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Building a kinder, gentler Reich.

Germany is footing a mammoth bill for unification. But the payoff may be a supercharged economic machine positioned to dominate post-1992 Europe.

When West Germany absorbed the former German Democratic Republic in July 1990, the country kicked off perhaps the second most ambitious political and economic experiment of modern times. Indeed, some maintain the merger of powerhouse western Germany with its stunted half brother in the East leaves the "new" Germany poised on the brink of an economic miracle similar to that following World War II. But a funny thing happened on the way to the consolidation. The even-par currency conversion that signaled unification helped to precipitate an economic slowdown. Subsidies pumped into the crippled east by its western sibling have fueled inflationary pressures. One result: Germany has thrown open its doors, soliciting other Western nations to invest in the east and rummage for bargains among the region's privatization prospects.

The pointman in this thrust is Juergen Moellemann, Germany's minister of economics and a number of parliament. When Moellemann, 46, took the job in January 1991, many German business leaders sniffed at his lack of economic credentials: previously he was education minister. But in little more than a year on the job, Moellemann--working with the Treuhand's Birgit Breuel--has taken a stiff broom to the East German mess. He kicked off the "Upswing in the East" program, which pumped 24 billion deutsche marks ($15 billion) into eastern infrastructure projects. To boost business in the new federal states, Moellemann helped to squeeze an export deal from the Soviets, introduce a strict set of export-control laws, and unravel legal snarls involving the ownership of eastern enterprises.

But fresh from charting Bonn's new, course, Moellemann doubled back and called for cuts in payments to the former GDR, which research firm UBS Phillips & Drew last year tallied at DM100 billion. In the process, he fetched valuable political capital: As a close friend of foreign minister Hans-Dietrich Genscher and a member of the Free Democratic Party --long Germany's free-market concience --Moellemann is widely though to seeking FDP leadership and perhaps even Gencher's slot, should the latter step down in a few years as expected.

Abroad, he has proved an adept flag carrier in the campaign to attract foreign investors. During a September sojourn in the U.S., he assured legislators and corporate chiefs that Germany isn't interested in barring U.S products from a "fortress Europe" after unification in 1992. He exhorted U.S. companies to shake their international lethargy and board in investment bandwagon in the new federal states. Ever the savvy saleman, Moellemann also put out word that interest from U.S firm is picking up. Transulation: The store is busy, and supplies are limited. better shop now.

Will U.S. companies bite? some giant players already have. Moellemann cites with pride the dozen or so U.S. companies that so far have staked claims in eastern Germany, including General Motors, Procter & Gamble, and Coco-Cola. To be sure, the benefits of investing now include government incentives and an educated workforce eager to enact their own economic miracle.

Yet most stateside concerns seem unconvinced they can tote home trophies from the touted, German big-game hunt. Some of their concerns are outlined in this month's CE roundtable. Some maintain German companies have already picked the shelves clean of the best GDR had to offer. Others justify their stay-at-home approach by pointing to Gemany's recent economic stumble.

For example, inflation is hovering just below 4 percent, a rate untenable by German standards. Then there's a wage structure that is outstripping productivity gains. In sum, the argument goes, the Germans are on a collision course with recession and a productivity cost squeeze, and may soon find themselves priced out of key world markets. Darryl F. Allen, present and GEO of Maumee, OH-based Trinova, underscores these points: "American don't need any additional capacity and don't have a strong desire to contribute directly to a unified Germany."

In a wide-ranging conversation wit CE editor J.P Dolan, Moellemann fields question on these concerns and reprises his pitch about opportunities in the eastern laender (states). Still, most CEOs likely will tidy their own houses in the short term and wait to see whether Germany's present trouble are temporary or the beginning of a more substantial decline.

As the decade unfolds, will Germany be a kinder, gentlier economic reich? Will we see a Germany Europe or a European Germany? Selecting a coutious spin, Moellemann insists the new Germany would be content as an equal among equals. Some of his neighbours aren't so sure, and likely will keep their ears cocked for fresh rumblings of German aggrandizement. Time will tell. And North American CEOs--along with their counterparts worldwide--will anxiously await the drama's next act.


