INSIDE STORY : Germans pay a price for freedom fire sale

How do 2.5 million lost jobs, slashed manufacturing and huge subsidies, laced with scandal, add up to success? John Eisenhammer looks at how the East was sold - and the casualties
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The Independent Online
THERE are not many companies whose claim to fame is to have worked themselves speedily out of existence - especially after achieving the status of biggest conglomerate in the world. But for Birgit Breuel, the passing of 1994 is an occasion for few regrets. The nightmare is over.

For on 31 December, the Treuhand- anstalt, the trustee agency she headed, which was charged with privatising the eastern German economy, ceased to exist. In just four and a half turbulent years, it has passed from colossus to virtually empty shell, its pre-ordained demise closing the most extraordinary, and controversial, chapter in the annals of privatisation.

In 1990, at the time of unification, the Treuhand had about 14,000 companies on its books, not including the myriad small businesses like restaurants, bars and pharmacies. It counted its employees in millions. By the end of 1994, just 60 companies remained unsold. It was the fire sale of the century, a triumph of the market, as it smashed the edifice of the old communist command economy.

But it is an exercise few would dare to repeat. For the Treuhand is assured of its place in the record books, not just because of the immensity of its privatisation, but also the human and financial cost of its zeal.

No enterprise has amassed such losses - about DM265bn (£1.1bn) - with such alacrity. And none has exacted such a heavy price in the destruction of industry and jobs. In eastern Germany, the Treuhand became the symbol of the brute force of capitalism, thePlattmacher, the leveller of the economy. Birgit Breuel, a former finance minister from Lower Saxony, is as tough as nails, and she certainly needed to be. "Where else could people in the East get rid of their anger, if not against us?" she says. "For four years we protected the backs of the politicians by taking the unpopular decisions."

Glad to be out of the firing-line, Breuel steps aside convinced of a job well done in hellish circumstances. "The only clear thing about our task was the goal of the market economy. How to get there was shrouded in darkness," she says. But others are less impressed, such as Heiner Flassbeck, chief economist at the DIW economics institute in Berlin. "DM265bn losses in just four years, that is no reason to celebrate. It is tempting to say, at that price, anyone could have done it. Is that an achievement?"

It was meant to have been very different. Detlev Rohwedder, the first head of the Treuhand, who was assassinated by Red Army Faction terrorists in April 1991, used to muse about how the agency's coffers would end the sell-off overflowing with profits of DM600bn. It was a catastrophic misjudgement, but typical of those euphoric early days of unification. Chancellor Helmut Kohl promised blossoming landscapes, and that no one in the East would be worse off after unification.

Reality soon took over. Within the closed communist trading bloc, Comecon, East Germany had achieved a certain success - it claimed to be the 10th industrial power in the world. But in open international competition, fatal flaws were mercilessly revealed. The capital stock was worthless; the infrastructure a nightmare. It will take a generation to repay the debt of rebuilding eastern Germany.

But by the time this realisation dawned, it was too late. The political force of unification had swept all doubts before it. "The economy just had to live with what was decided," says Wolf Schode, the Treuhand's chief spokesman. There is no disputing that political pressures for prompt unification were overwhelming; but the readiness in the West to seize the historic opportunity was founded on the confidence that it was rich enough to take political decisions virtually regardless of economic consequences.

The Treuhand's difficult task was rendered herculean by its political masters. The introduction of the deutschmark for one ostmark in the summer of 1990 delivered a revaluation shock to the East the likes of which no economy has undergone. There followedthe agreement rapidly to raise eastern wages to basic western levels, despite vast differences in productivity. Between 1991 and 1994, basic wages in the East rose by 53 per cent. Kohl's expressions of dismay when the East lost its vital markets in the former communist bloc were disingenuous. The hard-currency deutschmark and huge wage rises could not have had any other effect.

The Treuhand was also ravaged by the curse of eastern Germany's ownership chaos, where conflicting claims on confiscated property, going back to Nazi times, made the break-up and sale of the vast state conglomerates a nightmare. The government's principled decision to give restitution priority over compensation meant every competing claim, often in the absence of documents, had to be painstakingly processed.

Rolf Schafer knows all about patience. This year, aged 81, he finally got back his Dresden engineering business expropriated by the communists in 1972. He had been negotiating with the Treuhand since 1990. Production in the East fell by more than half inthose first turbulent years of privatisation. The numbers in work fell from 9.7 million at unification to 6.2 million in the first half of last year. Manufacturing industry was devastated, and about 2.5 million jobs were lost. "There was muc h talk of preserving the industrial cores of the East, but in the end little more than the pips have been saved," says Rudiger Pohl, head of the IWH economic institute in the eastern city of Halle. Of the 180,000 once employed in the eastern chemicals se ctor, lessthan 30,000 still have jobs. High-profile investments such as Elf Aquitaine's refinery, Siemens's plan for a chip factory near Dresden, and Opel's car plant at Eisenach - all bought with hugely expensive inducements - could not make up for the destruction.

