July 9, 2004 -- FRANKFURT -- After four years of economic stagnation and political squabbling, Germany has acquired a reputation as a country stuck in its ways when it comes to restructuring the welfare state. But today, its parliament is expected to pass the country's deepest cut in social benefits in half a century.

Officials expect a majority in Germany's upper house to approve -- across party lines -- a sharp reduction of generous state benefits for the long-term unemployed, a step aimed at pushing the jobless back to work. The lower house approved the measure last week.

The initiative is part of a package of changes proposed by the Social Democrat-led government of Chancellor Gerhard Schroeder meant to increase employment, restore economic growth and put the nation's welfare state on sounder financial footing. The measures, which have split Mr. Schroeder's party and led him to step down as its chairman, go beyond the more-modest abatements of other euro-zone economies, except for the Netherlands' changes in the 1990s. France has made some progress on reworking state pensions and is debating health-care changes, but voter backlash has prompted the government to shift its energy to protecting jobs and increasing consumption to spur growth. In Italy, political disunity and fiscal disarray have delayed the government's ambitious tax-cutting agenda.

Until now, a German who hasn't worked for more than a year receives unemployment benefits at 53% of his most recent net wage, plus supplements for local and family circumstances, for an unlimited period. The new law would replace this with a flat rate of €345 per month ($426), plus rent and family supplements -- the same as the minimal-relief check given to the poor. The change means many unemployed stand to lose hundreds of euros a month.

Job centers responsible for the new system will be able to suspend or partially withhold payments if recipients turn down job offers. But people who find low-paying work can continue to receive some or all of these payments.

Economics minister Wolfgang Clement calls it "the most significant and comprehensive labor-market reform in the history of the Federal Republic." Many economists say Germany's proposals, dubbed "Agenda 2010," will fall short of restoring economic dynamism. After three years of nearly no growth, economists believe German output will grow by 1.8% this year, mainly thanks to surging exports. Domestic demand remains weak. Data from German manufacturers show that orders from abroad rose 4.1% from April to May as the global economy improved, but domestic orders fell 0.6%.

"Even the highest pressure on the unemployed won't work if there are no jobs," says Eckart Tuchfeld, an economist at Commerzbank in Frankfurt. "The measures are a good first step, but more are needed. Some positive effects will become tangible, but they won't be enough to really improve economic growth." To help create more jobs, he says, the government would have to allow employers more flexibility on industrywide wage levels, job security and working hours, and cut state health and pension levies on employment.

German employers long have advocated such measures, but labor unions already strongly oppose the government's existing steps as socially unjust. Last weekend, former party members and labor unionists -- who traditionally have backed the Social Democrats -- launched preparations for a new left-wing political party to challenge the government in elections. Unions have organized mass rallies against Mr. Schroeder this year, and the Social Democrats received their lowest-ever share of a national vote in last month's Europe-wide elections.

Ministers admit ordinary Germans haven't accepted the measures, but argue that there is no other way to make the country's welfare system affordable as the population ages. Labor-market changes already enacted include exempting more low-paying jobs from health and pension levies, turning offices that administer the dole into job centers modeled on those in the U.K., and making it cheaper for small businesses to lay off staff in bad times.

The government also has sought to bring the present and long-term costs of state health and pension provisions under control. This year it has limited the number of prescription drugs covered by state health insurance -- a step the government says already has saved more than €1 billion -- and introduced a €10 fee per quarter for visiting a doctor or dentist.

Pension changes enacted so far include removing tax incentives for early retirement, limiting state pension levels to keep employees' contributions below 20% of their wages and introducing a link between raises in state pensions and the ratio of workers to pensioners. But a much-heralded subsidy for government-approved private pension savings, introduced in 2002, proved too restrictive and fewer Germans than hoped have taken up the offer.

In a quest to stimulate growth, the government also has cut income taxes for individuals and businesses, by a total of €15 billion in 2004 and €6.5 billion next year. But German consumers, worried by job insecurity and welfare changes, show little inclination to spend more.