In a move seen by the Chancellor as a major breakthrough in the fight against unemployment, German unions have agreed to moderate wage demands in return for measures allowing employees to retire early.
Employers and unions accepted a compromise proposed by Mr Gerhard Schroder after union leaders withdrew their demand to reduce the statutory retirement age from 65 to 60.
"This is an important breakthrough for securing jobs and boosting jobs. We've done a lot to create room for manoeuvre in the wage rounds. We should now be able to avoid the difficult position where we have simple pay negotiations in 2000," the Chancellor said after a 90-minute meeting of the Alliance for Jobs.
Germany's biggest union, IG Metall, will announce its opening demand in this year's pay round tomorrow but Mr Schroder was confident the union would act in the spirit of yesterday's deal.
Under the compromise, pay rises will be based on productivity increases but not, as has been the case until now, on the rate of inflation. In return, employers have agreed to seek ways to allow employees to retire before 65, thus freeing up jobs for young people.
Among the methods being considered is the introduction of "working time accounts" which would allow employees to build up credit working hours which they could use for longer holidays or early retirement. The government has promised to examine ways of making part-time work more attractive, in the hope that older workers will move from full-time to part-time work.
Yesterday's deal represents the first significant achievement of the Alliance for Jobs, a forum of employers, unions and the government aimed at tackling unemployment. Reducing unemployment, which remains above 10 per cent, was Mr Schroder's central pledge on coming to power and he has told voters to judge him on his performance in this field when he seeks re-election in 2002.
The alliance appeared doomed before Christmas when talks between employers and unions broke down over the issue of reducing the retirement age. Both sides denied yesterday they had given ground and one union leader warned that difficult negotiations still lay ahead.
The news of yesterday's agreement will be greeted with relief at the European Central Bank, where the prospect of this year's German wage round has been awaited with some trepidation. Large wage rises in Germany could have an impact on inflation in the euro zone as a whole, making an early increase in interest rates more likely.
The breakthrough at yesterday's talks is the latest economic policy success for Mr Schroder, who pushed through massive public spending cuts last year and recently announced a massive tax giveaway. The Chancellor's popularity has soared as his government finally appears to have got into its stride, while the opposition Christian Democrats remain bogged down in a scandal over secret donations to former chancellor Dr Helmut Kohl.
