Germany's public sector reached a pay deal early on today to avert a strike that could have tipped Europe's largest economy into recession, but looks set to worsen the government's budget problems.
Government employers and services union Verdi - representing 2.8 million rubbish collectors, nurses, fire fighters and other public servants - agreed the wage rise of 2.4 per cent for this year and two further increases each of 1 per cent next year.
The news brings relief to Chancellor Gerhard Schroeder's increasingly unpopular government by sparing Germans a winter of uncollected rubbish, flight cancellations and transport problems.
But economists said the 27-month pay deal, running from November 2002 until the end of January 2005, would make it harder for Germany to get its budget deficit back under the European Union limit of 3 per cent of gross domestic product.
The combined budget deficit of Germany's local, state and national government breached the EU's 3 per cent ceiling last year, and yesterday the European Commission gave Germany four months to act to bring its deficit back under control.
Berlin, which has a per capita debt more than double that of Argentina, is trying to opt out of the deal. Several states in the economically depressed eastern Germany are also expected to seek exemption.