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Amid Slump, Germans Learn Hard Lessons

HEIDI HONES, hotelier in the German spa resort Baden-Baden, recently offered her views on the country's economy along with a breakfast basket of fresh rolls and a soft-boiled egg cooked to perfection.

"We Germans have had it too good, for too long," she told an American couple seated at the table. Too many Germans have gotten used to the high life, she went on. Her hope was that the country's economic recession - being labeled the most severe since the end of World War II - would bring people back down to Earth.

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In Germany, where living standards would seem to be measured more by whether there is a Mercedes in every garage than by whether there is a chicken in every pot, the reality of harder times is starting to set in.

This year the number of jobless in Germany will increase by about 550,000 to a high 3.55 million, predicts a report released May 4 by Germany's six leading economic institutes.

The institutes forecast west German economic output falling by 2 percent. Even with a modest recovery in east Germany, the overall economy will shrink 1.5 percent, though recovery should begin in the fourth quarter.

Siegfried Utzig, economist for the powerful Federation of German Industry, the nation's largest industry association, argues that recovery is actually further off than the institutes predict. Because Germany's success is linked to its exports, "the turning point will only take place when exports spring back," he says. He sees little indication that will happen this year.

More than half of Germany's exports are bound for the European Community market, and the economies on the receiving end, such as France, Spain, and Italy, are in trouble.

On May 6 the new French government issued a gloomy assessment of that country's economy, estimating the 1993 budget deficit at twice the amount forecast by the previous Socialist government.

On top of this, German exports are at a price disadvantage because of major currency devaluations that several EC countries took during the European currency crisis last fall. Some economists say Bundesbank, Germany's central bank, caused the crisis by stubbornly holding interest rates high.

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The six economic institutes say the Bundesbank failed to cut interest rates quickly and sharply enough to end the recession.

Peter Pietsch, an economist at Commerzbank, says he sees "no alternative to the Bundesbank's policy of small and careful steps" in easing rates. Germany, he argues, still needs a strong mark, and that an abrupt drop in short-term rates now would undermine the mark and adversely affect the long-term bond market.

MR. Pietsch expects further small interest-rate cuts, one at the end of May and another at the end of June.

The reductions so far, the most recent on April 28, have eased the strain in currency markets, with other countries following the Bundesbank's lead. These include France, whose franc appeared on the verge of dropping out of the European Monetary System last fall and winter.

Economists now say the franc is out of danger.

Pietsch argues that sharper cuts in the Bundesbank's short-term interest rates would not have the effect of enticing business to invest, since most businesses in Germany rely on long-term credit for capital spending. Those long-term rates are already at a historical low, he points out.

A "decisive factor" for the economy will be government fiscal policy, says Klaus-Werner Schatz, senior economist at the Institute for the World Economy in Kiel. But he is not optimistic about the possibility of financial discipline in Bonn, which he says is following a course of tax increases to pay for German reunification rather than spending cuts.

The bite of this recession has also renewed debate about Germany's eroding competitiveness. The issue first surfaced in the 1980s, but disappeared again when the economy boomed to serve East German demand.

Worldwide, German workers enjoy among the highest wages, the longest vacations, and the fewest working hours. German corporations also shoulder a comparatively heavy tax burden.

In east Germany, members of the metalworkers union, IG Metall, are striking for wage parity with the west Germans. That employers are resisting their demands for parity shows that firms are taking the competitiveness issue seriously, Pietsch says.

Still, he predicts that when recovery finally does come, the urgency of the issue will subside. In Germany, old habits die hard.

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