Germany’s coalition government parties have agreed to an incentive plan encouraging employees to accept dismissal more readily, officials have told the Financial Times.

The changes would mark a victory for the Christian Democratic Union of the chancellor-in-waiting Angela Merkel, which is pressing the Social Democrats, its coalition partner, to agree steps to improve labour market flexibility.

The CDU and SPD hope to reach a full coalition agreement by next Saturday, but officials admit that negotiations on labour market reforms – a sticking point between the two parties – are proving difficult.

The job protection rules may be formalised at an extra round of talks tomorrow next Tuesday on labour issues.

“We are in a very sensitive phase,” according to a CDU official.

Under the proposed change, employees hired after the new law is put in place will be given a choice between working under current regulations – with the right to appeal against sacking – and accepting the possibility of a compensatory payment upon redundancy. Such payments from an employer could amount to half a month’s wages per year of employment, and workers would still be eligible for government unemployment benefits.

Figures last week showed that seasonally adjusted unemployment in Germany remained stuck at around 4.8m people. Many companies and economists argue that strict job protection rules are a recruitment disincentive because they make dismissals more difficult, although the SPD and trade unions say the current rules allow substantial flexibility.

“The SPD has recognised that job protection rules need to be made more transparent and predictable,” an official close to the party said.

But Klaus Brandner, SPD parliamentary spokesman on labour affairs, said his party rejected CDU proposals to raise the threshold below which job protection rules do not apply.

At present the rules do not apply to companies with fewer than 10 staff. The CDU supports a threshold of 20 employees. “This sort of substantial change” will not happen, he said.

Experts said the CDU proposal of a choice between current procedures and compensation could improve matters by reducing ce the long winded and expensive steps involved in redundancies. Companies often face legal challenges, and the final costs of dismissing staff are difficult to predict.

A compromise is also likely tomorrow on regulations governing minimum wages for some groups of foreign workers. These aim to limit the impact of cheaper eastern European workers entering the German labour market.

The two parties this week also will seek to finalise budget cuts in order to honour European Union budget deficit limits. Joaquín Almunia, EU monetary affairs commissioner, last week warned that formal sanctions procedures might open against Germany next month, as this year’s deficit was likely to exceed the 3.7 per cent of GDP estimated by Berlin.

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