Shadow budgets hide German problems: Europe's leading economies are battered as France wrestles with Maastricht and Germany battles with unification

THEO WAIGEL, the German Finance Minister, called yesterday for a 'two- to three-year wage freeze'. Such a sacrifice, he said, would be 'preferable to tax increases'. Opening the 1993 budget debate in parliament, Mr Waigel said that the 'iron discipline of austerity' was needed to stabilise an economy that was not growing. Mr Waigel held up the government's budgeted increase in expenditure for 1993 of 2.5 per cent as a model of restraint.

His argument is badly weakened, however, by widespread scepticism. The apparent curb in the rise of state outgoings owes much to huge problem areas being taken out of the official budget and placed in so- called shadow budgets.

According to the calculations of Lothar Muller, a member of the Bundesbank's central policy-making council, state indebtedness will have increased at the end of next year by nearly DM800bn ( pounds 294bn). More than half of this increase is, however, hidden in the shadow budgets. While financing for the large public transfers from west to east for this year and next (some DM340bn) has been secured, it is apparent that the medium-term financing for such continuing transfers has not.

With the western German economy slowing down rapidly, the sums no longer add up. The recent proposals for firms and the relatively wealthy in the west to make compulsory interest-free loans to the east was the first significant indicator that a government U-turn on tax increases is not far off. Each day senior ministers dismantle a few more blocks from the government's 'no tax increases' barricade. Mr Waigel knows there is little hope of a wage freeze.

There is a chance, however, of encouraging restraint. This is essential if struggling eastern German firms are to have any hope of survival, and if high-cost western German industry is to regain some of its lost competitiveness. But the government needs to offer a quid pro quo. Hence the sudden discussion about some form of hidden tax on the wealthy who, the unions strongly believe, have escaped lightly from the burden of unification. This is what is meant by the 'solidarity pact': union wage restraint in return for squeezing the wealthy.

Just how difficult this will be to achieve has been highlighted by this week's chaos in Chancellor Helmut Kohl's governing coalition. This unprecedented disarray has dealt a heavy blow to the small band on the Bundesbank's central council who favour easing interest rates. For it is locked in a merciless battle over public spending with the government. Aware that the massive transfers to the east will continue for years, the Bundesbank is trying to force huge compensatory cuts in the west, to avoid a perilous explosion of state indebtedness.

So far, it has had little success. Only the shadow budgets allow Mr Waigel to present himself as a model of austerity. Meanwhile, spending by the western states grows by around 6 to 7 per cent a year. The record high interest rates are a reflection of the Bundesbank's determination to change this. It knows that the strength of the mark lies largely in special international factors. This artificial situation could crack at any moment, should fears take hold that the economy is overburdening itself. The high interest rates are likely to stay until the Bundesbank is satisfied that public spending in the west really is being cut.

'Through its efforts at consolidation and stabilisation, Germany will meet the expectations of its partners and provide the basis for lower interest rates,' Mr Waigel said yesterday. Frankfurt and the rest of Europe are waiting for action to follow the words.

(Photograph omitted)