Saving Eastern Firms, One at a Time

It was a hectic but happy day: Saxony's economic and labor minister, Kajo Schommer, was able to announce, "Germania is to be saved, after all."

If there's one thing that virtually every observer in eastern Germany agrees on, it's that the region has to redevelop its productive capacity - its manufacturing base - if it is to avoid permanent collective welfare dependency with western Germany subsidizing its existence. And so the report that Germania, a venerable manufacturer of specialized machinery in Chemnitz, would not fold was a bit of good news.

Dr. Schommer announced Aug. 6 that "with a new concept, a new entrepreneurial strategy," Germania will go on operating, with a staff of 150-plus, at least until the end of 1999 - if the Saxon state cabinet, the German privatization agency, and the European Commission all approve.

It's clear that capitalism in eastern Germany is still on training wheels. Schommer talks a tough line on the virtues of budgetary discipline and low debt levels within state government but says that state subsidies are going to be needed for another 10 years in eastern Germany. It will take that long, he says, for eastern Germany to reach "the lower edge" of western Germany's economic performance.

Still, he argues, to be supported companies need to be held to certain criteria: "The business plan needs to make sense, the salaries and wages need to be appropriate for the firm." That was not the case for Germania, many observers agree, where wages were much too generous.

Saxony and the Bonn government have defied the European Union by announcing their intent to grant subsidies to Volkswagen to ensure completion of construction of two auto plants, one each in the Saxon towns of Zwickau and Mosel. The EU calls the subsidies anticompetitive and is preparing a legal challenge against them. Critics complain that if the subsidies are the only thing that will make the venture worthwhile, Volkswagen should not be building in Saxony, and if they're not, then they are unnecessary.

But Schommer defends the subsidies as essential to protecting jobs not only at Volkswagen but at about 200 supplier firms in the region. A total of 23,000 positions are seen to be at risk. Saxony was "the cradle of the German auto industry," Schommer says. Before World War II, about a third of all German cars were produced here.

Economists speak of "agglomeration economies" - local areas where a given industry is concentrated and a network of often quite-specialized supplier firms grow up around main producers. Michigan's auto industry and California's Silicon Valley computer industry are two familiar examples.

The agglomeration provides resources, including specialized labor pools, that let firms compete and innovate to stay world class. After 40 years of a command economy, which sapped the region's industrial competitiveness, this is what eastern Germany needs to regain, economists say.