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Europe's Powerhouse Starts To Clank And Grind


International Business

EUROPE'S POWERHOUSE STARTS TO CLANK AND GRIND

Fall is only a month old, but a wintry chill is already settling over Germany's economy. Even though Finance Minister Theo Waigel assured his Group of 7 colleagues at their Oct. 12 meeting in Bangkok that Germany remains an island of stability as world growth slackens, Europe's powerhouse is showing signs of wear.

Burdened by high interest rates, soaring wages, and $100 billion in unification expenses, Germany's economy appears to have declined for two consecutive quarters--the classic definition of a recession. Even the beginnings of a turnaround in eastern Germany (box), whose flat-broke economy may grow 10% next year, won't be enough to halt the national decline (charts). Says Dieter Wermuth, Frankfurt-based managing director of France's Caisse des Depots et Consignations: "The economy has stagnated."

SPECTACULAR BOOM. Stagnation spells bad news at home and abroad. Claiming immigrants have been usurping Germans' jobs and housing, for example, ultra-right-wing groups have been escalating their violent attacks against the 5.6 million foreigners who live and work in Europe's biggest economy. But many European states, which for more than a year have been relying on the reunified Germany's surging demand for imports to help ward off recessions of their own, also have reason to worry. "Weakness in Germany will result in much weaker European growth in 1992," says Richard Freeman, chief economist at British chemical maker Imperial Chemical Industries PLC.

Germany's post-unification demand boom has been spectacular. It powered western Germany to a 4.6% jump in GNP last year and sucked in imports like crazy. That growth now looks set to taper off: In August, for example, Germany showed a relatively slim $1.8 billion trade surplus. The import slowdown reflects a free-fall in consumer and business confidence. Indeed, economist Andrea Koop of Bank in Liechtenstein (Frankfurt) estimates that GNP plunged at a 5.6% annual rate in the third quarter. That's far worse than the 2%-a-year decline in the previous three months.

Still, Bundesbank President Helmut Schlesinger shows no signs of wanting to stimulate demand by lowering interest rates. Although short-term rates are hovering around 9%, Schlesinger vows he won't let up until inflation is half its current 4% level.

Schlesinger's stand is drawing fire from France's conservative opposition, which is pressing French Finance Minister Pierre Beregovoy to devalue the franc, if necessary, to get his country's rates down. And British Prime Minister John Major, who wants another rate cut ahead of general elections that must take place by next June, probably won't get his wish fulfilled until the Bundesbank moves.

BACK FOR MORE. He may have to wait a while. Keenly worried about the risk of a wage-price spiral, Schlesinger is focusing almost exclusively on domestic concerns. To help pay for eastern Germany's reconstruction, Bonn hiked energy taxes and slapped on a 7.5% income tax surcharge on July 1. The new levies snatched back almost all the gains workers had made from wage settlements earlier this year.

As a result, workers are coming back for more. Although metal and auto workers already obtained 7% raises this year, Volkswagen's influential labor unions are now demanding a 10% hike for 1992. The unions are expected to settle for 6.5%, setting an example for other wage deals nationwide. On top of 1991's gains, such agreements promise to be a heavy drag on corporate earnings. A chemical industry employers' group, for instance, says its workers now cost them some $30 per hour, including fringe benefits. It is much the same story throughout German business. "If we go on like this," complains German Industry & Trade Assn. President Hans-Peter Stihl, "we will lose our competitiveness."

Some companies are fighting back. Chemical maker BASF, for example, is slashing employee bonuses by 15%, after cutting them 19% last year. And others are simply moving production out of the country. The Robert Bosch electrical group recently slashed 1,400 jobs and moved some of its production to cheaper sites in Malaysia. Daimler Benz's AEG unit is threatening to close its Roffhausen typewriter factory, which employs 2,700 and is losing $120 million a year. And Siemens, which is facing intense Asian competition, "will have to exploit every means at our disposal to reduce costs," warns CEO Karlheinz Kaske. It already plans to shutter one telephone-handset factory employing close to 1,000 workers.

GROWING GLOOM. The plant closings, tax hikes, and tough talk on interest rates are beginning to take their toll on consumers. They have all but abandoned auto showrooms, sparking a 20% drop in car sales in August and a further 1% in September. They are also giving retailers the brush. "Our sales have fallen in July, August, and September," says Elmar Kratz, a spokesman for the Hertie department-store chain.

Despite the growing economic gloom, Chancellor Helmut Kohl's economic policymakers aren't yet willing even to admit there is a problem, much less take steps to give the German economy a push. Largely because of the 9.2% annual growth rate Germany recorded in the first quarter, Bonn is sticking to its predictions that GNP still will be up 3% this year. "I am not prepared to talk about recession," says Economics Minister Jurgen W. Mollemann. Nonethleless, many others believe one has set in.

With the next national elections still three years away, Kohl can afford to bide his time. By the middle of next year, a slow economy and the scheduled expiration of Kohl's income-tax surcharge may permit the Bundesbank to moderate its stance on interest rates. But until then, Germans may have little choice but to tough it out.John Templeman in Bonn


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