Reunification painis not over yet

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The Independent Online
Even more so than the Germans themselves, German economy watchers are prone to mood swings. The initial reaction to reunification was that it was Wunderbar - for both east and west Germany. A year or so later, the east was set to become the west's mezzogiorno. In the event, the mafia duly turned up - but further east in Moscow.

The latest half-yearly report from the six research institutes in Germany suggests that the dollops of financial aid that have crossed the former iron curtain are beginning to work. The eastern German economy is forecast to grow at about 9 per cent for the second year running. Reindustrialisation is now firmly under way, with manufacturing production set to rise at 13 per cent, well up on the rate in 1994.The "ossies" are starting to come off the drip-feed of western German support: for the first time in five years there will be no growth in overall financial transfers.

But the report also shows the depths of the hole that opened up in eastern Germany. Living standards there would halve overnight without support from the west. Investment may be growing by 13 per cent in 1995, but that is mainly a result of public pump-priming. Businesses that compete directly with western German and foreign companies are still hard pressed to make any money.

Meanwhile, the 4 per cent wage settlement in engineering suggests western Germans are becoming impatient with continuing sacrifice.Pressure for higher wages is "clearly a response to higher taxes", says Klaus Werner Schatz of the Kiel Institute. Personal consumption in the west is set to rise by 1 per cent in real terms in 1995, the same as last year, after a fall of 1 per cent in 1993.

Just as a rising tide lifts all boats, so economic growth alleviates the pain of redistribution. The trouble for Germany is that the recent sharp appreciation of the mark is set to reduce economic growth, the research institutes warn - even taking into account therecent interest rate cut by the Bundesbank.

The report published no forecasts for 1996 but the Berlin Institute is pencilling in a fall tolower than 2 per cent compared with the prediction ofa 3 per cent increase in total output for the current year. The pain of German reunification is by no means over.

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