In the long term, this will only cement an already rigid labour market, discouraging small entrepreneurs from hiring more staff.

Politicians attribute the German economy's woes to labour costs, which are the highest in the world. These accrue from the heavy social security contributions, which Mr Kohl has tried - and now failed - to cut.