TIME: Almanac 1993/TIME Almanac 1993.iso/time/070990/07090218.000

Text File | 1992-08-28 | 13KB | 249 lines

                                                                                GERMANY, Page 76

The Big Merger


Nothing like this instant melding of two fundamentally disparate
economies has ever happened before, anywhere


    At first, as Frank Sinatra used to sing, they had high hopes
-- pie-in-the-sky hopes. After 40 years as the poor relatives,
the East Germans were going to be welcomed into the big house.
Following decades of yearning for the good life, as they had
seen it nightly on West German television, 16 million East
Germans would be inside the supermarket with real money in
their pockets. In the country's first-ever free election last
March, people acted not only on the principle of one man, one
vote, but also for one mark, one mark. Last Sunday, when
monetary union between the two parts of the country took effect,
they began to collect.

    The shopping spree had actually started months earlier. East
Germans moved beyond the oranges and bananas, so popular when
the Wall first came down, to consumer electronics and cars.
Everywhere, new brand names began to beckon: Panasonic, Miele,
Zanussi. Magdeburg became Marlboro country. The West German
chain Spar opened a supermarket 40 km east of the border and
stocked it with Western goods. East Berlin got its Benetton.

    Yet with DM-day come and gone, the mood is uneasy. While
West Germans fret over the blank check they have signed, East
Germans fear that before they enter the earthly paradise, they
may have to pass through a purgatory of inflation and
unemployment. They are also concerned that they may prove to
be easy pickings for predatory Westerners, or Wessis in G.D.R.
parlance. Certainly, the Wessis are coming. Hotels are packed
with Western businessmen eager to cut deals, whether the object
of desire is a state-owned company, retail floor space, or a
summer home on the Baltic.

    Inflation worries arise because state subsidies in the
G.D.R. kept many prices artificially low. Rent and the costs
of basic foods and public transport typically were a fraction
of those in West Germany -- less than one-fifteenth in the case
of rent. On the other hand, consumer durables were outrageously
overpriced -- and an open market will bring them down.

    East Germans earn less than half the average West German
wage, and the 1-to-1 money conversion, the key part of the
economic-union agreement, does nothing to alter that. In part,
this is rough justice. Productivity in the G.D.R. is perhaps
only a third of West Germany's, so employers will be paying
less but also will be getting less.

    For nearly a half-century, East German workers have held
lifetime jobs in companies that had only to meet production
goals, without much concern for costs, quality or innovation.
The madness in this method is symbolized by the Trabant, the
plastic-enclosed, four-wheel motorcycle posing as a small car.
Until last November, customers waited up to 15 years for the
privilege of buying one for then 22,000 ostmarks, or about
$4,000; currently, the Trabant cannot be sold  at any price.

    Other G.D.R. industries have their Trabants in the form of
outdated TVs, shoddy appliances and suits like Khrushchev wore.
These unattractive wares now compete with Western goods; before
July 1, across the East, prices were being slashed to fire-sale
levels to unload old inventory before the full wave of Western
goods arrived. If pent-up demand goes mainly to line the
pockets of Western suppliers, G.D.R. producers, without
financial reserves or adequate credit, will lack the cash flow
needed to meet deutsche mark payrolls. Says Claudia Wormann, an
analyst with the Inner-German Economic Policy Committee of the
Federation of German Industry: "During the first months,
enterprises will be living from hand to mouth."

    Unemployment is inevitable, and estimates range from a few
hundred thousand people to as many as 3 million -- a third of
the work force. Klaus Reichenbach, a senior East German
official, reckons that 15% to 20% of all companies are doomed,
and the remainder will certainly have major layoffs. So far,
the impact has been modest. Industrial output has fallen 4.5%,
and only 100,000 people have registered as unemployed.

    Things would be different if East German enterprises could
get help from the deep pockets of a Western partner; thus a
fierce mating dance is going on. Each day brings news of deals
or rumors of deals, and sometimes it seems as if the G.D.R. is
about to become a wholly owned subsidiary of Western business.
For the moment, however, many takeover bids are hanging in
midair because Western firms can still hold only a 49% share
in an Eastern firm. Similar uncertainty surrounds the purchase
of property. As Volkswagen chairman Carl Hahn puts it, "people
are flying blind."

    By contrast, no limits are put on joint ventures not
involving a transfer of ownership, and nearly a thousand have
been announced. The biggest are in the auto industry: VW and
the builder of the Trabant; General Motors and the manufacturer
of the Wartburg; and Daimler-Benz and the G.D.R.'s sole
truckmaker. These deals can provide a quick supply of salable
products and produce needed cash flow.

    Automobiles could be the engine of East German economic
recovery. Certainly the demand is there. In a country where
people waited a dozen years to buy a car, it is a triumph of
tenacity that half the households own one. Since virtually all
those car owners want to replace their Trabants and Wartburgs
with real cars, estimates of potential sales range from 200,000
a year up to 700,000.

    GM plans a new assembly plant outside Eisenach to produce
150,000 cars a year by 1993. Executives of Opel, the firm's
German subsidiary, do not cite a figure, but the investment
will be more than $100 million. Opel managers see Eisenach as
a part of their European network, so production is not
earmarked solely for the G.D.R.

    By and large, Western companies are not counting on East
Germany's remaining a low-wage country forever, and they are
planning to put in their best technology. Thus, over time, East
Germany could become something of a technological showcase.
Says Opel management board member Horst Borghs: "It's the
nature of the business. Your newest plant is always your best."
Opel's newest will be in Eisenach.

