VOLKSWAGEN granted its German factory workers an inflation-busting pay rise yesterday, the latest hefty wage hike in Germany as union demands meet support from politicians seeking both to woo local voters and underpin the wider European Union.

Germany faces federal elections in September which have emboldened unions to press for salary increases popular with the public. But Berlin is also hoping the round of salary increases can encourage Germans to spend more on goods and services from weaker eurozone economies, evening out imbalances and boosting the bloc as a whole, after the International Monetary Fund pressed the German government to act.

VW's pay deal - which lifts wages 3.4 percent from September, then by another 2.2 percent from July 2014 - matches an agreement negotiated earlier this month by the IG Metall union for Germany's 3.7 million engineering and metal workers. Inflation is just 1.2 percent.

"This and other similar wage deals will encourage Germans to spend more, supporting German economic growth but also helping eurozone rebalancing," said Christian Schulz, an economist at Berenberg Bank.

By increasing labour unit costs the deal at VW - Europe's largest carmaker - and others will reduce German competitiveness and level the playing field with countries still struggling to fire up their economies following the debt crisis.

Private consumption almost exclusively drove German growth in the first quarter, and wage hikes and low unemployment may boost it further.

VW had urged staff to settle for a "moderate" pay increase as a prolonged global slump in car sales hurts sales and profits.

"We're pushing the envelope of what's feasible, given the difficult market situation in Europe and tough international competition," VW human resources chief Horst Neumann said about the pay deal, which will apply to 97,000 workers at its six western German plants and 5,000 employees at the financial services division.

Deliveries of VW's main namesake brand shed 10.9 percent in the home market between January and April and fell 7.9 percent across austerity-strapped western European countries. First-quarter operating profit at the German group fell by a quarter to 2.34 billion euros (US$3.03 billion).