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Analysis: Unification on trial in Germany

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, March 18 (UPI) -- The upcoming elections in the east German province of Saxony-Anhalt will be followed with bated breath by the South Koreans who face the faintest prospect of unifying with their Northern brethren.

The result of the vote by the 3 million residents of Saxony-Anhalt on April 21 is effectively a test of the success of the merger of East and West Germany. Can the two political entities so deeply divided by ideology, economic doctrine and performance, wealth, political structure, mentality and history actually be in marital bliss 12 years on?

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The answer was a resounding "nein" four years ago.

An openly xenophobic right-wing party, financed by an eccentric Munich-based millionaire publisher, garnered 13 percent of the votes in the 1998 bellwether elections in Saxony-Anhalt, which was once one of Germany's industrial production base second only to the Ruhr. Germany's chemical and engineering industries flourished there, and under communist rule, the Soviet bloc placed Saxony-Anhalt on a pedestal.

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Yet by 1998, one out of every four working adults was unemployed. Another 100,000 participated in make-believe and stopgap retraining schemes and public works. Saxony-Anhalt's bloated, inefficient and technologically retarded industries crumbled as they faced the powerhouses of West Germany.

Klaus Schucht, Saxony-Anhalt's minister of economics since 1994, supervised the agonized disintegration of its smokestacks. The former Treuhand privatization expert and chairman of coal mining giant Ruhrkohle AG oversaw salaries in the public sector slashed by up to 20 percent in return for job security. Welfare rolls swelled, 15,000 people became homeless by 1996, and unemployment reached 28 percent in company towns like Bittersfeld. Yet dwindling tax receipts forced the government to implement four consecutive austerity plans, each harsher than the previous.

Inevitably, the voters trounced the ruling Christian Democratic Union. The CDU came out almost equal to the former communist party, the Party of Democratic Socialism, or PDS. The minority Social Democrat or SPD-Greens government of Saxony-Anhalt was unaffected, though people rated its performance at 0.2 on a scale of minus 5 to positive 5. Only the racist German Peoples' Union, or DVU, benefited, as it linked mass unemployment to the ubiquity of foreigners, the self-enrichment of an old-new elite of turncoats, and an all-pervasive social crisis. The "Magdeburg Model" of compassionate reform the Eastern way had failed.

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The "World Socialist Web Site" quotes the DVU's campaign slogans with terrified fascination: "German money for German jobs"; "Jobs for Germans first"; "This time -- make your vote a protest"; "Corrupt politicians, greedy parliamentarians, European Union bigwigs, asylum fraudsters"; "If the bosses won't invest, then the state must fund new jobs." The DVU denounced former German Chancellor Helumut Kohl for being "the main culprit" for the "collapse of our economy."

Not everything is bleak, however. In an article published November 1999, The Economist magazine described a prospering Hanseatic town in Saxony-Anhalt. It attributed the relative prosperity of the former East Germans, the Ossies, to former West German, called the Wessies, returning to reclaim their property or to invest in the region.

Wessies and Ossies still clash in mutual suspicion and envy, the mental barriers are still there, alienation and estrangement as well as crime are rampant, pensions and salaries are lower, unemployment is much higher, and the "blossoming landscape" promised by the CDU has shriveled -- but the railway to Berlin is being reopened and the town is full of shopping malls and glittering banks, observed the Economist.

Yet, this is true only in the interface zone between east and west. Further inland, the picture is grim indeed, particularly in Saxony-Anhalt. Unemployment was still at 21 percent in January, double the national average and more than in any other eastern province. Its gross domestic product grew by 0.6 percent in 2000, under-performing national growth even though both the manufacturing and services sectors outperformed the German average. Additionally, the construction industry contracted by 10 percent in the 12 months to April 2001.

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Chancellor Gerhard Schroeder has spent a good part of January cajoling Bombardier, the Canadian rail equipment maker, not to end production at its Halle factory with 900 workers. The German government agreed, in return, to buy from Bombardier several undeveloped land tracts. It has been reported rumored that Bombardier was also promised lucrative state contracts immediately after the September elections.

The mighty trade union IG Metall has pressured BMW into investing $900 million in a new car plant in Leipzig, with supplies coming from Saxony-Anhalt. BMW complied but made it clear that it expects the state of Saxony-Anhalt to underwrite a third of its investment.

