The Wealth Of A Nation

There's a fairy-tale quality to West Germany's economic takeover of East Germany. The fable goes something like this:

Once upon a time, a rich kingdom took over a poor one. The money in the 15 million bank accounts of the poor kingdom was no good, so--poof!--the rich kingdom exchanged it for the Deutsche mark, a currency better than gold. The air in the poor kingdom was so fouled that it stung the eyes. So--abracadabra!--the rich kingdom started a big cleanup. The houses in the poor kingdom hadn't been fixed up since the government seized everything 40 years ago, so--shazzam!--the rich kingdom gave everybody back their property. The stores were only half filled with crummy products, so--presto!--companies from the rich kingdom restocked them with really good stuff. Only one problem remained. A lot of businesses in the poor country were likely to fail when forced to compete with firms in the rich country. So merry old king Kohl promised that all laid-offworkers would be supported and retrained for new jobs: "Nobody will lose," Helmut Kohl promised the East Germans, "and most will win."

The crazy thing about this tale is that it is going to come true. There will be a couple of years of enormous turmoil--unemployment, bankruptcies, perhaps even political unrest. Many East Germans will still go west to find work and West Germans east to get rich. There will likely be a burst of inflation and higher taxes, too. Every fairy tale has its villains. But after the rough transition, the 16.3 million people who call the German Democratic Republic home are likely to live happily ever after. "Living standards--at least income levels--should approach West Germany's in something like five years," says Horst Schulmann of the Institute of International Finance.

The experiment will work partly because many East German companies are stronger than people think. When communist stupidities vanish, many other businesses should get healthy, too. New firms will spring up like wildfiowers; 59,435 start-ups were already registered by the end of May. West Germany is deploying a huge pile of cash to ease the East's conversion to capitalism. It is selling $70 billion in bonds to provide a social safety net, and will divert tens of billions more from other government programs.

Above all, the capitalist blitzkrieg of the East will succeed because of pride. Even more than Japan, Germany has recovered from the moral and physical destruction of World War II. It is now cheerfully and nakedly on the make. There are no pessimists in high German places. Every government official, businessman and banker radiates determination to make reunion succeed. "It's goiing to be a mess and then it's going to work," says Hartwin Haas, who is reopening branch operations of the giant Dresdner Bank in Saxony, the state where the bank was born.

In the East, there's visible anxiety over the arrival of economic freedom. Everyone's job is temporarily in the air. Yet nearly all these worried East Germans joined in overthrowing the old communist system. And three out of five voted in this March's elections for the program of coldturkey capitalism that their new coalition government, under Christian Democrat Lothar de Maiziere, negotiated with the West. "Socialism, or so-called socialism, has totally failed," says de Maiziere. Or as Ulf Witte, a heavy-construction worker from Quedlingburg, so aptly puts it: "Sure I'm worried, but communism didn't work. West Germany does."

The economic revolution will touch almost everyone in West and East alike. World interest rates have already jumped. Thirty percent of West German manufacturing is foreign-owned--half of it by American firms like General Motors, Ford, IBM and Hewlett-Packard. So American and other foreign businesses will profit as German economic growth accelerates. In getting a jump-start on reform, the East Germans will be in a position to lead capitalism's march eastward--and strengthen trade connections across the Eastern bloc.

Looming larger: In an age when economic power is replacing military might as the true test of a superpower, the new Germany may loom larger, in Europe at least, than the United States. German leaders vow that their power will be "wrapped inside Europe, not around it," as Free Democratic Party Chairman Otto Graf Lambsdorff puts it. Helmut Kohl waxes lyrical over the chances for a Pan-European free market. "It is not for reasons merely of self- esteem," says Kohl, "that I call the 21st century the century of Europe."

In West Berlin one night recently, the quickening pace of change was visible along the Kurfurstendamm, the city's famed thoroughfare. Around a corner in front of a subway station, a street artist named Friedrich Koll staged an astonishing show. Dressed in a red Robin Hood outfit, the sprightly West Berliner clacked a couple of soup spoons together to the accompaniment of German dance-hall songs. Half a dozen people danced wildly 200 others swayed and quaffed beer illegally sold by street peddlers. An unprotesting policeman looked happily over the scene. Koll, collecting contributions from the crowd, declared that "unification makes a wonderful business." He works East Berlin at noontime and West Berlin after dark.

