Country struggles to weather deficit, inflation, strikes

GERMANY'S ECONOMIC STORM

May 01, 1992|By Carl Schoettler | Carl Schoettler,Berlin Bureau

BERLIN -- With strikes continuing to rain across Germany, the economist at the big and influential Deutsche Bank sounds like a television weatherman as he assesses the nation's economy.

"Gloomy at the moment, rosy in the future," said Helmut Kaiser, a senior analyst at Deutsche Bank's research center. "It depends what horizon you look at."

The strikes, which have stopped everything from buses to garbage collection, are the latest economic storm to hit Germany. By this time next week, several million German workers might be out on the streets in the biggest mass strikes since World War II.

But the nation's economic troubles run much deeper. Problems include inflation, flagging exports, high interest rates, troublesome unemployment rates, a deficit that has increased fivefold in the past two years and unexpected costs from unifying East and West Germany.

In fact, the German economy met the classic definition of a recession when output fell in the last two quarters of 1991, said Wolfgang Scheremet, who works at an economic research institute here.

Still, Mr. Scheremet shares the widely held view that Germany -- where output increased in the first quarter of 1992 -- will stumble along until fall, when there will be a slight recovery, like those already under way in the United States and Britain. The reason: ** The end of various taxes, including the "solidarity contribution" that helps fund reunification, will pump cash into the economy and stimulate growth.

The strikes disrupting Germany aren't expected to have a major economic impact. Most economists think they will be settled soon for only mildly inflationary pay raises of 5 percent to 5.5 percent. And Mr. Scheremet said the Deutsche Bundesbank had already figured on a 5 percent pay raise in setting interest rates in November.

But those wage settlements -- and the ones that follow with metalworkers and other employees of private companies -- are being watched closely by inflation-conscious Germans.

Any rise in the inflation rate brings memories of the bad old days: rampant inflation in the Weimar Republic, worthless million-mark notes and the rise of Nazism in the 1930s.

"Germans abhor inflation for historical reasons," said Jeff Thinnes, deputy director of the Aspen Institute, an international research center. "Inflation has such a taint that Germans accept higher unemployment rather than inflation."

Now, they have both. Unemployment is about 6.5 percent in western Germany. In eastern Germany, the official unemployment rate is 15 percent, but some analysts say that counting people in training or make-work programs would boost the rate to more than 30 percent.

Inflation has been running about 4.5 percent, high for Germany, and the Bundesbank, the country's central bank, has tried to control it by pegging key interest rates as high as 9.75 percent.

Other European countries closely monitor Germany's interest rates because the German mark is the basis of the European monetary system. High German interest rates keep similar rates high in other countries in the European monetary system, including France and Britain.

Meanwhile, high interest rates impede economic growth in those countries, and that prevents them from buying German goods. That, in turn, hurts the economic recovery in Germany, one of the world's largest exporters. And it creates an unpleasant economic merry-go-round for the entire continent.

Political disarray -- underlined by the disorderly and unseemly maneuvering in choosing a replacement for retiring Foreign Minister Hans-Dietrich Genscher -- worries economists more than the slumping economy does. And, in many ways, the strikes now wracking Germany measure the people's discontent with their political leadership as much as their economic troubles do.

German workers say the costs of unification have fallen unfairly on them. And economists agree.

Taxes levied to pay for unification hit hardest at people with low incomes," Dr. Kaiser said. For a family of four living in an apartment, the special taxes, or "solidarity contribution," cost about $750 a year.

Some of that money was used for special work programs designed to limit the impact from closing money-losing factories in eastern Germany. One such program consists of 500 "employment companies" created by state and local governments to give work to about 200,000 people. Workers often are given tasks that help retrain them or that meet a social need, such as cleaning up contaminated production sites.

About $95 billion has gone from the former West Germany to the former East Germany. The reunification costs, financed mainly by deficit spending, are widely seen as the block on which the German economy stumbled.

And west Germans don't see much happening in the east: 16 million easterners -- 20 percent of the German population -- produce 7 percent of Germany's gross national product.

Economists, however, tend to believe the Germans will pull through and pull Europe, east and west, along with them.

But economic forecasting is like predicting the weather. You have to wait until tomorrow to find out whether the sun is shining and the skies are blue.

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