Chancellor Angela Merkel told unions on Wednesday that the German system that gives workers a say in corporate decision-making needed change, but defended so-called co-determination as a key part of the country's economic fabric.
"Co-determination is a fundamental feature of the social market economy," Merkel told a conference of the Federation of German Unions (DGB) to mark the 30th anniversary of the system known in Germany as "Mitbestimmung".
The tone of the speech was less confrontational than one she gave to a DGB audience three months ago in Berlin. In that address, she was whistled and booed after warning unions that they risked losing their influence and relevance.
On Wednesday she made clear at the outset that she was not questioning the system that gives worker representatives in Germany the right to sit on the boards of roughly 730 companies with 2,000 employees or more.
But she did stress that co-determination needed to be adapted to the demands of European and international competition, noting that the system should not hurt German firms - for example by encouraging those that merge with foreign companies to put their headquarters in other countries.
A commission set up by the government of Merkel's predecessor Gerhard Schroeder is currently studying reforms to the co-determination system and is expected to make proposals in November. Merkel called the reform a "Herculean task" and urged the commission - composed of unions, industry groups and independent experts - to make clear recommendations.
"It would not be a good sign if the commission simply offered up a series of suggestions for which there was no consensus," she said. During last year's election campaign Merkel urged far-reaching reforms of the labour market that were unpopular with German unions, but her narrow victory forced her into a coalition with the centre-left Social Democrats (SPD) and led to a watering-down of her economic plans.
German unions remain suspicious of her intentions. Merkel and fellow conservatives within her government have sought to loosen job protection rules and questioned whether German unions should retain the right to negotiate sector-wide wage deals. Germany's unions were once the most powerful in Europe, but their influence has waned in recent years.
Many German manufacturers have moved their production to low-wage countries in eastern Europe and others have successfully resisted worker demands for big wage increases with the threat of such moves. Even the once-feared IG Metall union, which represents the 3.4 million workers in Germany's metals and engineering sector, has been forced to accept only small wage increases in exchange for promises of job security.