Clear Title: This week's capitalist reforms will clear the way for thousands of entrepreneurs all over the East. Restoration of private-property rights will let homeowners with clear title immediately start repairs. Or they can borrow money against their homes to launch new businesses. Decontrol of almost all prices (rent control is a major exception) will show every business what they've got to do to compete in the wider German market. Heavily subsidized bread will rise from 27 cents a pound early this year to around $1.85. Formerly scarce goods like toothpaste, deodorant and coffee are dropping steeply; color-TV sets are coming down by more than half. To get the environmental cleanup underway, engineers this week will start testing catalytic converters for East Germany's state-made Trabant and Wartburg automobiles. New factories will have to meet West German environmental standards, and there'll be at least a 10-year cleanup of existing plants. A gigantic new West German state trust agency will take title to East Germany's massive, state-owned Kombinate (cartels) and other smaller businesses. Some 130 cartels control factories and businesses that employ 40 percent of the country's 8.5 million workers. Trust managers will dissolve the cartels, convert individual enterprises into corporations and try to sell them off to private businesses. Many of the medium-size and small businesses, nationalized in 1972, will be resold to former owners.

This week, East Germans will be carrying around a new currency. Over the last two months the Bundesbank, West Germany's central bank, has trucked in 25 billion Deutsche marks' worth of coins and notes to distribute through some 30,000 banking offices. East Germans were required to make bank deposits of old coins and bills by midnight Friday. As of July 1, East Germans from 15 to 59 years old were eligible to convert up to 4,000 Ostmarks into Deutsche marks, one to one. (Older people will enjoy parity on the first 6,000 in their accounts; youngsters will get it only on the first 2,000.) The balance will get a two-toone exchange. Based on official estimates, a three-person East German family will start out with around $15,500.

Hartwin Haas of the Dresdner Bank believes more than half the new windfall will be saved, perhaps three quarters. Whatever the ratio, Thomas Kunja, an East Berliner who escaped to West Berlin several years ago and now distributes Electrolux vacuum cleaners, knows exactly what they'll buy. "A video recorder--half already have color TVs," says Kunja. "And everybody will take a trip." Why? "What do you do when you get out of jail? You run. You have to prove you're really out with a trip west. After that, people need everything: a decent car, decent kitchen stuff, a decent rug. If only 1 percent of them want a decent vacuum cleaner, I'm going to be rich."

Eastward rush: West German banks, retailers, accountants, construction companies and hotel chains have rushed to sign joint ventures or start their own businesses in the East. The Dresdner Bank alone opened 35 branches, and took over an additional 62 offices from the state-owned German Credit Bank. Local services will proliferate. When East Germany's first pornography shop was launched on June 14 in Leipzig, 29 men were lined up before the doors even opened.

One day two weeks ago, a half dozen people in the bar at the Hotel Central in the polluted chemical and mining town of Bitterfeld spoke of their plans for the future: a taxi company, a restaurant, a tailor shop, a trucking firm, a game parlor. Edmund Gutmann, a West German contractor with a 12-cylinder BMW outside, planned to launch home-renovation, materials-recycling and environmental-cleanup firms--all beginning this week. "Bitterfeld's the dirtiest most run-down area in Europe," Gutmann said cheerfully. "It needs everything."

American subsidiaries are coming, too. IBM in Germany is hiring software programmers. Opel, the German subsidiary of General Motors, will start assembling the midsize Vector model at the Wartburg plant in Eisenach in October. Coca-Cola is spending $140 million on six bottling plants. Philip Morris bought Tabakontor, one of three East Germany cigarette factories, and Levi Strauss is launching a jointventure jeans factory in East Berlin. Yet these are still exceptions. So far most foreign and West German investors have remained wary, throwing a scare into Bonn officials who may have to subsidize or close factories that can't find buyers. Economics Minister Helmut Haussmann, addressing 1,200 delegates of the Federation of German Industry last month, blasted "the small-minded doubters, the subsidy seekers and the bookkeepers" who are refusing to take risks.

East Germany still has many world-class businesses--printing machinery, Zeiss optics, Meissen china. But most of its big factories have been deprived of innovation, capital and maintenance for 40 years. "Many are white elephants--although a lot have parts that can and will be saved," says Norbert Walter of the Deutsche Bank. "A number of issues have to be resolved," says Haas in Dresden. "Who pays for lawsuits or cleanups resulting from past pollution? What wage rates does industry have to pay? Output per worker here right now is maybe a third what it is in the West. It's going to take months to sort these things out." The initial jolts are likely to trigger from 15 to 20 percent unemployment next year.

