With war looming in Iraq, Chancellor Gerhard Schröder has been able to dampen an internal party debate that spilled out into the public on ways to solve Germany's most pressing domestic issue -- the growing legion of 4.6 million jobless citizens. But as he looks to the future, Schröder sees the issue posing as a source of long-term internal strife.

The latest debate began after Schröder's Social Democrats suffered two disastrous defeats in state elections on Feb. 2. In Schröder's home state of Lower Saxony, the party was driven out of the premier's office after 13 years in power, and in the central state of Hesse, it watched the Christian Democrats grab an absolute majority. Social Democrats aligned with former German parliament member Andrea Nahles then issued an appeal to the party's leadership. "A change of course in financial and economic policies is an absolute necessity," the group said in a declaration after the elections.

The group also was quick to point out just where the change of course should begin -- on the stability pact that governs the euro and, specifically, its strict requirement that a country's budget deficit may not exceed 3 percent of gross domestic product.

"The question is whether our attempt to reach this goal will strangle the economy or whether we will give priority to promoting more growth and less unemployment," the declaration said.

Targets of criticism

The declaration was directed at, among others, Finance Minister Hans Eichel, who has the task of keeping the budget under control. It is a task that has defeated Eichel at times.

His budget for 2002 is under scrutiny by EU officials to determine whether Germany should pay fines for running a deficit of 3.8 percent. Eichel also has until May 21 to cut the budget deficit for 2003 from 3.7 percent to 2.75 percent.

During a closed-door meeting of the party's upper-level leadership Monday, Schröder was able to address some of the concerns and apparently end the group's worries -- at least for now.

Nahles said the chancellor promised to launch a new European initiative to promote economic growth and raised the possibility of veering off the consolidation course mandated by the pact. "We can live with that," she said.

This interpretation of comments was challenged later in the day by the Social Democrats' general secretary, Olaf Scholz. But on Tuesday afternoon, sources acknowledged that the government was considering the possibility of increasing deficit spending as a way of reviving the stagnating economy.

Disagreement among leadership

Even though Schröder was able to calm Nahles and her supporters, he knows the upper levels of the party disagree on ways to combat unemployment. It pits the party's parliamentary group leader, Franz Müntefering, against Wolfgang Clement, the former state premier whom Schröder brought in after his re-election in September to be his super minister of labor and economics.

The issue involves stringent rules on layoffs. To many of the country's economists, the regulations act as a brake on employment. In the days leading up to the elections, Clement suggested that the rules be loosened. This suggestion produced attacks during Monday's meeting from party members, who said his comments had contributed to the devastating losses at the polls, the newspaper Berliner Zeitung reported on Tuesday.

Müntefering went public with his criticism on Tuesday morning, defending the layoff protections as well as the country's use of industry-wide wage agreements. Such regulations are a "good thing for Germany," he said in a television interview. "They are also essential for keeping the economy competitive."

Chancellor courts union

The debate is unlikely to go away soon as Schröder looks for ways to cut the 11.1 percent jobless rate. Employers see a loosening of the layoff protection rules as one essential means to create jobs. But the unions think such changes would amount to the surrender of valued social protection.

On Monday evening, the chancellor launched an attempt to win over the labor unions in the debate to create jobs. Schröder met with Klaus Zwickel, who heads the country's 2.8 million-member IG Metall union. The topic of the talks was the chancellor's Alliance for Jobs, the forum at which leading members of Germany's business community, labor unions and government have met off and on again in an attempt to find ways to create jobs. The alliance collapsed last week under the weight of union opposition to new suggestions made by an employer group.

Following the meeting, Schröder said he wanted to revive the talks soon. But he also indicated that the talks would touch on sensitive issues, saying he wanted to hold a meeting "without an agenda and without any taboos."

Zwickel's response followed on Tuesday morning. The union leader said in a radio interview that he saw no reason to resume the talks unless some legal commitment was built into the process. "If promises are not kept, then the politicians will have to create laws," he said.