A union dispute at Volkswagen is the litmus test for a nation's economic guru

At the end of Porsche Strasse there looms the raison d'être for the Lower Saxony town of Wolfsburg. Four chimneys tower over the Mittelland Canal. Below them is fixed a giant marque. It reads VW, for Volkswagen.

The home of Europe's biggest car manufacturer, a short drive off the autobahn that links Hanover with Berlin, would be an unremarkable little town. Except that Wolfsburg has become a metaphor for Germany's struggle to reinvent itself after almost two decades of industrial sclerosis.

This symbolism can be summed up by one man - a figure more closely associated in the minds of German workers with the pains of reinvention than even Chancellor Gerhard Schröder: VW's director of personnel, Peter Hartz.

The employment guru, and author of Job Revolution - picked by Schröder to head his commission to reduce Germany's vast welfare budget, staggering under unemployment of 4.6 million - has become a lightning rod for all the merging tensions in German society: between unions and and management; government and governed; east and west; right and left.

The recommendations of his Hartz Commission - to encourage the long-term unemployed back to work - are behind four weeks of growing anti-Schröder 'Monday demonstrations' that started in the east and have spread to over 140 German cities. The tough prescription has led to puns on Hartz's name with hart - or 'hard'.

Under a provision known as Hartz IV, Germany's once-generous unemployment benefits will be cut to a single year from three. Jobseekers must then find employment or apply for a new, lower, means-tested benefit that will even take into account the amount of children's savings.

These are measures so controversial that they have triggered a growing political crisis within Schröder's own governing Red-Green coalition, confronted with an almost devastating collapse of support for Schröder's own SPD, and threats against him by the more left-leaning in his party - including former leader 'Red' Oskar Lafontaine - to form a separate group.

It is not only in the area of welfare reform that Hartz's name has emerged as a byword for controversy. In Wolfsburg too he has stirred up anger in the workforce, with an announcement last week that VW, faced with declining profits, was seeking a two-year wage freeze among its 175,000 employees as part of plans to reduce labour costs by 30 per cent by 2011. The plan was immediately rejected by the powerful IG Metall union - setting up what some fear could be a bitter confrontation between the union and the management.

And so last week Hartz became the symbol of two converging forces that confront Germans with an unenviable choice: to work harder for less money or to risk losing their jobs to factories overseas and face a tough new benefits regime.

Rainer Redweik is a Volkswagen computer operator who collates exhaust emission reports in the Wolfsburg works. A union member, he is intelligent, cautious and pragmatic as he articulates worries about the Catch-22 confronting workers, switching between concerns over Hartz's plans for Volkswagen's workforce and his concern over Hartz's recommendations for the unemployed.

He can see the challenges confronting German industry from globalisation and cheaper manufacturing overseas, although he questions whether their product is the same quality. He sees the need for welfare reform, but is horrified by some of the remedies suggested. And he admits that he is baffled by what he calls 'the politics of Volkswagen'.

'I don't understand it,' says Redweik. 'They want to take away our money, yet share-holders will still get theirs. And the management will still be getting good money.' He complains too about a plan for newer employees to be paid less than longer-term workers for identical jobs

When he switches to the welfare reform agenda, his feelings are more mixed. He is scandalised at a proposal to count the savings of children of the unemployed towards their parents' assets but agrees that with so many out of work, some cuts are inevitable and even 'positive'.

But if he articulates one thing, it is uncertainty about the future - the same poisonous uncertainty that is demolishing support for Schröder. What men like Redweik can see around them is a slow unravelling of Germany's post-war social accord, amid the ever-declining power of the trade unions which contributed so much to the social stability in western Germany since the Fifties.

Now 48, Redweik was born into a generation that expected the union-protected guarantees of the generation before: an apprenticeship that would prepare the worker for a job for life; eight-hour shifts; a shortening work week and the Lohnfortzahlung, which would ensure his pay would continue in case of illness.

Since the Fifties these unions had fought for a working week ever-shortening towards 35 hours, and collective bargaining agreements that bound whole industries. Their influence went beyond that. In 1998 they helped to propel Schröder into power, organising rallies, helping his election effort and spending millions on advertising.

But even as he was elected, trade union power was in a deep decline. A membership that peaked at almost 12 million following reunification has now lost more than a third of its members. Of those that remain, up to a third are pensioners while the average member - like Red-weik - is male, educated and over 40.

In the past 12 months German management has begun to reverse a half-century of union gains, beginning in the east when IG Metall was defeated in a strike designed to bring work hours down from 38 hours to the 35-hour norm in western Germany.

Managements have since forced two high-profile settlements - at DaimlerChrysler and Siemens - where workforces agreed to work longer hours for no extra money to save jobs moving abroad, setting the scene for the showdown between Volkswagen and IG Metall in September.

Jörg Köther, one of the IG Metall officials involved in negotiations with Hartz and Volkswagen, feels industrial action is almost certain in a case he contends will have ramifications across Germany if his union loses its claim for a 4 per cent wage rise and guarantees of full employment, rejected in Volkswagen's hard-nosed pre-emptive bid.

But Köther paints a more sympathetic picture of Hartz: 'For most people now demonstrating in Germany against his welfare recommendations the simple view of Peter Hartz now is that he represents both the management pressure on one side to bring down wages and an attack on welfare benefits on the other. But it is more complex than that. He was always one of the more progressive managers - although not easy for the unions to deal with.

'When I hear what he has to say now it sounds not like Peter Hartz, but the company's board that is speaking.'

Köther is convinced the dispute is important because of managements' desire to take on the unions. 'If we lose at Volkswagen,' he said, 'every other company in Germany will do the same.' He is certain of another thing. When Schröder's party goes to state elections in the autumn and afterwards, IG Metall's 2.5m members, 'upset and angry' at his betrayal, will no longer help him.

'What happens in Wolfsburg with the Volkswagen negotiations will have a significant impact for Germany,' agrees Dr Martin Werding, director of social policy and labour markets at the Ifo Institute in Munich.

'Germany has seen 20 years of relatively poor economic performance, lagging behind our competitors. For 20 years we have reduced our working hours and that trend has not been matched by a reduction in compensation for workers. Now we have the world record for pay per hour worked.

'The reason it is being addressed now is because our economic crisis is becoming more and more visible with the problem of massive long-term unemployment.'

Werding believes this has caused the convergence of the two issues: tough welfare reforms and a move to drive down wages. But one thing worries him. 'The unions do not have a clear strategy. They do not understand how things have changed in Germany in the past 30 years.'

And if a premonition was needed in Wolfsburg about the likely trajectory of September's negotiations, there is a poster pasted on the town's walls. It is for a grand arm-wrestling competition. Its sponsor is Volkswagen.