America’s main car union yesterday offered big employment contract concessions in the hope that its financial sacrifices may force the hand of Congress to sign off a $34 billion (£22.9 billion) bail-out cheque to save the US auto industry.

The United Auto Workers union said its members had agreed to allow America’s biggest car companies – General Motors, Ford, and Chrysler – to delay payments to cover retired employees’ healthcare benefits and to suspend the industry’s jobs bank.

Ron Gettelfinger, the president of the union, hopes that such measures will show willingness among lawmakers in Washington who are dubious about whether to use taxpayer money to rescue the American car industry.

Mr Gettelfinger’s timing could not be better. Today, the heads of GM, Ford and Chrysler face a hostile Congress where they will be questioned to ascertain whether the three car companies are sufficiently robust to be able to repay the loan.

GM has given warning that without immediate federal aid, it could run out of cash by Christmas. In the event that the carmaker was forced to file for Chapter 11 bankruptcy protection, it would result in severe job losses and a subsequent fall in membership of Mr Gettelfinger’s union.

Congress is loath to use American taxpayer money to bail out bust industries and wants to make sure that the companies have a reasonable chance of recovery so that they can pay back the money with interest. They also want to safeguard the three million jobs which the US auto industry provides across the country during a period when 240,000 Americans are losing their jobs every month.

Alan Mulally, the chief executive of Ford, who has agreed to work for $1 a year and sell his five corporate jets in order to secure a $9 billion ten-year loan, admitted yesterday that he had been ill-prepared when he first faced Congress last month and asked for the loan. Since then all three carmakers were ordered to present detailed business plans to show how they would recover from the current slump and repay the money. This week, Ford said that it would shift its manufacturing to make smaller fuel-efficient cars. It also said that it was considering selling Volvo and would seek to cut costs by reducing its supplier and dealer base.

America is not the only big economy forced to face the dilemma of whether to use federal funds to bail out its car industry. The German car industry is poised for its worst year since reunification in 1990 as nervous drivers put off new purchases and companies cut back on their fleets.

The recession, now official after two quarters of negative growth, is beginning to bite in Europe’s biggest car market. “This is going to have an impact on unemployment,” Matthias Wissmann, chairman of the Association of Automobile manufacturers (VDA), said. “The car markets are plunging at an unprecedented speed.”

The association estimates that fewer than three million new cars – probably 2.9 million, although some analysts reckon on an even deeper fall – will be sold next year.

The car industry is the mainstay of the German manufacturing and export economy, its pride and joy. As a result, politicians in the states of Hesse, the home of Opel, Bavaria (BMW), Lower Saxony (Volkswagen) and Baden-Württemberg (Daimler and Porsche) are starting to panic. Lay-offs have started in the main production hubs, but it is the suppliers that are feeling the worst of the squeeze.

Pressure is mounting on Angela Merkel, the Chancellor, from local political governors to introduce more incentives to buy cars. She has resisted urgent demands to cut value added tax. German carmakers and suppliers employ 761,600 workers. The way that Mrs Merkel deals with the crisis is critical to her chances in the general election scheduled for September 2009. If unemployment soars in the car industry and she is seen as being too passive, the chances are that Germany will shift to the Left.

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