Germany Faces Growing Deficit, Inflation Fears as Unemployment Soars in Eastern States, West Grows Rapidly. A BOOM AND A BUST

By Francine S. Kiefer, writer of The Christian Science Monitor | The Christian Science Monitor, February 19, 1991 | Go to article overview
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Germany Faces Growing Deficit, Inflation Fears as Unemployment Soars in Eastern States, West Grows Rapidly. A BOOM AND A BUST


Francine S. Kiefer, writer of The Christian Science Monitor, The Christian Science Monitor


ON the windy Baltic coast in the German city of Rostock, residents are shivering through this winter in apartments set at 50 degrees F.

Rostock, once home to East Germany's massive shipbuilding industry, is broke. The contracts to build ships have evaporated, unemployment is skyrocketing, and the city can't afford to heat block after block of communist-style high-rises. Bonn, say local officials, has to do something.

The severity of the economic problems in eastern Germany is just now being more fully recognized in the German capital, nestled comfortably on the banks of the Rhine and far removed from the hardship to the east.

"We underestimated the problems," Economics Minister Jurgen Mollemann said last week, when he introduced a three-year, 30 billion marks (US$20.5 billion) program to revitalize the east German economy. Supporting the five new German states is now "the primary domestic goal," said Dieter Vogel, the government spokesman.

How Bonn handles this economic crisis is not just an issue of domestic importance, however. "We're not living in isolation," says economist Peter Pietsch at Commerzbank. Germany's economy is the anchor for Europe, and the fiscal and monetary decisions made here ripple through the European Community. Troubles in eastern states

The economic situation in eastern Germany is dire. About 2.6 million east Germans are unemployed or working reduced hours, out of a work force of roughly 8 million. Trade with the Soviet Union, the former East Germany's largest market, is at a standstill. Western investment has been slower than expected. Cities and local governments have an inadequate tax base for revenues. Many cities, such as Leipzig, say they are near insolvency.

The fiscal challenge is how to pay for east Germany's revival.

Because of reunification, this year's deficit is expected to be about 140 billion marks, about 4 percent of Germany's gross national product (GNP) - a worse ratio than the United States had during the later Reagan years. This could easily grow if the economic turnaround in eastern Germany is delayed until next year, as some economists predict. In addition, Germany has earmarked 15.6 billion marks for the Gulf war, with further payments possible if the war drags on. Tax increase likely

Germany can control its deficit by raising taxes, cutting costs, or both. Finance Minister Theo Waigel is to present tomorrow the draft budget for 1991 - which will not include a tax increase. Instead, Mr. Waigel wants to wait until spring to assess needs. But he has already announced the likelihood of a tax hike, probably by July 1 and probably on oil, gasoline, or other consumer goods. Chancellor Helmut Kohl says higher taxes will be needed to pay for the Gulf war.

Norbert Walter, chief economist at Deutsche Bank, warns that raising taxes will have a dampening effect on the economy, "exactly at a time when we don't need it." Germany, he says, "is an overtaxed country.

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