The unmaking of eastern Germany: Unsaleable firms are damaging the others, says John Eisenhammer

THE SIMMERING tensions between Germany's business community and its politicians since reunification are boiling into a full-scale public row as the country sinks further into recession, and its badly stretched resources become scarcer. At stake is the shape and development of eastern Germany's struggling economy.

It is nearly three years since reunification and hardly anyone is celebrating. The government in Bonn mutters darkly that the big western banks have been unpatriotically strict in handing out credits in the east, stunting the development of new businesses, especially in industry. Retorting that there are more than enough funds available in the east, Frankfurt's banking barons hardly bother any more to hide their dislike of a government that has lurched from one blunder to another.

The mutual recrimination is likely to continue for as long as the eastern German economy remains in what the main research institutes call a 'critical state'. When this might end is anyone's guess, but in the meantime, the west continues to pump massive amounts of money - DM130bn ( pounds 51.8bn) last year, even more this - into the east.

The task the west must accomplish is the transformation of a system made up of a giant industrial Kombinate into one driven by small and medium- sized firms - the classic German mittelstand. This was always destined to take far longer than the absurdly optimistic expectations of many in the west. Instead of a self-balancing process of decline and regeneration, eastern Germany has been ravaged by de-industrialisation at a pace without modern parallel. The region's GDP last year was 40 per cent below what it had been in 1989. An equivalent effect would have been to cast west Germany 20 years back in time. Of the 3.3 million people who used to work in industry in the east, 750,000 still have jobs.

Rather than sinking into deprivation, however, the region maintains the fiction of a bustling western prosperity, with flashy shops full of fancy goods and public works as far as the eye can see. Thanks to the billions from the west, eastern Germany last year was able to invest and consume 183 per cent of its GDP.

The fact that official unemployment in the east is 'only' 15 per cent, despite the collapse of most of the region's industry and agriculture, owes much to the generously subsidised early retirement, job creation, maintenance and training schemes. In reality, unemployment is between 30 and 50 per cent.

Behind the failure of Chancellor Helmut Kohl's expectations of industrial regeneration in the east is the almost total absence of a mittelstand. In between the headline-grabbing investments of western giants such as Siemens and Daimler- Benz, and flourishing artisan and craft activity, there are only rare mittelstand shoots pushing through the scorched earth of de-industrialisation.

It was panic at the seemingly unstoppable nature of de- industrialisation, and the fear it would be accelerated by recession in the west, that prompted Chancellor Kohl to switch to writing blank cheques for the remaining unprivatised firms late last year - part of his policy for the so-called 'preservation of industrial cores'. About a third of those still employed by industry work for hopeless cases, in sectors such as textiles, shipbuilding and machine tools. Exposing them to the market would be the same as putting workers out on the street.

So these cores are to be kept alive; 'the bigger your losses, the higher the subsidy,' as Tyll Necker, head of the Confederation of German Industry, put it. The Treuhand, the agency set up to restructure east German industry, has set up a number of management holding companies, each containing 10 or so unsaleable firms. These are placed under the control of western managers, who have to invest some money. The Treuhand remains the biggest shareholder, covering investment and losses for three or four years. The idea is that, in this time, the firms will become capable of standing on their own feet.

However, the way in which many of them are trying to reach this goal is proving highly controversial. Increasing numbers of newly privatised firms, some of them the beginnings of a mittelstand, complain they are being cut down at the knees by the aggressive pricing policies of these subsidised management holding companies.

The Zwickauer Kammgarn, producing worsted yarn, is part of one such 'industrial core'. Millions have been invested in it by the Treuhand; productivity is high and quality excellent. But it has no market. 'The only way for us into the already over- crowded western markets is through prices,' says Hans Wohlfart, ZK's director. 'We are covered for the next three years or so. In that time, I hope space will be made by one of our competitors going under.'

The competition is not amused. Peter Streckmann, technical director of an eastern plant making specialist pressure vessels and container tanks, which belongs to the western German Kramer group, says: 'Every time we make a tender and fail to get it because of under-bidding, we see it is a Treuhand firm.'

The big banks, still smarting at the government's insinuations of insufficient economic patriotism, have rounded on the industrial cores policy as the latest grand folly of the politicians. 'How can it make sense to hold on to these industrial cores, which in their desperation seek to survive with dumping prices?', demands Georg Krupp, a board member of Deutsche Bank.

'They are quite simply destroying the market for new firms,' he adds.

(Photograph omitted)