Kohl Prods The Giant

On a cold January morning in Berlin, the outlook for the new year is grim. By 9 a.m., hundreds of anxious job-seekers have already gathered in the city's nine unemployment offices, filling waiting rooms with a haze of cigarette smoke. Since Germany's unification, east Berlin's unemployment rate has climbed close to 13%. And to many of Berlin's new jobless, Chancellor Helmut Kohl is to blame. "He is letting the smaller people down," grieves Detlef, a 34-year-old warehouseman who lost his job a year ago.

Berlin laborers aren't the only ones pointing fingers at Kohl this winter. As a $100 billion-a-year reunification bill and painfully high interest rates push Germany into its worst slump in a decade, industry chiefs, economists, and European allies from Ireland to Italy are pleading with the burly Chancellor to get on the stick. "Our markets are sliding away," says Hans-Jurgen Marczinski, managing director of Thyssen Maschinenbau, a leading machine-tool maker. "There should be less blather and more action."

Until recently, such calls had gone unheeded. But in past weeks, Kohl finally appears to have awakened. Mindful that America's prolonged recession swept George Bush from office, Kohl is mounting a swift offensive to rescue the economy and save his Conservative coalition government--and himself--from possible defeat in 1994's state and federal elections.

JUICY BONE. By late January, Kohl hopes to have forged an ambitious "solidarity pact" among federal, state, and local governments and unions, industries, and banks. To get what he wants, the Chancellor has been summoning opposition and labor leaders to his Bonn residence for private dinners lasting well into the night. Showing he's willing to deal, Kohl recently tossed his Social Democratic Party opponents an important bone: continued federal subsidies for the core of eastern Germany's state industries. But the Chancellor also argues that Germans must accept painful cuts in social programs and a loss of real income after a decade of steady growth. He maintains his pact is vital to preserve Germany's sagging competitiveness, accelerate the slow recovery of the formerly Communist East, and help foot the staggering cost of unification. Without an accord, Germany--and Kohl's dream for an economically and politically united Europe--is sure to founder.

A solidarity pact has been needed only twice since 1945 to propel Germany out of dangerous economic shoals. But Kohl has ample reason to seek such drastic action. In this winter of discontent, Bonn's federal budget deficit is mushrooming (charts). With industry orders and production falling (table), economists see German gross domestic product dropping more than 1% in 1993 after expanding a meager 1.5% the year before. If unemployment continues to mount, violent attacks on foreigners by right-wing radicals could worsen. For these reasons and more, Kohl is likely to win his pact. Even Social Democratic leader Bjorn Engholm concedes that "if we work at odds with one another, nothing will move at all."

RATE CUT? Kohl's deal, involving a commitment to slash federal spending and cap wage increases, would pave the way for the Bundesbank to cut Germany's 8.6% short-term interest rates, perhaps by as much as 2.5 percentage points, beginning as early as February or March. That could ease pressure on France and other neighboring economies, restore stability to Europe's currency system, and even bring the German recession to a close by yearend. "With a cut in rates, we would see a black cloud lifted," says Robert Faircloth, chief operating officer of British conglomerate BTR PLC.

Hints of Kohl's new deal are emerging. Inflation averaged 4% in 1992. But Germany's dire straits are beginning to persuade unions to moderate wage increase demands. The powerful metalworkers' union I. G. Metall, for example, has agreed to a mere 3% increase this year, and public-sector negotiations for 1993 are also likely to come in around that level. Such moderation, says economist Richard Reid of UBS Phillips & Drew, could allow inflation to decline to 2.1% by 1994.

Keeping labor costs down in eastern Germany will be a thornier affair. Eastern wages are skyrocketing under a lavish post-unification deal to ratchet them up to western levels as soon as 1995. April's scheduled increase for eastern metalworkers alone is 26%. But with eastern productivity only a third of that in the west, such a jump would deal a death blow to hundreds of money-losing machinery makers. "You might as well close their doors today," says Otto Lambsdorff, head of the the governing coalition's Free Democratic Party.

So far, I. G. Metall has refused to renegotiate the eastern deal. But with 3 million easterners out of work, government officials expect the union soon will have to accept a compromise exempting ailing companies from the wage increase and allowing them to strike their own pay deals. Such a crack in Germany's broadly binding industrywide contracts could even give employers leverage to forge similar agreements in the west and win new flexibility in work rules.

With labor expected to accede to his pact, Kohl is stepping up the squeeze on state and federal coffers. He is seeking deep budget cuts, including $5 billion to $7.5 billion in a supplemental budget for 1993 and $19 billion to $31 billion over the next three years. That will mean revamping Germany's cradle-to-grave social security system. "The government wants to take an ax not only to a branch of the social welfare system, but to the entire tree," fumes Socialist Engholm.

But Kohl maintains that there's fat to trim. A four-person eastern household on welfare, for instance, receives $1,420 a month, $100 more than the net income of a working family. Kohl proposes cutting jobless benefits in the east and west by 3% and then freezing them for several years. He warns that income taxes will have to rise by 10% in 1995.To win public support, Kohl will soon take to the airwaves. He plans six TV shows patterned on the fireside chats of Franklin D. Roosevelt and the radio pep talks of former Chancellor Ludwig Erhard, who coaxed Germans into performing an economic miracle during the 1950s. Kohl is also counting on a political boost from an expected Cabinet reshuffle. Newly designated Economics Minister Gunter Rexrodt, a former Citibank executive and Berlin finance minister, likely will accomplish more than predecessor Jurgen Molleman, who resigned amid an influence-peddling scandal.

VW LAYOFFS. Even if Kohl wins over politicians and workers, convincing industry to step up investment will still be a Herculean task. Kohl will try to boost private investment in the east by increasing incentives. But, slammed by the slump in western Germany and brutal competition in Asia, manufacturers no longer have the luxury of doing what the Chancellor asks. With sales languishing, Volkswagen is delaying a $1 billion addition to its eastern car plant in Zwickau and Daimler Benz is putting off a truck plant in Berlin. Machinery maker Metallgesellschaft is even shutting down an eastern plant it bought from the government only a year ago, although that might subject the company to penalties. And many companies are moving production to the Czech Republic, Hungary, and Poland, where wages are 10% of German levels.

Manufacturers are equally reluctant to invest in the west. VW, for example, may slash its 1993 capital spending in half, to around $3 billion. It's also shedding 30,000 of its 273,000 workers this year alone. Daimler Benz is also trimming its labor force. Even sectors that had been shielded from the downturn are being buffeted. Although the fourth quarter is usually the biggest period for software maker SAP, for example, 1992's final months fell far short of company expectations.

More pain lies ahead as Kohl struggles to get his once-vibrant economy to shake the reunification blues. Imbued with a strong sense of fiscal discipline, Germans prefer to hear the truth even if it's unpleasant. Twice before in the postwar years, they listened. For the sake of Germany, Europe, and the global economy, they are close to doing it again.

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