Gerhard Schr÷der returned from his summer holiday in Italy last week to a flood of economic bad news and an open letter from Germany's best-selling newspaper.

"Welcome back to work, Mr Chancellor! Good holidays? Well rested? Wonderful, because there is a lot to do," said Bild.

Figures out last week showed that unemployment in Germany rose for the seventh month in a row last month to 9.2 per cent, while industrial production fell to 0.4 per cent.

Germany's dependency on exports has made it more vulnerable to the economic slowdown in the US, while mass lay-offs have become a daily event.

Siemens is laying off 10,000 workers and chemicals concern BASF is cutting 4,000 jobs worldwide.

In his first post-holiday interview, Mr Schr÷der bit the bullet and conceded that he will probably not deliver his key election promise, to bring unemployment below 3.5 million before next year's election.

"Unemployment will be lower than when the government took office," he told Stern magazine. "I'm not saying everything is in order; unemployment is not sinking to the degree we expected."

In the interview, Mr Schr÷der laid out his economic plans in the run-up to next year's election, and defended his "politics of the steady hand".

His "steady hand" politics has been written off as "limp hand" politics by the conservative opposition, who accuse Mr Schr÷der of being unwilling to take one-off steps they see as essential to stimulating growth.

Mr Schr÷der is determined to avoid "anticyclical global steering", the Keynesian approach to economic management that characterised the approach of the Social Democrats in the 1970s and early 1980s.

At that time, the government spent large amounts of money to fine-tune the economy and tweak capital expenditure to smooth out the cyclical growth troughs.

But when the economic fog cleared, Germany was more in debt, while numbers of unemployed were higher than ever.

"To start a spending programme now would endanger the consolidation of government finances just coming off ground," said Dorit Feldbruegge of the conservative Frankfurter Allgemeine Zeitung. "By the time these handout programmes take effect, the economy would have already revived again on its own," he added.

Mr Schr÷der also rejects another idea from the CDU, endorsed by the Financial Times Deutschland, for increasing the flexibility of the German labour market by making it easier to dismiss workers.

"There are good arguments in favour of reform. A more flexible employment market would, in the long term, improve the chances of long-term unemployed finding work and less bureaucracy would increase the economic growth potential," wrote the FTD in its leader.

"We obviously could do that. But we do not want to," Mr Schr÷der said.

"The average worker is not just a manoeuvrable mass of capital to be thrown on the street in a time of downturn. I am interested in the fate of a worker's family. That's why I am a Social Democrat."

The CDU has been keen to capitalise on the economic bad news, and has been eager to remind the electorate of Mr Schr÷der's promise to reduce unemployment to 3.5 million. "The chancellor of the economic slowdown is taking back his campaign promises from 1998," said Mr Friedrich Merz, parliamentary leader of the CDU.

Last June, the CDU chairwoman, Ms Angela Merkel, suggested bringing forward the next phase of the tax cuts scheduled for 2003 as an effective way of giving the anaemic Germany economy a much-needed transfusion.

The suggestion has since found favour elsewhere and the chancellor and his finance minister Mr Hans Eichel will face growing pressure in the coming months.

"This reform could be put into force quickly, and, unlike the famous Keynsian steering approach, would not squander any money on needless prestige projects," wrote the Financial Times Deutschland.

Although the rate of inflation in Germany is falling, ECB chief economist, Mr Otmar Issing, suggested in a newspaper interview that the ECB would wait for more concrete signs of a downward trend in euro zone inflation before cutting its main interest rate from 4.5 per cent.

With an election on the way, it is unlikely that Mr Schr÷der will radically alter his approach in the coming months.

But with growing queues at employment offices and expected growth of just 1.5 per cent, Mr Schr÷der will have to explain to voters the difference between "steady-hand politics" and "doing-nothing politics".

Wrote one commentator: "Mr Schr÷der has a lot to do ahead of the election. And while cautiousness and a steady hand are certainly important, they cannot be an alibi for inactivity."