Of $10 billion scheduled for capital expenditures in Saxony-Anhalt's decrepit infrastructure, more than $6.3 billion are transfers from the federal government and the European Union. Saxony-Anhalt, at 25 percent, has double the rate of investment in the Lander of West Germany, though its investment rate is scheduled to decline to 20 percent by 2004. More than 60 percent of its $7.2 billion budget relies on tax revenues, while the rest comes from transfers. Transfers -- mainly social benefits -- constitute almost half the state's operating expenditures.

Even so, Saxony-Anhalt runs a budget deficit of 9 percent, mostly financed with $2.7 billion of fresh borrowing per year. It is renowned for its lavish roadshows to market its bonds to international investors. It expects to have zero net borrowing in 2006 -- but the mountain of total outstanding debt, of which 76 percent is negotiable, will weigh on this impoverished state for a long time to come. Moreover, it has a reputation in financial markets as being dangerously exposed to credit derivatives in a desperate attempt to reduce its effective interest rate to 5 percent.

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The federal government has rejected calls by the Lander to guarantee their bonds by intermingling state and federal obligations in auctioned "packages." A conceptually similar mixed package of $1.6 billion in three year notes issued by seven states, "Lander jumbo," -- the 12th of its kind -- was sold in January at a mere 0.22 percent above the federal benchmark. The Lander owe $320 billion among them. Even a marginal improvement in interest rate translates to hundreds of millions of euros in annual savings. Saxony-Anhalt, rated the lowest among the Lander at AA minus, spearheads this campaign.

The region's Finance Minister Heinrich Aller has said he is against different credit ratings for the states and the federal government. There is no risk to the government in guaranteeing the states, as they are "too big" and "too public" to default on payments, he said.

German Finance Minister Hans Eichel, meanwhile, is concerned that centralized bond sales could cause the government's borrowing costs to rise.

The government is reluctant to act as guarantor for states on interest and debt repayments, said Deputy Finance Minister of Germany Karl Diller.

But many are betting that, in an effort to impose fiscal discipline on the oft-errant Lander, the federal government may yet agree to joint issuance of bonds subject to clear limitations on regional budget deficits in a "national stability pact." This may materialize -- not coincidentally -- just before the elections to the Bundestag in half a year's time. Should this happen, Germany's rating is likely be downgraded but Saxony-Anhalt would stand to benefit, its borrowing and debt service costs cut considerably by its enhanced credit rating.

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This could be one of the goodies the SPD has in store for the eastern states, under the umbrella of its "Toward the Future" economic program. Schroeder unrealistically promises to equalize wage levels between east and west by 2007. Investors in the eastern parts will be entitled to even more generous incentives. Job creation schemes, worth $9 billion annually, will abound.

Sunday, the SPD held a special and unprecedented conclave of its associations in the eastern states in Magdeburg. It is a measure of desperation. Despite some recent anti-eastern steps by the CDU and CSU such as contesting cross-subsidies in Germany's health insurance funds that benefit the Ossies -- discontent with the SPD and its lackluster performance is rife. The CDU intends to shift the emphasis from unilateral transfers to the east, for a whopping $900 billion since 1990, to the formation of new businesses, the promotion of R&D in universities, and the enhancement of business-critical infrastructure.

The SPD never really swept Saxony-Anhalt off its feet. Reinhard Hoppner, the current prime minister, heads a minority government, the outcome of narrowly averted defeats in both 1994 and 1998. He did his populist best to reflect East German disenchantment and longing for a spurious past of tight-knit communities and low crime rates. But in doing so he played into the hands of the PDS whose rise is now inevitable. It has been the SPD's silent partner all along and thus legitimized and rehabilitated. Its comeback is part of a trend all over Central and Eastern Europe. But apart from the PDS, it would be wrong to read too much into the state elections in April as far as the future alignment of national politics is concerned.

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Perhaps more importantly, the elections in Saxony-Anhalt are a referendum about the unification of Germany. Has it really been a failure, good intentions and almost a trillion dollars notwithstanding? Is future Germany an entity permanently fractured along the old fault lines of rich vs. poor and east vs. west? Does the solution consist of throwing more money at the problem or is a fundamental re-think called for? Above all, will it ever get better? The unemployed, welfare-dependent, and humiliated denizens of Saxony-Anhalt don't believe so. They feel second-class and East Germany is retroactively idealized in a perverted form of nostalgia.

Germany -- and the world with it -- has been losing its faith as well. The experiment may have failed after all. South Korea is watching closely.

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