The Treuhand privatisation agency set up to sell off East German state assets is being touted by Eurogroup chairman Jean-Claude Juncker as a model of German efficiency that could help resolve Greek’s debt crisis.
But the fire sale of communist East German industry — 14,000 companies were sold in four years — may not be such a shining example for Greece because the Treuhand ended up $170 billion in debt instead of an anticipated $900 billion profit.
Greek’s parliament voted last week to set up a privatisation agency under austerity plans agreed with the European Union and IMF. Juncker has repeatedly portrayed the now defunct German agency as a beacon for Greece, as have Dutch leaders.
The Treuhand conducted its four years blitz disposal of East German assets from the former aviation ministry headquarters built for Hermann Goering’s Luftwaffe.
Launched with great promise in 1990, it left massive debts, a legacy of bitterness after 2.5 million jobs were eliminated and wide swathes of de-industrialisation.
There are key differences between the situation of East Germany as communism imploded across Eastern Europe and the debt crisis plaguing Greece. Economists agree, however, that Germany’s experience offers cautionary tales.
“It might not serve as the best model for Greece, but the Treuhand did run into a lot of unexpected and unpleasant surprises and that could happen in Greece too,» said Juergen Michels, the lead eurozone economist at Citigroup in London.
“What’s similar is Greece will be selling off a very large overall package of assets,» he added. «The unknown question about it all is what are the underlying values. There are lots of question marks surrounding large loss-making companies.»
The biggest surprise was the gap between initial estimates of what East Germany’s state-owned industry would be worth and the stunning amount it ended up costing reunited Germany to wind up the communist state’s companies.
East Germany did have one of the strongest economies in East Europe in the Cold War and Detlev Rohwedder, a West German industrialist assigned to run the Treuhand, confidently forecast huge windfall profits from selling off East German holdings.
“The whole thing is worth about 600 billion marks ($380 billion),» Rohwedder said after being appointed by Chancellor Helmut Kohl in 1990.
The Treuhand was the brainchild of civil rights activists who toppled communism and opposed unity with West Germany. In early 1990 they proposed an agency to sell off state property, then worth an estimated 1.4 trillion Deutsche marks ($890 billion), and distribute the profits to the eastern public.
But the Treuhand had only four months from March 1 to June 30, 1990 before the convulsions of monetary union between East and West Germany made its task far more difficult.
The West German government introduced the Deutschemark at a one-to-one parity with the East German mark on July 1, 1990 instead of a much higher 5-to-1 market rate. That placed a huge burden on Treuhand industries with sky-high debt and costs.
In addition, East German firms lost their biggest market in communist eastern Europe, while their domestic customers were thirsting to buy for Western goods and know-how.
Rohwedder took charge on July 3, 1990 and quickly became a focal point of critics in the east, who described him as the callous face of Western capitalism. Angry easterners staged mass protests at the Treuhand, blaming it for rising unemployment.
Rohwedder was assassinated by suspected left-wing militants in 1991. He was succeeded by Birgit Breuel, a conservative ex-finance minister of the West German state of Lower Saxony.
When the Treuhand closed in 1994, it had run up debts of 270 billion Deutsche marks ($172 billion). Four million Germans were employed by Treuhand-owned companies in 1990 but only about 1.5 million jobs were left in 1994.
The Treuhand’s failures were largely blamed on the legacy of an inefficient, bureaucratic communist economy, while its rare successes were ascribed to a group of dedicated western managers who put their careers on hold to help the reconstruction effort.
“I’d say the Treuhand succeeded by and large in its objective and did quite a good job under difficult conditions in the early 1990s,» said Ferdinand Fichtner, chief economist of the DIW economic research institute in Berlin.
“It had a huge volume of privatisations to complete in just a few years and it’s got a negative image for reasons beyond its control. Eastern companies lost their business customers when demand for East German goods from the east bloc collapsed.
“I think it’s wrong to blame the Treuhand for that and high unemployment,» he added, referring to the chronically high level of joblessness in eastern Germany. It has remained roughly double west German levels since 1990 and is now at 10.9 percent.
Joerg Kraemer, chief economist at Commerzbank in Frankfurt, said it was difficult to compare the Treuhand and its task with the problems facing Greece.
“It’s a different issue,» Kraemer said. «The Treuhand was not trying to sell assets at the highest possible price and it wasn’t primarily concerned about the fiscal budget. Its job was to sell off dilapidated communist state companies in the hope that they’d be rebuilt, restructured, and made healthy.
“Greece has a completely different objective,» Kraemer said.
Under its EU/IMF bailout programme, Athens is supposed to sell a state asset every 10 days on average.
Fichtner at DIW said he hopes the Greek sell-off will be slowed down and made more orderly with a Treuhand-like agency. He said privatisations earnings will be small compared to long term savings of newly privatised firms becoming more efficient.
“The revenues aren’t going to be substantial enough to significantly reduce the debt in Greece,» Fichtner said. «In my mind, the most appealing aspect of a Treuhand-style agency for Greece is that it will slow down the privatisation process.
“If capital markets know Greece has its back to the wall and will push through sales in the short term of a year or even less, values will be destroyed,» he said. «Obviously, they’ll get more if they take their time over the next few years.»