German Economy Picks Up Pace But Welfare State Is Still a Drag

THE German economy is on the mend. Consumer confidence is up, and economists predict steady growth for next year.

So why aren't Germany's political leaders and manufacturers smiling? They know the current upswing won't solve the longer-term structural problems that threaten the country's ability to compete globally in the 21st century.

``Nobody should believe that this bit of growth can overcome the economic problems that Germany is currently facing: a dramatic loss of jobs, budgets stretched to the breaking point, and a welfare state that we can no longer afford,'' economic analyst Hans Barbier wrote in the Frankfurter Allgemeine Zeitung, a daily newspaper.

How Germany handles economic restructuring will greatly impact the rest of Europe. As the continent's most populous and prosperous nation, Germany serves as the paymaster of the European Union. Thus, a future downturn in the German economy could not only cause a continental recession, but it could also put the brakes on the EU's attempt to forge economic and political union.

The current batch of economic statistics and projections seem to allay concerns about the German economy.

Economists project growth for 1994 at about 2.5 percent, vastly exceeding all expectations at the beginning of the year; the number of jobless has also been gradually falling, from just over 4 million early this year to roughly 3.6 million currently; and the unemployment rate is just above 8 percent in Western Germany and around 14 percent in the East.

And for 1995, the country's leading economic institutes are predicting more improvement: Growth will inch upward to 3 percent; the number of jobless will remain fairly constant at high levels, in the 3.6 million range; and the inflation rate should drop to about 2.5 percent from 3.5 percent this year.

Meanwhile, some forecasters say the deutsche mark will remain relatively stable and perhaps slightly depreciate against other leading global currencies - something that should help maintain exports, upon which Germany is so dependent.

Yet, while the immediate future looks secure, business leaders and the Bundesbank, Germany's central bank, say prosperity could hit a brick wall, and German competitiveness may begin to erode, unless government, industry, and labor address the economy's structural weakness.

``The burden of the welfare state will crush us if we fail to act,'' Klaus Murmann, president of the German Employers' Federation, recently told reporters.

ECONOMIC restructuring - welfare reduction and state spending cuts, along with job creation - is a top priority of Chancellor Helmut Kohl's recently reelected government. But the government's ability to fully implement its agenda is far from assured.

Chancellor Kohl's coalition has a slim 10-seat majority in the lower house of Parliament, the Bundestag, while the opposition Social Democrats control the upper house, the Bundesrat. Such a legislative configuration appears to be a recipe for gridlock.

Despite the political differences, the government in the first 10 months of 1994 made some progress on containing costs: A Bundesbank report Wednesday showed that public sector borrowing fell sharply to $21 billion from about $63 billion over the same period in 1993.

Reducing Germany's debt, incurred to finance reunification, will take a large amount of political will. The public debt burden is expected to reach about $1.29 trillion in 1995, roughly 62 percent of gross domestic product.

In one move to raise revenue, the government is reimposing a reunification tax of 7.5 percent on Western German incomes starting Jan. 1. However, the reunification tax has generated fierce political debate.