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While Trains Stop, Germany's Economy Derails


International Business

WHILE TRAINS STOP, GERMANY'S ECONOMY DERAILS

It's 7 a.m. at Frankfurt's main railway station and the start of another workday. But in the cavernous Hauptbahnhof, the trains aren't running on time. Indeed, they aren't running at all. For the first time in nearly two decades, Germany's rail workers are out on strike, leaving tracks empty and information boards blank.

For commuters accustomed to efficient service and labor peace, the rail walkout is shock enough. But from one end of Germany to the other, nearly 200,000 of the country's 2.8 million public-sector employees have taken to the streets. Irate over Chancellor Helmut Kohl's refusal to grant 5.4% wage hikes, the union workers are letting garbage pile up in Munich and are standing by as 35-mile-long traffic jams clog highways around Dusseldorf. "We must step up the pressure," vows Wolfgang Warburg, the public-service union's deputy chief.

In confronting the public-sector unions, Kohl is for the first time admitting something a growing number of Germans already know: With its cost exceeding $1.8 trillion, unification is going awry. Says Commerzbank economist Peter Pietsch: "We were wrong to say we could have a new economic miracle and it wouldn't cost much at all."

BROKEN DREAMS? The hoped-for miracle is rapidly becoming a morass. Rising inflation, high interest rates, and an orgy of government borrowing are unraveling Germany's consensus-driven economy and could even prolong a global economic slump. But for a Europe whose economic future is inextricably linked with Germany's, Kohl's showdown with labor is a watershed. If the Chancellor can't persuade western Germans to shoulder the cost of rebuilding the east, more than unification will flounder. So will Kohl's dream of a united Europe cast in Germany's image.

Already, Germany's major corporations are abandoning hopes of creating an Asian-style tiger on their eastern doorstep. With employers promising eastern workers wage parity with their $13-an-hour western counterparts by 1996, manufacturers are fleeing Germany for the real Tigers and elsewhere. Volkswagen, for example, plans to invest more than $25 billion outside Germany in the 1990s. "We have to produce abroad to give ourselves a future," says CEO Carl H. Hahn. Just as the public workers were beginning their walkout, Mercedes-Benz said it would slash 20,000 jobs by 1994. Officials have already indicated they might shift some production to Mexico.

Of course, Germany was a high-cost nation even before the Berlin Wall fell in 1989. But inflation is now at a 10-year high of 4.8%. With metalworkers threatening to follow public-sector employees off the job, both Kohl and Bundesbank President Helmut Schlesinger fear the Germans--and Europeans--will price themselves out of world competition. In fact, machinery giant ABB Asea Brown Boveri already plans to cut costs by "closing factories this year and next across Europe," warns ABB's German operations chief, Eberhard von Koerber.

Such concerns prompted the Chancellor to take on the public-employee unions, much as the Reagan Administration confronted striking air-traffic controllers in the 1980s. With national and local governments already $110 billion in the red, Kohl believes the 5.4% wage hike recommended by an arbitrator last month will cost an additional $1.2 billion that taxpayers can't afford. Kohl's offer: 4.8%.

The Chancellor's success will set the pace for the rest of his cost-cutting agenda. To reduce government deficits, Kohl wants to slash subsidies to western states, squeeze spending by state and municipal governments, and prune Germany's cradle-to-grave welfare system. That's sure to anger voters. Weary of being asked to pay to rebuild the east, support Russia, and house asylum-seekers from Eastern Europe, voters in April's state elections deserted Kohl's Christian Democrats and the opposition Social Democrats in favor of extreme right-wing parties.

LOST ALLY. Kohl's problems only deepened with the Apr. 27 resignation of longtime Foreign Minister Hans-Dietrich Genscher, the most popular politician in Germany and the Chancellor's main ally in pushing for European integration. Genscher's resignation immediately touched off a power struggle among members of Kohl's ruling coalition. That bodes ill for unity in the runup to the critical elections facing the government in 1994.

Worse, Kohl no longer will be able to count on Genscher to persuade voters that last December's Maastricht Treaty on European union will be in their best interests. "They are only now waking up to what European union really will mean and what it will cost," says Rosalind Stevens-Strohmann of London's Royal Institute of International Affairs.

With elections looming, Kohl has little time to change voters' minds. Frankfurt bankers figure if he stays his ground, the Chancellor will be able to limit public-sector raises to around 5%. Such a concession could open the door for industrial settlements well under the 6.4% increase won by steelworkers in March. That, in turn, would reduce fears of a wage-price spiral and permit lower interest rates, perhaps by fall.

Through the turmoil, Kohl has remained upbeat. Facing reporters on Apr. 27, he insisted that the German economy will grow 2% this year and 3% in 1993. By yearend, he maintained, inflation will fall to "three point something, which we can live with."

To deliver on those promises, Kohl will have to balance his obligations to hopeful east Germans, resentful west Germans, and anxious Europeans. In his decade as Chancellor, Kohl has never faced such a daunting challenge.John Templeman and Bill Javetski in Bonn, with Mark Maremont in London and bureau reports


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