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