BUSINESS

A costly marriage

Euphoria over a unified Germany is waning

PATRICIA CHISHOLM August 27 1990
BUSINESS

A costly marriage

Euphoria over a unified Germany is waning

PATRICIA CHISHOLM August 27 1990

A costly marriage

Euphoria over a unified Germany is waning

BUSINESS

They already share the same currency, language and cultural heritage. Those fundamental ties helped persuade many Germans that full pofitical union between East and West Germany would also lead to a smooth integration of their economies. But as the planned Oct. 14 date for formal unification draws closer, citizens of both Germanys are growing increasingly skeptical. Since July 1, when the West German D-mark also became the currency of the East, and when West Germany’s free-market economy became the norm for both countries, the unemployment in East Germany has doubled to 270,000—about 2.5 per cent of the workforce. Prices for necessities such as food—previously heavüy subsidized under communism—have soared in the new free market, prompting some East Germans to accuse West German suppfiers of price gouging. As weU, many disülusioned East Germans like Else Lundner, a waitress in East Berlin, canceUed plans to travel in Western Europe this summer because rising prices at home had drained their savings. An angry Lundner said that West German ChanceUor Helmut Kohl painted a false picture of a prosperous future under unification, merely to gain support in East German elections last March, which Kohl’s party, the Christian Democrats,

won. Said Lundner: “He’s not getting my vote next time.”

But there have been costs to West Germany, as weU. In fact, to prop up the East’s sagging economy, the West German government has already poured in about 43.8 biffion D-marks worth of aid into East Germany. The money has gone to pay for everything from servicing the deficit to propping up state companies Earfier this month, East German officials warned that their economy, battered by competition from more efficient West German companies, was on the verge of complete coUapse. Simply to keep the fights on, the East German government increased its subsidies for electricity by $443 milfion, and the money to pay for it wifi have to come from the West.

And since the agreement on economic union was reached on July 1, under which West Germany agreed to help modernize the formerly Communist state’s economy, the East German government has demanded ever-increasing amounts of financial help. Indeed, some analysts have put the total cost of unification over the next three years at $88.3 billion, about a quarter of which is expected to be supplied by foreign investment. Arranging financing on such a massive scale could have an indirect impact on Canada. If a worldwide

credit crunch develops as funds pour into Germany,

Canada will be forced to raise its own interest rates to attract investors to government bonds.

Kohl has acknowledged that he may have to break a tong-standing promise and raise taxes to pay for some of the costs of the union. That prospect is dampening the enthusiasm of many West .Germans, who are only now beginning to count the cost of absorbing their eastern cousins. The seemingly bottomless pit of financial need in East Germany is beginning to alarm West German taxpayers, who will probably be forced to pay at least a part of the cost of renovating East Germany’s tired and antiquated industrial sector. East Germany has also demanded rhore funds for wage increases, to dissuade its workers from moving to the West, | where they would likely go on x

and retrain the growing numbers of their own unemployed.

For the average East German, monetary unification has so far been a mixture of euphoria and disappointment. Ultimately, most economists expect that the union will produce an economic boom, making the unified German economy Europe’s strongest. The unified German economy, with a gross domestic product of $1.5 trillion, becomes 45 per cent larger than France’s and nearly 75 per cent larger than Britain’s. As well, by taking advantage of East Germany’s economic connections to other formerly Communist countries, the unified Germany is expected to dominate trade and finance in the once-socialist region.

But East Germany clearly has a long way to go before it will be on an equal footing With West Germany. Prior to unification, East Germans had to wait for about 15 years to receive delivery of a Trabant, the notoriously unreliable glass-and-fibre car that frequently lasted for barely •more than two years. Only seven per cent of East German households have telephones, and its telecommunications system is one of Europe’s worst.

Now, a flood of West German goods and investment is creating a cornucopia of freemarket consumer choice. For one, Wolfsberg#based car manufacturer Volkswagon AG has committed $255 million to upgrading, over the next two years, the Trabant plant where it will

produce its compact Polo model. And the West German state-owned telephone system announced last month that it will spend more than $35 billion over the next 10 years to modernize East Germany’s phone system.

the unemployment rolls, as well as subsidies to support

Still, the array of Western-supplied goods in East German stores, from Braun kitchen appliances to color televisions to Siemens washing machines, remains largely unsold because of mounting unemployment. Long accustomed to state-guaranteed jobs, many consumers are increasingly fearful that they will become one of the three million East Germans that some analysts expect to be unemployed by early 1991. Already, 656,000 of the state’s 8.8 million workers are working only part time because of the plummeting demand for East German goods.

While West German companies are clearly optimistic about having found a receptive new market, the outlook for many East German businesses grows darker by the day. Unable to meet production targets or to sell their goods, an estimated 40 per cent of East German businesses will have closed by year’s end. Said Reiner Gohlke, the West German official supervising the progress of East German businesses under unification: “For the next six months, the economy in the eastern half of Germany will really be dragged through the mud.”

As a result, the initial optimism that greeted the conversion of East German ostmarks to D-

marks last July has abated. Indeed, economists now warn that East German dreams of immediate prosperity could take years to fulfil. Said Holger Kluge, executive vice-president international at the Canadian Imperial Bank of Commerce in Toronto: “The East Germans thought that they would have a BMW and a house. They didn’t realize that it took many years for other Western countries to afford these things.”

Meanwhile, officials have become increasingly uneasy about the growing drain on West Germany’s resources. Already, the huge demand for capital to keep the East afloat has sent interest rates in an upward spiral. Rates on 10year West German government bonds jumped to 8.75 per cent in June from 7.25 per cent in January, and, since late last year, the bank rate has risen 150 points to 8 per cent. As a result of higher rates and a workforce swollen by immigrants from the East, unemployment in West Germany is also rising, climbing to 9 per cent from 7.5 two years ago.

The same demand for resources that is pushing German rates higher could also pull some foreign investment out of Canada. According to Kluge, attractively high German interest rates and new investment opportunities opening in East Germany may persuade some German investors to transfer their capital out of Canadian financial markets to a united Germany. Clearly, building a giant economic power in the heart of Europe will be expensive for West German taxpayers and will send shock waves through world financial markets.

JOHN HOLLAND

PATRICIA CHISHOLM with JOHN HOLLAND in Berlin