Unified Germany Likely to Remain an Economic Giant : Commerce: Analysts confirm the government’s 2.5% growth projections despite growing political strains at home and abroad as a result of integrating the east.

Like late spring flowers, the first hints of a new economic life have sprouted along the autobahns of eastern Germany.

“Here, a new motor hotel will be built,” noted a sign just west of this industrial city.

Similar announcements for restaurants and filling stations have appeared on the highway connecting Berlin with Leipzig, while elsewhere in the south, preliminary construction has already begun--evidence that the estimated $30 billion in capital investment committed so far to eastern Germany since last October’s unification has begun to take root.

According to government figures, some 300,000 businesses and 1 million jobs have been created in the east since the communist system collapsed there 18 months ago.

“The reconstruction process has definitely started,” said Peter Peatsch, an economist at Frankfurt’s Commerzbank.

Despite these indicators, no one here believes that a few modest wisps of renewal mean that eastern Germany’s economic misery is about to end.

Indeed, the political and social fallout from the collapse of the controlled economy, put in place over four decades by the former communist state, is expected to worsen in the months ahead, with the more jobs lost than created, at least through next spring.

But the growing conviction that the worst is in sight in the east, coupled with a continued buoyant business climate in the larger western part of the country, has reinforced the conviction that Germany’s role as Europe’s economic powerhouse is in little danger, even in the short term.

Despite Bundesbank President Karl-Otto Poehl’s description of last July’s currency union between the two Germanys as “a disaster,” and such developments as the collapse of trade with eastern Europe and the recession in several large western countries--including the United States, Britain and Sweden--the German economy remains healthy and strong, most indicators show.

A report published last week by the country’s five leading independent economic institutes confirmed the government’s relatively optimistic 2.5% growth projections.

And with the demands of rebuilding the shattered east pushing demands for imports (expected to increase by well in excess of 10%), the fallout from German unity remains a positive influence on the economies of the country’s major trading partners. (Germany’s trade surplus, for example, is expected to drop by more than half--from $63 billion last year to around $26 billion this year, the economic institutes’ report shows.)

“We’ve had a smooth entry into the year 1991, better than anywhere else in the world,” Economics Minister Juergen W. Moellemann told parliament earlier this month. “The government anticipates a real growth of 2.5% to 3%,” Moellemann predicted. “With this kind of dynamic we can do it”--finance the east’s reconstruction.

While economic indicators are encouraging for Germany, problems abound. Managing the east’s integration and dealing with the growing political strains it presents, both internationally and domestically, will create formidable headaches for Chancellor Helmut Kohl in the coming months.

On the international front, German relations with the United States, already strained by Bonn’s equivocal early reaction to the Gulf War, are expected to be complicated further by economic differences in the two crucial areas of interest rate policy and farm subsidies.

At last week’s gathering in Washington of finance ministers from the seven leading industrial nations, tensions were visible, despite statements to the contrary, as the Bush Administration pressured Bonn to lower interest rates to help spur growth, and, with it, ease the effects of the U.S. recession.

There is little hint that the Germans will budge.

“A cut in interest rates is not on the agenda,” Poehl told the London-based Financial Times in an interview last week. “German monetary policy has to remain tight.”

Bonn’s economic policy-makers argue that Germany’s current interest rates are already among the lowest in the European Monetary System. Cutting rates now would risk triggering inflation that would quickly require a sharper rise in interest rates.

“Germany has the best combination of solid growth with low inflation of any country in the world,” noted Peatsch. “That in itself is a contribution to global recovery.”

There are also few signs of a German shift on farm subsidies, which have troubled U.S.-European Community relations and threaten to torpedo the Uruguay Round of global tariff reductions.

Political observers believe that Kohl’s recent domestic problems--highlighted by his Christian Democrats’ stunning defeat in the chancellor’s own home state of Rhineland Palatinate for the first time since World War II--only further reduce prospects of his risking farmer alienation by taking a prominent, unpopular stand for reducing liberal EC subsidies.

Indeed, Kohl is expected to devote most of his political capital in coming months to nurturing an economic revival in the east and preventing a collapse of morale in the beleaguered region.

Leading economic observers expect that the number of those jobless or on shorter working hours in the east could jump from just over 1 million last year to more than 3 million before year’s end, as universities in the east empty the class of ’91 onto the labor market and obsolete, uncompetitive industrial units are forced to close permanently, not just for the traditional summer shutdown.

Western Germany’s big banks and its leading economic institutes, most of which had predicted that the eastern recovery would begin this spring, shifted their forecast back, first to the autumn, then to the spring of next year.

“We all underestimated the severity of the problems,” said Peatsch.

By early 1992, however, the massive infusion into the region of money--this year alone an amount expected to exceed $85 billion (more than half east Germany’s gross domestic product)--will begin to pay off, economists believe.

While Bonn has poured huge sums into the east and will continue to do so, it has also introduced obstacles that have slowed the revival there to a crawl. Learning complicated western German adminstrative methods, for example, has nearly paralyzed newly created state and local governments in the east, while lethargic western German telephone and energy-generating monopolies have slowed the installation of modern communications and utilities.

All are vital to new investment.

“In some ways, east Germany now suffers from a Third World problem of having more money than it can absorb,” said Claus Schnabel, economist at the Institute for the German Economy in Cologne, one of the country’s five major economic institutes. “The lack of local administration is a serious problem in hampering small-scale investment.”

Although the state telephone monopoly, Telekom, has long since embarked on a seven-year, $35-billion program to give the east what it contends will be one of the world’s most modern phone systems, basic telecommunications between eastern and western Germany remain a nightmare. A local call between eastern and western Berlin can require 20 attempts. Calls between western Germany and eastern Berlin often fail to go through at all.

“When the Germans do something, they do it to the last detail,” said Schnabel of the phone system being designed for the east. “Telekom is carefully building a system that will last a hundred years when it finally comes into service, but what is needed is something that will function right now.”

Another worry facing economic planners is how to keep skilled manpower, essential for the revival of the east, from emigrating west, where wages are nearly double and job prospects far better. To maintain eastern wage levels in line with the lower productivity and keep the east an attractive low-wage investment area merely invites skilled workers to leave, economists and social scientists admit. But they also say that to boost wages would discourage investment, increase unemployment and stimulate emigration.

“It’s like trying to square a circle,” said Schnabel. “There’s no answer to the problem.”

To some degree, the answer has been made for the government by Germany’s usually moderate trade unions, which have pushed for excessively large wage settlements in the east as part of a scramble for new membership there.

How much damage these settlements will bring, like so much of Germany’s unification process, remains a giant question mark.

“We’re on new ground,” Schnabel said. “There are no plans, no theories and no guidelines. It’s all trial and error; it’s easy to be critical.”