VIEWPOINTS : West Germany Set the Pattern for Europe’s Recovery : Tougher Budget Controls, Supply-Side Policies Inspire Confidence, Growth

West Germany, the world’s third-largest market economy, seems headed for a new era of prosperity--in substantial measure made possible by Chancellor Helmut Kohl’s reform program, which his conservative-liberal coalition initiated after taking power in Bonn three years ago.

The original goals of that program--to “consolidate” a runaway budget while cutting inflation and boosting business confidence--are being achieved.

In its annual report on the German economy, for instance, the Paris-based Organization for Economic Cooperation and Development notes with approval that over the past three years, the combined public sector deficit has already been reduced from nearly 4% of gross national product to 2.3%.

Equally significant is the Kohl government’s embrace of “supply-side” policies, designed to stimulate more growth and innovation in West Germany’s heavily administered economy.

The capstone of these efforts involves the equivalent of a $7.7-billion personal income tax reduction package, scheduled to take effect between 1986 and 1988.

Other supply-side initiatives involve turning over some state-run industries to private enterprise; the removal of regulatory obstacles and the liberalization of capital markets so that small- and medium-sized entrepreneurs obtain access to venture funds.

How have those efforts fared? The results are mixed.

The coalition’s widely touted initiative to sell off public assets, for instance, suffered a major rebuke recently when Kohl’s arch conservative rival, Franz Josef Strauss, informed Kohl that he and his Bavarian supporters were opposed to the partial privatization of Lufthansa Airlines.

Battle Only Just Begins

But the battle has only just begun. Economics Minister Martin Bangemann confidently maintains that state subsidies will be reduced by about $500 million in 1986.

Kohl has registered more tangible successes in promoting the revival of business confidence, as reflected in surging profits for a number of key manufacturing firms.

Case in point, the mechanical engineering industry, where domestic demand virtually doubled between 1983 and 1984.

This development has brought with it badly needed good news on the employment front with the expected addition of about 30,000 engineering positions.

Overall, about 200,000 new jobs were created in West Germany last year, and an equivalent number of jobs is expected to be created this year.

The coalition is also making headway in its widely touted effort to help revive bootstrap entrepreneurship--notably, the government’s $270-million venture capital program through which private firms lend seed money to small- and medium-sized businesses.

As the respected Hamburg weekly, Die Zeit, observes: “The most stable jobs are now found in the smallest firms.”

That explains why such corporate giants as Daimler-Benz, Nixdorf and Siemens are funneling millions of German marks into venture capital investment funds.

States Contributed, Too

The Kohl government’s efforts to improve business confidence have been given an added stimulus by parallel actions undertaken by individual federal states that actively encourage the formation of new, high-tech and service enterprises on the local level.

The biggest success story up to now is Baden-Wuerttemberg, whose dynamic Christian Democratic governor, Lothar Spaeth, has turned his once-poor state into a center of entrepreneurial activity.

Between 4,000 and 6,000 such firms are established in Baden-Wuerttemberg each year.

Likewise, there has been a quiet revolution taking place within West German universities which have in the past been sharply criticized for their unwillingness to impart basic entrepreneurial skills to the new generation.

The message has gotten through. In West Berlin, for instance, a Center for Innovation and New Enterprises has been established at the Free University.

The center provides training in business administration, while stimulating long overdue collaboration between students and “live” entrepreneurs.

Germans are noted for their pessimism. So despite the encouraging economic news, it has been difficult for them to own up to the obvious.

As of late, though, this pose has been abandoned. “Things are developing much better than we expected,” cheerfully admitted a top economic aide to Kohl at the end of 1984.

Hans-Guenther Sohl, former president of the Confederation of German Industry, adopts a more buoyant pose: “The Federal Republic of Germany’s low inflation, budget reductions and trade surpluses have made it the wonder boy of Europe,” he declared recently.

Investment Boom

This new-found bullishness is confirmed by growing indications of an imminent investment boom.

According to the respected Industriekreditbank, a Frankfurt-based institution that finances medium-sized businesses, this boom will be felt most directly in the strategically vital high-tech sectors such as microelectronics and data-processing equipment where West Germany has been losing its competitive edge.

In sum, investment outlays could rise by 8% in real terms for 1985--the highest rate of investment since the late 1970s.

What about the future? At this point, the danger facing West Germany’s ruling conservatives is not that they will do too much to stimulate growth--but that they will do too little.

In late October, the five “senior” research institutes which advise Bonn on economic policy exhibited a rare display of solidarity by unanimously urging the government to push forward the second phase of its tax-reduction package by one year, from 1988 to 1987.

Such a step would certainly be applauded by West Germany’s Common Market partners, which look to future growth in Western Europe’s most powerful economy as the decisive factor that could pull the rest of them out of recession.

As a result of 1985’s healthy trade and current-accounts surpluses and improved prospects for domestic economic growth, West Germany is indeed well positioned to undertake some vigorous actions that could work to its benefit and to that of its allies, including the United States.