Estimates on the cost of unification in 1991 range as high as several billion deutsche marks, with the bill to be shared by the public and private sectors. What will be the final price--and economic impact--of unification?

It's impossible to say. But I suppose that on an annual basic, this year's costs will continue at least for another two or three years, perhaps slightly decreasing over that time. In infrastructure alone, our institute estimates that we will need an investment of about DM500 billion. It's obvious that such unification costs have to be borne by both the public and private sectors.

The side effects of unification have included 4 percent inflation and tax increases partly to underwrite the government subsidies to eastern Germany. How long will people tolerate this?

Not too long, at least in terms of the inflation rate. From the political side, we are obliged to reduvce the inflation rate at least towards at 2 to 3 percent range.

This should be possible if we meet too preconditions. First, our labor unions and entrepreneurs need to strike a reasonable agreement concerning wages and salaries. And second, there needs to be further reductions of subsidies and expenditures. If these things are accompliced, it will be possible to reduce our inflation rate within the next two years.

But we must also resolve the tax question. We have to at least reduce taxes for our companies to ensure they remain competative. We also have to reduce taxes to stay competative with Britain, France, and other countries with lower taxes. We cut taxes in the early 80s. Not only did state revenues not decline, but because of strong economic growth, state income actually increased.

The supply side effect?

Yes. But now we are in a dilemma. Our first chamber, the bundestag, agree to a tax reduction. The second chamber, the Bundestat, opposed the changed. I hope that in the end both will agree

Meanwhile, we also have to consider reducing personal income taxes within the next two years. Currently, our top brackets are 50 percent and 53 percent. I would like to see the top marginal rate at 46 percent. No higher than that.


You've been a strong advocate of increased U.S-German economic intergration regarding the new federal states, and you've argued that NATO should maintain a central role in Europe. Why?

Some say that given the downfall of communism and the basic change in East-West relations, the U.S. should have no further presence in Europe. I disagree. We need an America political, economic, and even military presence in Europe.

NATO has been and should continue to be a stabilizing force. The collapse of the communist system has jeopardizes stability in the east. So, it's in our national interest--as well as in our economic interest--to have investors from U.S. coming to East Germany, as they did in former times to West Germany. We need the capital. We need the know-how. We need the technology of the American economy and finincial sectors. All of these are reasons for enligntened investors from the states to engaged themselves.

What's in it for North American investors?

They have a chance to gain an early presence in a Germany that may provide an entree into other Europian markets.

Other that Coca-Cola, Phillip Morris, and a few other companies, U.S. investment in the new federal states has not been particurly strong. Are you dissopointed?

U.S investment is very low. Until now, it's comprised just a dozen or so companies. This is inadequate.

There are some exceptions. Foreign investors who have already established companies in the East are happy with the quality of their production. For example, General Motors opened a new manufacturing facility in eastern Germany. Its top officials maintain they have the highest standards of all General Motors factories everywhere in Europe. And they told me they have no problems in finding motivated, highley qualified people.


Why are some american companies reluctant to take the plunge in the east?

I think ther have been several reasons. First, the economies of the new federal states are soft. Second some corporations mainatain return on investment in the preconditions for foreign investors remain poor: this area involves legal property questions, the infrastructure, telecommunications, and education. These elements detract from the former communist states' potential as vialible business locations.

And yet may Europian companies aren't nearly as gun-shy.

The French, the British, and others better aquainted with conditions in the former communist states more likely than investors in Houston or Detroit to take a strategic approach that emphasizes middle-term planning. None-theless, during a recent trip to the U.S., I found investors expressing a huge interest in Germany. I wouldn't have understood it if I found otherwise. Eventually, eastern Germany will be among the strongest markets in the European Community.


What are your projections about an economic rebound in the East?

This year we anticipated growth rates of up to 10 percent in the new federal states. These forcasts have been confirmed by the major German institutes for economic research. Ther are other indicators that underscore such prospects. And John-Claud Paye, secretary general of the OECD, predicts the east of Germany will boast thriving modern industry in just a few years.

