Last updated: March 3, 2006 10:27 am

D-mark day dawns

West Germany is about to take over a country that has lived more of a lie than most outsiders ever imagined.

This Sunday, July 1 1990, the two post-war halves of Germany will, in all but name, be reunited. A treaty on monetary, economic and social union comes into force, establishing West Germany’s “social market economy” as the norm for all Germany. Any clauses in East Germany’s constitution that contradict it will no longer apply. The East German Ostmark will give way to the West German D-mark as East Germany’s legal tender, the Bundesbank will become the central bank for all Germany, and East Germany’s fate will, de facto, become the full responsibility of the government in Bonn.

In 10,000 booths and banks around the country East Germans will each have a week to exchange 4,000 Ostmarks (more for the old, less for the young) for D-marks at a rate of one-for-one. The rest of their cash or deposits, and all their debts, will be worth only half as many D-marks. Prices and wages in East Germany will supposedly be converted at one-to-one as well. In practice they will be launched into an East German unknown whatever the market will stand, whatever the employer can afford. There, and not in the technical matter of money and rates of conversion, lie the true rigour, hope and risk of the change. This D-day will destroy a microcosm of the Europe of the past 40 years.

Germany was forced to be a laboratory in which prime examples of the developed world’s two competing ideologies worked side-by-side. No differences of language or culture muddied the test. A man-made membrane separated the two experiments. When, late last year, that barrier burst, the findings were conclusive. A communist command economy is an utterly hopeless way of running an advanced society: not even Germans could make it work.

Now the experiment moves into a new phase. What happens when the market rushes into the workings of a command economy? How quickly will East Germans adapt to its opportunities and unforgivingness? Ideology apart, will their government abandon an ingrained urge to meddle and control? How will the people react to the destruction of individual vested interests? What state support will they irresistibly demand to lessen their discomfort, and what will West Germans be ready to supply, whether honestly through risk capital and soundly financed public spending, or covertly through inflation? This German crash-course in capitalism is undeniably special: East Germans are free to quit for West Germany if conditions at home become too tough.

They are being handed sound money to work with from the start of their new experience. The weight of resources waiting to be invested in the new freedom is unusually large. Nevertheless, the outcome of East Germany’s “big bang” must powerfully influence the rest of Eastern Europe’s approach towards the market economy.

The West Germans are facing this test with an almost schizoid blend of elation and worry. They are glad to do what comes so naturally, but disturbed that its fulfilment might upset their carefully run economy and tidy lives. West Germans have always found it hard to dare to hope for unification. Only a year ago, in his book “The Germans”, a British journalist, Mr David Marsh, printed an intriguing set of quotations by a dozen eminent contemporary Germans on the idea of unification. Only one of the 12 came out prescribing one German state: the rest talked of “roofs”, and “European unity”, and “loose confederations” and so forth. Yet even as they talked, West Germany was already spending some DM5bn a year on its relationship with East Germany, weaving a spider’s web of practical links between the two countries. And when the chance for one nation came, Mr Helmut Kohl, the West German chancellor, and the foreign minister, Mr Hans-Dietrich Genscher, a master of German political Fingerspitzengefhl, knew instinctively that they must go for it.

The story of Germany’s move towards union has been one of whirlpool-like acceleration, in which expected time frames have collapsed and then collapsed again. It had four essential features that brought East Germany to this weekend’s changes. First, the Soviet Union no longer had the will to sustain the East German order the line of fear that reached back to the Kremlin had snapped. Second, the communist regime was shown to be more corrupt than most East Germans had remotely realised. Third, the unstoppable right of East Germans to leave for West Germany put intense pressure on Bonn and made gradual change in East Germany almost impossible.

Fourth, when Mr Helmut Kohl gambled an East German election on the promise of a quick currency union, his alliance there won it hands down.

In short, a common presumption in the West lay in ruins that East Germany had forged an identity for itself and that its people would certainly want to preserve the better parts of their system in any opening towards the West. When the lid was lifted, the pot was found to be scorched and empty.

East Germany’s separate identity will vanish largely unmourned. Like the Sptheimkehrer, those haggard German prisoners-of-war whom the Soviet Union allowed home in the mid-1950s, most East Germans seem to view their years of communism as just so much stolen time.

Any visitor to the country today can see that the economy has been continuously plundered. It is well-known that the Soviet Union dismantled and sent home much of East Germany’s capital stock after the war: some 30 per cent of the rail network is single-track today because the Russians used trains on one track to cart away the rails from the other. But, less well-known, East Germans thereafter plundered it themselves, running down its capital stock and ruining its environment to bridge the gap between cheap consumption and expensive supply.

Hitler’s motorways are now fully depreciated, to put it mildly. Bouncing over their ruts takes the western driver back 40 years to unfenced dual-carriageways, rustic-effect bridges and a fellow motorist seen every kilometre or so in a car that makes a Beetle look futuristic. The housing stock is decrepit. Some 42 per cent of it is still in private hands, but central allocation and absolute rent control have had their predictable effects.

Two-fifths of the housing was built before the first world war and does not appear to have seen a paintbrush since. People in East Germany spend just 3 per cent of their disposable incomes on their homes, and it shows.

