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Eastern Germany Starts Showing A Pulse


International Outlook

EASTERN GERMANY STARTS SHOWING A PULSE

In some respects, east Germany is a land frozen in time. In east Berlin, every weekday morning, thousands of listless workers emerge from bleak 1950s-style housing projects and trudge off to giant, belching factories. Once the showcase of the socialist system, these plants are nearing collapse. Subsidies from the west are all that sustains them.

But hints of change are in the air. In late June, the Bundestag voted to move the vast apparatus of government from Bonn in the prosperous west to Berlin in the heart of the blighted east. Many see the vote as a sign of determination to speed the turnaround of east Germany. "The decision for Berlin was an essential signal for the recovery of eastern Germany," says Daimler Benz Chairman Edzard Reuter.

The decision to move the government comes as Germany's very costly effort to remake the east's economy is showing signs of paying off, after a frustrating and painful transition year since reunification. The east's economy is getting some powerful medicine in the form of an incredible $86 billion in government spending in 1991 alone. Private investors are kicking in another $37 billion.

NEW JOBS. Most economists now believe the east's economy is hitting bottom, if only because it can't go much lower. While many more industrial plants face shutdown, services are starting to pick up. New building orders, for example, leaped to $172 million in May, 50% above the total in April. One of the more optimistic forecasters, the German Institute for Economic Research in Berlin, now says that gross national product will jump as much as 18% in the second half, after declining 24% in the first half. "The negative things have already happened," says Heinz J. Hockmann, director of Commerz International Capital Management in Frankfurt.

The recovery in services and a few other sectors is creating jobs, offering at least some offset to continuing layoffs in heavy industry. Fresh investment and startups have so far added 1 million new jobs. Much of the demand comes from a core of new entrepreneurs. More than 340,000 east Germans have started new businesses, and banks have granted the startups $6 billion in fresh credits.

At the same time, privatization has picked up steam. The Treuhand agency, the government unit for privatization, has sold 2,500 of the east's 9,000 former state companies and expects the total to approach 60% by yearend. For instance, Otto Bertz, CEO of Potsdam-based heating and plumbing contractor HVT, is scrambling to find workers and buy new equipment. Bertz, who just led a management buyout of the former state-owned company, plans to cash in on the expected surge of construction activity around the capital, just 22 miles away. He predicts a boom that will "radiate for 100 miles around Berlin."

BACKBONE. Beyond that, blue-chip companies are planning to move into or expand in the east. Sony Corp. just announced it will transfer its European headquarters from Cologne to Berlin. Daimler Benz is planning to double its 4,500 east German payroll by the end of the year. As megaprojects such as Daimler's get under way, many believe a backbone of smaller companies will form quickly. Large investors are already drawing medium-size suppliers to east Germany. Volkswagen's decision to invest $3 billion in a new assembly plant in Zwickau and expand an engine plant in Chemnitz has brought seven new auto suppliers to the region, including France's Valeo, Britain's GKN, and Johnson Controls from the U. S.

But the first whiffs of an economic turnaround aren't much consolation to the hundreds of thousands of east German workers who are still facing layoffs between now and yearend as the government slashes payments to the 2 million "short-time" workers. Including the short-timers, who work half-days or less, unemployment will spike sharply this year, to as high as 4 million, or nearly 50% of the work force.

Unemployment at those levels can't be allowed to last long. But there is little more that the government can do. After pouring in money, it's moving itself to Berlin. The east Germans and private business will have to take over now.Gail Schares in Berlin


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