What sectors or industries would be most approached for North Amarican investors?

There are apportunies ranging from the chemical and computer industries to all types of services. Telecommunications, transportation, equipment for waste disposal: All these sectors are open to foreign investors.

And all the subsidies we offer we are as open for forign investors as for national ones. So there's no difference.

What would be the best way for a foreign investor to pursue a stake in an East German company?

A foreign company might buy an already existing company from the Treuhandanstalt, our vehicle for privatizing former state-owned concerns. Alternately, an investor might make a greenfield investment.


Both you and German officials have said that prospective, foreign investors are treated the same as their German counterparts. But recent press reports noted that Germany's Interhotel lodging chain was sold to sixt, a German car rental firm, while a group heated by Berlin-based Klingbeil group but including America firm Sheraton and Holiday Inn fell short.

Sixt was in the running, but eventually lost the deal. I'm not prepared to accept discrimination against foreign investors. I installed an information center for foreign investors here in Berlin. We are prepared to take Americans and others by the hand--to walk them around our institutions to help them get a fair deal.

The more we succeed in getting foreign know-how, technology and capital into the East, the faster the area will become a player in the international area.

What are you doing to lure foreign investors to the new federal states?

We have been very active in getting the message across. There are, of course, traditional agencies promoting economic cooperation, including German chambers of commerce. But we are not leaving it at that. I have made several journeys to the U.S., Japan and other European countries to campaign for eastern Germany as a place to invest.

How quickly are Eastern Germany getting up to speed in terms of productivity?

There's certainly a strong need for training, particurly in technical areas . But the East Germans also are higher motivated. They are strivng for a level of economic prosperity already attained in the West.


In hindsight, what lessons have you learned in terms of absorbing a communist society and trying to "Westernize" it?

First af all, we had no experience to draw on seeking to intergrate a former communist society and economy into a market systems and a democratic society. Until recently, all the experts were anticipating the time when capitalism would break down. The translation phase was expected to be towards socialism--not away from it.

The most interesting fact we've found is that you don't have to learn liberty. Even after 58 years of a totalitarian sytems --first a Nazi regime, and then a communist regime--people are prepared to be free. Of course, they need technicial and pratical training. But they dont need to learn how to think.

We believe that the former East Germans would need a long time to behave as free people. Not true. Also, we didn't imagine that the disaster of communism could be that catastropic. Wrong again. We believe reports that cited East Germany as the world's ninth largest economy. Their secret services must have been very successful in their work!

What was the most shocking thing that you found?

The total desolation of the infrastructure. East German industries were not at all world class. Another problem was the absolute lack of mid- and small-sized companies. The government destroyed them because they feared private enterprise. But in doing that, they also destroyed entrepreneurial thinking.

Large sections of the road and rail networks and telecommunications suffered serious neglect in the former GDR. They are being modernized by a comprehensive program of investment in the infrastructure.

What does that program involve?

Deutsche Telekom has already installed over half a millon new phones this year. By 1997, it will have invested DM55 billion in improving the phone network. Privatizations by the Treuhandanstalt are making good progress. Our of more than 10,000 firms, 4,300 have already found a buyer. At present. about 25 companies are being privatized each day.


By the year 2000, will the new Germany be a kinder, gentlier economic reich? Will we see a German Europe or a European Germany?

It will be a facinating Europe by the end of the decade. Look for a European Germany, not a German Europe. It's the price of our history, but it's also the way we Germans prefer. We want to integrate ourselves into a growing, European indentity.

But I would be happy if Europe takes on some characteristics of our economic system, for example, the tendency to minimize state intervention in the commercial sphere. Some of these elements are already present in the British, French, and Dutch systems.

How will this affect the relationship between Germany and the U.S?

I think we shouldn't talk--as President Bush did--about the U.S. and Germany as partners in the world leadership. The partners should be the U.S. and the United States of Europe. Germans will be happy as a part of that European entity.
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Article Details
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Title Annotation:economic development of Germany
Author:Donlon, J.P.
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:Mar 1, 1992
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