Unifying Germany Proves Costly : Massive Aid to East Takes Big Toll on Nation’s Economy

It has been almost two years since the powerful West German economy absorbed its smaller, weaker, formerly Communist eastern counterpart in a much-heralded union of economies and currencies.

And the unified country continues to struggle with the consequences.

A report by Germany’s five leading economic institutes presented to the government Monday declared that the eastern economy has, so far, failed to grow on its own. Instead, the east has existed mainly on a massive transfer of government funds from the west--a transfer that in 1991 and 1992 is expected to total well in excess of $110 billion.

The drag of these transfers, the delay in the east’s recovery and the continued recession in key export markets--including the United States--led the economists to cut the projected economic growth for Germany this year to 1%.

The figure is half what the same prestigious institutes predicted only six months ago. If borne out through the year, such weakness in Germany--a major U.S. trading partner and the linchpin of Europe’s economic system--would pose a threat to the fragile recovery taking hold in the United States.

Further, the experts warned that only interest rate cuts by the German Federal Bundesbank and a series of modest wage settlements in the current round of labor negotiations would save Europe’s largest economy from a further slowdown.

Last year, Germany remained one of the few vibrant economies in a Western Europe plagued by recession, growing 3.1%. The U.S. economy, by comparison, shrank 0.7% in 1991.

The economic institutes blamed the German slowdown in part on the Bundesbank’s decision to maintain high interest rates, saying it had dampened growth prospects domestically--in addition to its intended effect of dampening inflation.

The policy also was faulted for blocking recovery in key European export markets, such as Britain and France, whose currencies are linked to the German mark.

The experts--backing U.S. policy--urged the Bundesbank to cut its base discount rate, now at a post-World War II high of 8%, to stimulate economic growth throughout Western Europe.

In presenting the report at a news conference in Bonn, Hans-Juergen Schmahl of the HWWA Institute for Economic Research in Hamburg, also urged trade unions to reduce their wage demands in order to contain production costs and competitiveness.

“What we’re seeing now (in terms of trade union demands) is much too high,” Schmahl said.

His comments came as the 2.1 million strong civil servants’ union threatened to go on strike, following the government’s rejection of an arbitrator’s recommended wage settlement of 5.4% for 1992.

The union leadership had accepted the recommendation, despite its initial proposal of a 9.5% settlement.

Government negotiators have rejected the arbitration offer and refused to improve their initial 3.1% offer.

The institutes strongly criticized large wage increases in the eastern part of the country, claiming they would only discourage investment there; the economists also said such pay hikes would delay recovery in the east, because they have come without any matching jump in productivity.

The economic report predicted that after a 30% fall in production last year, the eastern German regional economy would grow by about 10.5% this year.

The growth, however, will be generated more by transfer payments from the west than a revival of eastern economic activity, the report said.