    If a sudden influx of bankers is an encouraging sign, the
East has cause to hope. Anyone entering the lobby of a luxury
hotel there these days is greeted by an array of signs
proclaiming the presence of representative offices of
well-known Western banks. Those in East Berlin's Grand Hotel
include the WestLB, Algemene Bank Nederland, Bayerische
Landesbank and Salomon Brothers. Peter Dahne, WestLB's
representative for the G.D.R., has set up offices in seven other
G.D.R. cities, and will soon move into permanent quarters with
a staff of around 50, drawn initially from WestLB's West German
employees. Says Dahne: "We expect to face the same competition
here as in West Germany." That appears likely. Deutsche Bank
will be opening 100 branches together with an East German
partner. Dresdner Bank, which quickly set up an office in the
city where it got its name, is expanding under the motto "Back
to the Future."

    Eastern companies that find no single Western partner must
eventually seek individual shareholders, either among their own
employees or the general population. Ideas have been floated
to distribute shares in former state-owned companies to
citizens in the form of mutual-fund certificates. At present,
ownership of these companies is in limbo, or rather in the
hands of a state trustee body, the Treuhandanstalt.

    Some enterprises, like the manufacturing of the Trabant, are
probably unsalable at any price. They may include major
polluters like chemical companies and lignite mines. The
outdated state steel company faces a bleak future since its
products typically cost three times West German prices. The
outlook for agriculture is also grim since farm prices in the
G.D.R. are above even the inflated European Community level.

    Not all is gloom, however. VEB Polygraph is a remarkable
success story -- a sort of Katarina Witt of East German
industry. The five principal enterprises of this former state
conglomerate -- Planeta, Plamag, Zirkon, Brehmer and
Perfecta-will now be run separately. All make sophisticated
printing equipment, and all are international leaders in their
fields. Some other machine and machine-tool companies get good
marks from Western bankers, including the Fritz Heckert plant
in Chemnitz and parts of the October 7 group like the Niles
gear-grinding machine company that had its origins in Niles,
Ohio. The list of the tigers, though, is far shorter than the
list of the dogs.

    Administering the kiss of life to many of East Germany's
industrial behemoths will be a daunting task. Reviving small
business should be easier because the area had a long tradition
of smaller, specialized industrial companies before the command
economy crushed them. It was only in 1972 that a final wave of
nationalization swept the last 12,000 firms into state
conglomerates. About half of them have already demanded to be
reprivatized. Officials in Bonn and Berlin hope the spark of
entrepreneurial talent can be rekindled with loans from
European Recovery Program funds. Demand is high. An initial
allocation of $3.5 billion has already been handed out, and a
replenishment of the pot is planned.

    Retailing is a classic small business in the Western world
and should become so again in East Germany. Despite the best
efforts of the Communists to squeeze out the last private
retailers, 17,000 were still in business when the Wall fell.
Many of them are eager to expand. West German suppliers, keen
to see a viable network of small retailers, are advancing goods
on credit and helping in other ways like donating old cash
registers and display cases. The threat to the independent East
German retailer is no longer the bureaucrat but the competing
capitalist.

    While East Germany faces enormous change, the impact of
monetary union on West Germany is likely to be modest. The
economic Anschluss adds 25% to the population but only around
10% to the gross national product. The conversion of marks adds
about the same amount to the West German money supply. If
spent, the freshly minted DMs will have the same effect on
growth as a sizable tax cut. When this new demand hits a West
German economy operating close to capacity, the Bundesbank will
be keeping a wary eye on developments. Bundesbank president
Karl Otto Pohl calls the 1-to-1 conversion "a generous offer
that went to the limit of what is economically acceptable." But
he believes inflation can be contained.

    The consensus of economists is that union will add around
1% to West Germany's current yearly inflation rate of 2.5% and
enough additional stimulus to keep annual growth around 4%.
Interest rates will probably be higher than they otherwise
would have been, although Friedel Neuber, chairman of the
WestLB bank says, "East Germany's capital requirements don't
necessarily need to result in higher interest rates." West
Germany, a major capital-exporting country, last year shipped
about $60 billion abroad. A diversion of a fraction of that to
East Germany would meet most immediate needs. Meantime, the
addition of a large, lower-paid work force should slow wage
rises in West Germany and boost profits.

    The big unknown in the equation is the amount of direct aid
that West German taxpayers will have to pay out to prop up the
East's economy. Figures as high as $60 billion a year over the
next few years have been mooted; the DIW economic forecasting
institute in West Berlin expects $30 billion annually. Bonn has
already put together a war chest of about $70 billion for
eventualities. Among other things, Bonn inherits a large G.D.R.
budget deficit and foreign currency debt of around $13 billion.
At the same time, the special aid to West Berlin that West
Germany provided, some $12 billion a year, can be phased out,
and defense spending may be reduced.

    Everything depends on how the East German economy responds
to a free-market jump start. Pohl points out that "no one can
subsidize uneconomic jobs in the G.D.R. forever." Elmar
Pieroth, a prominent West Berlin politician and businessman who
advises the G.D.R government, insists, "The spirit of
entrepreneurship is reappearing, and people are eager to take
advantage of the possibilities." That was the kind of spirit
that created the Wirtschaftswunder.