The plundering has been at its most damaging in industry. Mr Werner Scheer, director of the country’s Special Steel Kombinat, based in Brandenburg, explains that East German managers could make no use of depreciation charges to finance investment: they had no “own resources’. All profit after paying variable costs was sent straight to government, which meant that all capital spending had to be teased out of government as “fresh” investment. Here central whim came into play. If your company was in a favoured industry, such as energy, micro-electronics or heavy machinery, you got modernised. If, like Mr Harry Strohbach, the managing director of VEB (People’s Business) Prefo, a small Dresden toymaker, you seemed inessential, you were ignored. “Investment? What investment? Prefo has not bought new equipment for over a decade. Come and see my machine shop. It dates back to Augustus the Strong,” he whispers with black humour.

The command economy may have worked in war but it was overwhelmed by the complexities of modern peace. Pursuing, since 1974, a policy of Abgrenzung, East Germany shut itself off from the international division of labour. You can call this the regime’s fatal mistake, but it was a mistake that flowed logically from its choice of political isolation from the West. East German industry makes just about everything a modern man could list one shoddy version of each. Two-thirds of East German GNP is in manufacturing, energy and mining, (West Germany, 35 per cent) and one-third is exported, mainly to Comecon countries whose unquestioning custom leaves the supplier with no idea whether his products are world class or not.

Mr Horst Sindermann, the late number three in the Politburo, conveyed the quagmire feel of East German input-output planning in an interview in Der Spiegel: “I found in Berlin a giant bureaucracy that I was, as government leader, quite helpless against. Everything was controlled down to the smallest detail. Everything depended on everything else, but lots of things didn’t work and nobody could say why not. Before every meeting of the council of ministers there was a mountain of paper several hundred pages high. Nobody could work through it all, but it was there that the planning bureaucrats had laid their traps. I ordained that no submission should run to more than seven pages. It didn’t do much good.”

Mr Sindermann was no repressed liberal. He and his colleagues, particularly Mr Honecker’s clunking economic supremo, Mr Gunter Mittag, concentrated on pet visions rather than struggles to meet the people’s needs. Their crowning achievement was to invest 14bn Ostmarks during the 1980s in the development of a four-megabit memory chip. Robotron, the country’s badly-listing computer flagship, Carl Zeiss of Jena, a great but struggling optical name, and the country’s Microelectronic Kombinat were the beneficiaries of this project. Officials from these conglomerates now admit that it was all a waste of money. Production has been abandoned. The only mitigating factors in favour of the folly were the West’s Cocom rules, which meant that chips had to be made somewhere within Comecon and East Germany’s ambition to be the Japan of the communist world. For an example of an economic sanction that worked, look no further.

The upshot of all this is an economy with about 40 per cent of the real output per worker of West Germany, roughly equivalent to West Germany in the late 1960s.

There are half as many cars per household as in West Germany, and what cars! There are half as many colour televisions. The productive services of the economy are thin. They are epitomised by a chain of shops in the villages called “service shops” (cleaning, mending, cobbling) a planner’s pathetic answer to the intangible part of a modern economy. The East German system of national accounting excludes many services such as tourism, health, education, advertising, the arts, finance from “Net Material Product”, its version of GNP. Those who worry about the service-obsessed “hollowing out” of Western economies should hurry over to enjoy this system of book-keeping while it lasts.

The shortcomings of the telephone system are so striking that political control must have been a factor. Only 7 per cent of households have a telephone: in West Germany virtually everyone does. There are only a few hundred lines stretching outside the country. This is a most potent form of isolation, making it more or less impossible for western businessmen to arrange meetings within East Germany until they get there. East and West German officials estimate that, over the next seven years, 8m telephone connections will be installed as part of the DM55bn job of bringing the East German system up to scratch.

Transport also needs money. The East German transport minister, Mr Horst Gibtner, sketches out up to DM200bn of investment needed to restore the roads and railways, link the canals to West Germany’s, resurrect the Baltic seaports, modernise the urban roads and build a new international airport for Berlin.

The infrastructure estimates are all as vague as they are vast. The West German Bundesbahn, for instance, guesses that the East German Reichsbahn will need DM100bn of investment on track and DM30bn on rolling stock. Far from being daunting, it is odds-on that the gradual inflow of such sums, whatever they turn out to be, will provide the backbone of East Germany’s economic regeneration, and represent an essential difference between East Germany’s plight and that of the rest of Comecon. The Bundesbahn and the Bundespost are moving inexorably to extend their fiefs to all Germany. The railways are planning a merger for late 1991, and a pan-German railway timetable will be published well before that. The Bundesbahn is already offering, for day-rental, the richly veneered trains that the East German top brass built for themselves.

Some brave voices suggest that East Germany should seize its chance and leap-frog West Germany to a more privatised, less regulated transport and telecom infrastructure. There is no hope of this from the East German side, as will become clear later in this survey, and not much from the West German one. For West Germany’s infrastructure moguls, Project East Germany is a welcome relief from the chill winds of market-think wafting in from Brussels.

At a recent symposium on unification organised by the World Economic Forum, Mr Frerich Gorts, the state secretary in the German Ministry for Post and Telecommunications, claimed that a pan-German entity was vital under the “newly competitive” West German telephone system. There were roars of derision from the assembled German businessmen. Yet their laughter was good-natured. West Germans know their corporatist selves too well. The government-backed infrastructure borrowing that will spruce up East Germany will be 1990’s answer to the Marshall Plan that helped West Germany to its feet after the war. There will be no holding it back, and West German entrepreneurs are already gambling fortunes in expectation of it. Soon East Germany will be a vast construction site, its dust and clamour limited only by the number of men and machines that can be brought to bear on the job.

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