Germany

With the collapse of communism in Eastern Europe in 1989, prospects seemed bright for a fairly rapid incorporation of East Germany into the highly successful West German economy. The Federal Republic, however, continues to experience difficulties in integrating and modernizing eastern Germany, and the tremendous costs of unification have sunk western Germany deeper into recession.

The western German economy grew by less than 1% in 1992 as the Bundesbank set high interest rates to offset the inflationary effects of large government deficits and high wage settlements. Eastern Germany grew by 6.8% in 1992 but this was from a shrunken base. Despite government transfers to the east amounting to nearly $110 billion annually, a self-sustaining economy in the region is still some years away.

The bright spots are eastern Germany's construction, transportation, telecommunications, and service sectors, which have experienced strong growth. Western Germany has an advanced market economy and is a world leader in exports. It has a highly urbanized and skilled population that enjoys excellent living standards, abundant leisure time, and comprehensive social welfare benefits.

Western Germany is relatively poor in natural resources, coal being the most important mineral. Western Germany's world-class companies manufacture technologically advanced goods. The region's economy is mature: services and manufacturing account for the dominant share of economic activity, and raw materials and semimanufactured goods constitute a large portion of imports.

In recent years, manufacturing has accounted for about 31% of GDP, with other sectors contributing lesser amounts. Gross fixed investment in 1992 accounted for about 21.5% of GDP. GDP in the western region is now $20,000 per capita, or 85% of US per capita GDP. Eastern Germany's economy appears to be changing from one anchored on manufacturing into a more service-oriented economy.

The German government, however, is intent on maintaining a manufacturing base in the east and is considering a policy for subsidizing industrial cores in the region. Eastern Germany's share of all-German GDP is only 7% and eastern productivity is just 30% that of the west even though eastern wages are at roughly 70% of western levels.

The privatization agency for eastern Germany, Treuhand, has privatized more than four-fifths of the almost 12,000 firms under its control and will likely wind down operations in 1994. Private investment in the region continues to be lackluster, resulting primarily from the deepening recession in western Germany and excessively high eastern wages.

Eastern Germany has one of the world's largest reserves of low-grade lignite coal but little else in the way of mineral resources. The quality of statistics from eastern Germany is improving, yet many gaps remain; the federal government began producing all-German data for select economic statistics at the start of 1992.

The most challenging economic problem is promoting eastern Germany's economic reconstruction - specifically, finding the right mix of fiscal, monetary, regulatory, and tax policies that will spur investment in eastern Germany - without destabilizing western Germany's economy or damaging relations with West European partners.

The government hopes a "solidarity pact" among labor unions, business, state governments, and the SPD opposition will provide the right mix of wage restraints, investment incentives, and spending cuts to stimulate eastern recovery. Finally, the homogeneity of the German economic culture has been changed by the admission of large numbers of immigrants.