Smaller firms nationalized after 1972 have far fewer problems. There are 100,000 of them across East Germany, employing several million workers. Horst Jehmlich, of Jehmlich Organs, runs one of 4,000 such firms in the Dresden region alone. A fifth-generation master organ builder, Jehmlich boasts that he and his 50 workers "employ the very best 14th-century technology in the business." He exports half his output. Incredibly, all 22 organ-building firms in East Germany survived under communism. They did so by helping one another--just as the West German organ-building association is helping them now. Jehmlich says all he needs is "a big loan, so I can buy new machines and floor space and modernize. If I can do this, I can afford to raise salaries to West German levels in 18 months-which I have to do. Otherwise, my craftsmen head west."

Displaced workers: Given all the tumult, says Deutsche Bank's Walter, "it is not a question of how many [East Germans] will become unemployed--because many will--but how fast new jobs will be created." To tide over displaced workers, West Germany's social programs will pay 70 percent of lost wages for a year--and 60 percent after that. "But job creation will happen faster than most people think," insists Helmut Giesecke of the Association of German Chambers of Commerce and Industry. Bitterfeld, an area of 38,000, has only three restaurants or bars; Appenweier, a West German town of 8,500, has 29. The telephone system, deliberately constricted to keep people from conspiring against the old government, offers phones to only 7 percent of East German homes. Even then, the switchboards are overloaded; it can take half a day to complete one call.

Tackling such a mess all at once is likely to cost West Germany far more than Helmut Kohl is letting on. As one West German Finance Ministry official concedes, "We're now trying our own version of Reaganomics--heavy borrowing, tight money and no new taxes." The addition of East Germany may increase West Germany's population by 26 percent, but current East German output is still only about one eighth as large as West Germany's. That would be like America attempting to absorb a population the size of the West Coast with a living standard of Mississippi--difficult, but still digestible.

There are a few nightmare scenarios. If West Germany can't sell most of the industries it is taking over from the East German government--and if for political reasons it refuses to close them--Bonn will have to run them. For a supposedly free-market country, West Germany is already heavily socialized: 7 percent of its output goes to subsidies for business and farms, compared with only 2 percent in the United States. If Bonn is left holding the bag, reunification may wind up simply transfer| ring socialism from East Germany to West Germany. Helmut Giesecke of the Chamber of I Commerce insists that outcome is unthinkable, since West Ger man taxpayers won't stand for it. "All these businesses that I are responsible for the death of I production in the East must disappear'" Giesecke says.

If a closed European trading bloc forms around Germany, I that will threaten the world I free-trade order. Germany already conducts two thirds of its trade within Europe. "It's a live danger," says a U.S. official in Bonn. He notes that I fear of a Fortress Europe is Topic A in the current round of global trade talks due to be completed by the end of this year. "The only cure for a Fortress Europe," the official says, "is a reduction of European restrictions against the rest of the world. But the Germans themselves are supporting this."

Economic clout: The Germany that emerges from the next two to three years of upheaval will be the stronger force in Europe. In part, this is a natural consequence of Germany's successes. As British Prime Minister Margaret Thatcher said late last month, a unified Germany "would be dominant both in numbers and political and economic power." But it's economic power that will count most. Although West Germany has little more than a fifth the total output of the United States, it exports 37 percent of everything it makes. Americans export only 11 percent. It's Germany's export surpluses that enable its government and businesses to buy assets and to lend abroad.

Roy Jenkins, the former British chancellor of the Exchequer, recently wrote that fears of a reunified Germany are "largely misplaced . . . The currency and the Bundesbank have replaced the Wehrmacht ... as the quintessential German institutions." Yet that's precisely the point: in today's world, the Deutsche mark is more powerful than the tank. "Helmut Kohl is the financial equivalent of Bismarck," says David Hale of Kemper Financial. "He is proving the power of money." Hale, a longtime student of Germany, offers a history lesson. "Before 1914," he recalls, "Germany accounted for a quarter of all trade flows in Central and Eastern Europe, and was the first or second largest partner of every country in Western Europe. By 2010, the European economy is going to look more like the year 1910 than any decade in between." It took two world wars to destroy Germany's economic dominance. Now it is once again within grasp.


Costs of Division





A sampler of 1989 prices:





                          West       East[F*]





White bread (1 lb.)      $1.89        $.27





Coffee (1 lb.)           $4.33      $18.95





Subway ticket            $1.62        $.12





Best opera ticket          $55          $9





Automatic washer          $479       $1,377

[F*] SOURCE: FEDERAL STATISTICS OFFICE, WIESBADEN


Combined Clout





West      East





Populatin                 62.1m.     16.3m.





Percent employed in:


agriculture              5%         11%





industry                 40%        47%


services                 55%        42%





Average monthly


earnings in industry     $2321      $772

SOURCE:COMMERZBANK