"The political pressure to privatise quickly was immense," says Detlev Kalischer, head of the Treuhand office in Halle. This was no easy task in such chaotic conditions. "It was like having to fly a plane while still building it," he says. "We were overcome by the need to take decisions immediately," notes Breuel. Struggling to build up its organisation, the Treuhand hardly attracted the best of the West. Many were retired businessmen looking to bump up their pensions, or failed managers hoping for anot her chance.

"Of the five people I would deal with, usually three were no good," recalls Eckhard Krone, who negotiated with the Treuhand the sale of the Hennigsdorf steel works to Italy's Riva group. "But most frustrating of all was that you were constantly dealing with different people. The Treuhand was a revolving door."

What the Treuhand had little difficulty in attracting, by contrast, were buyers with an unscrupulous eye for the main chance. "In those days the jackals were everywhere," says Kalischer - people looking to snap up companies and flog them for the real estate. "One of my biggest regrets is that in those first two years there was never time properly to check out investors. It was a mass business, and everything had to go." Amid such dogmatic haste, it was inevitable that many succeeded in hoodwinking the Treuhand. The city of Halle became synonymous with such abuses. The first director of the Treuhand office there, Wilfried Glock, fled amid accusations of bribe-taking.

The total damage is estimated at DM24m, not counting the misery of further job losses, as scores of companies had to be privatised all over again. Glock now awaits trial in a Stuttgart jail. His luck ran out last March, when he was arrested in Texas for speeding in his Rolls-Royce, and promptly deported.

Breuel is quick to point out that such scandals amount to only a fraction of the Treuhand's overall record.

The privatisation dash was driven by the unquestioning faith of the Bonn politicians in the healing powers of the market. "They were completely transported by romantic notions of West Germany in 1948, of currency reform, the d-mark and Wirtschaftswunder (economic miracle). The comparison could hardly have been less appropriate," says Heiner Flassbeck. Moreover, the government was convinced foreign business people shared its enthusiasm for eastern Germany. It was a shock to find they did not.

"Investors were hardly queueing up," says Rudiger Pohl. "The problem was that to secure the eastern market, most did not need to invest there, but supply it from outside. People had to be pushed."

More often than not the Treuhand found itself dealing with just one bidder for a company. The vision of earning DM600bn rapidly vanished. Instead the Treuhand found itself having to offer inducements to attract investors. Most could count on having around 40 per cent of their costs paid for. And for some, the generosity stretched to 100 per cent of the deal. The Treuhand sold land at a fraction of its market value, assumed the debts of the businesses to be sold, and the cost of environmental clean-up, and often covered losses for a given period, in addition to the normal start-up investment subsidies. Kvaerner of Norway went into negotiations with the Treuhand expecting to pay a token single mark for the heavily loss-making War now shipyards, and came away with DM500m for its trouble.

For all the political rhetoric about the primacy of the market, eastern Germany was a place where the fiction of a functioning society was preserved by an unprecedented flow of public funds. Domestic consumption exceeds production by over two-thirds, thanks to western handouts of DM150bn a year. It is the most heavily subsidised region in the world, having received more than twice as much aid as the OECD gave the Third World over the same period.

Little wonder, then, that the East is one big building site. From very low levels, the regional economy is growing powerfully; GDP is expected to have expanded by 9 per cent last year. Industrial production, after its free fall, has been rising since mid-1993. Helmut Kohl's blossoms are ever more apparent amid the ruins. But it requires a leap of faith to share Birgit Breuel's view that eastern Germany is already one of the most modern economic regions in Europe.

A proper judgement on the Treuhand's achievement will have to wait five years or so. The destiny of eastern Germany's economy lies beyond the headline-grabbing mammoth investments - with the thousands of small and medium-sized firms. Most are heavily borrowed.

"There were too many subsidies and not enough proper assessment of entrepreneurial risk, as sell-offs were rushed through," says Flassbeck. "There could be a lot of failures."

But that will not be the Treuhand's problem. On 31 December it played its final act as scapegoat. "The creation of the Treuhand was one of the clever things the politicians did," says Wolf Schode. "It got blamed for everything that went wrong in the eastern German economy. And when it goes, it will take the blame with it."