BAMBERG, Germany (Reuters) - When Kristin and Thomas Schmitt took out a mortgage and bought a house last summer, the German couple’s dream looked as if it was coming true. Two months later, they learned that the tire factory where both work would be shut down early next year.

A malaise in Germany’s mighty automobile industry, caused by weaker demand from abroad, stricter emission rules and electrification, is starting to leave a wider mark on Europe’s largest economy by pushing up unemployment, eroding job security and hitting pay.

“It’s a nightmare. This is pulling the rug out from under our feet,” said Kristin Schmitt, 40, of the plant closure in the Bavarian region of Bamberg, one of Germany’s auto supplier hubs.

The couple, who have three children, still hopes managers at their Michelin tire factory change their mind, but the risk of unemployment looms large - and not only for the Schmitts.

The German auto sector is expected to cut nearly a tenth of its 830,000 jobs in the next decade, according to the VDA industry association.

Some think-tanks and government officials fear that the toll will be higher as electric cars provide less assembly work than combustion engine vehicles, simple work steps are replaced by automation and companies relocate production.

This is not yet 1970s Detroit, a U.S. car centre that was plagued by urban decay as factory relocations, cheaper imports and higher fuel prices destroyed jobs.

But the danger is growing, automotive companies, workers, as well as regional and labour leaders, told Reuters.

Different firms are taking different steps. At the Schmitts’ plant in Hallstadt, workers are trying to avoid forced layoffs; at a Bosch factory in nearby Bamberg, pay cuts and reduced hours have been agreed, as has investment in new fuel cell technology.

With pockets of rising joblessness in the affluent, auto-producing heartlands of Bavaria and Baden-Wuerttemberg in southern Germany, there are serious implications for a country which relies on the car industry for roughly 5% of its economic output and, and an important part of its national identity.

“Germany is entering uncharted waters. The transition could well mark the end of the golden age for cars as a mass employer,” said Stefan Bratzel, head of the Center of Automotive Management, a German research institute.

“For politics, it’s a ticking time bomb.”

The outbreak of the coronavirus is adding to the crisis by disrupting global supply chains and dampening passenger car sales in China, an important market for German manufacturers.

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Threats of mass lay-offs will be a defining feature of upcoming wage negotiations in the metalworking industry where unions are focusing more on job security than pay hikes.

“It could well be that we have passed the peak of automotive production,” Volkmar Denner, CEO of Germany’s largest car supplier Robert Bosch, said in January when he announced massive job cuts and a business review to cope with plunging profits.

POST-WAR ‘MIRACLE’

The Schmitts live north of the city of Bamberg, whose medieval and baroque architecture has been lovingly restored since the 1950s. It is typical of the well-heeled cities that prospered during the “economic miracle” of Germany’s post-war reconstruction.

Yet this region, which heavily depends on combustion engine technology, is facing a challenge that will have repercussions for Germany as a whole.

“We’re talking here about some 25,000 jobs in the region; that’s roughly 15% of the overall workforce,” Bamberg mayor Andreas Starke told Reuters. “This shows how dependent the region is on combustion engines.”

For the Schmitts - Thomas works on the assembly line and Kristin in the stockroom - and their more than 850 colleagues at the Michelin tire factory, the chances of keeping their jobs are looking grim.

Works council head Josef Morgenroth is trying to convince the management that the company can’t pull out of an earlier agreement which ruled out forced lay-offs until the end of 2022.

The local Michelin management declined to comment, saying it was still in talks with the works council.

‘AUTOMOBILE CRISIS’

To help workers affected by the car industry disruption, politicians, companies and labour unions have called on the government to support the shift to alternative technologies such as electric cars or hydrogen-powered fuel cells.

In a rare joint statement, automakers and unions said in January that Berlin must expand state-backed employment schemes, known as Kurzarbeit, to cover a longer pay subsidy period of up to 24 months as well as retraining in new skills such as building electric vehicle parts.

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The German cabinet is expected to approve the more flexible Kurzarbeit rules next month. Under the scheme, companies can apply for state aid to avoid lay-offs and keep skilled workers for a limited time of currently up to 12 months.

Depending on agreements between company and works council, employees work reduced hours or even stay at home, with the government paying two-thirds of the lost net income.

For the economy as a whole, this means consumers have less money to spend, eroding Germany’s most important pillar of economic support in recent years as exports falter. That in turn could become an issue for the European Central Bank as it seeks to stimulate the wider euro zone economy with a limited arsenal.

Research institute GfK expects German household spending to grow by 1% in 2020, down from roughly 1.5% last year.

Even without the planned changes, the number of employees already forced to work in Kurzarbeit schemes jumped to 96,000 in November, up from about 20,000 two years before, and surpassing levels last seen during the euro zone debt crisis in 2012/13, according to the Federal Labour Office.

Projections suggest that the number will rise to 117,000 this month, with the increase mainly due to the problems in the car industry, said Detlef Scheele, head of the state agency.

PAY CUT VS JOB CUT

Some auto suppliers have cut pay without applying for state aid under the short-time schemes.

At the Bosch factory, management and the works council sealed a deal to avoid forced lay-offs until 2026 under the condition that all 7,000 employees reduce working hours and accept a pay cut of nearly 10% from April 2020.

“Of course, this is causing mixed feelings,” said Sven Bachmann, production manager at the plant, which is 100% focused on combustion engine parts. “For me personally, the relief prevails that my job is safe for the next six years.”

In addition, the company pledged to invest in fuel cells, which could become an important alternative energy source for trucks and buildings over the next 10 years.

“This pledge is really important because it shows Bosch is not only thinking about cutting costs, but also about securing future growth and jobs,” works council head Mario Gutmann told Reuters.

The city of Bamberg is complementing the efforts by building a new district on an old U.S. military base where stationary fuel cells, powered with hydrogen, will provide electricity, heating and warm water for up to 1,000 apartments.

Mayor Starke is hoping that Bamberg’s efforts to diversify its local economy can help cushion the negative effects of the car crisis on the regional labour market.

There’s a lot at stake for people like the Schmitts.

“We cancelled our holidays, we also told the children that we have to scale back special treats,” Kristin said. “Now, we all pray that we can keep the house.”

(Graphic - Less work in Germany, )