Struggle in the Valley

Since last fall, the once exuberant West German economy has stumbled through what Economics Minister Karl Schiller likes to call its "Talfahrt," or trip down into the valley. The nation's economic growth, after averaging nearly 6% a year since 1950, slipped to barely 3% in 1966. So far this year, real gross national product has actually declined. New Chancellor Kurt Kiesinger shares the widely held view that the roots of the downturn can be traced to an orgy of overspending by the governments of Konrad Adenauer and Ludwig Erhard. To restore public confidence, Kiesinger's seven-month-old coalition regime last week finally reached for drastic measures that will put the budget in better balance and then, the government hopes, help push the economy back up the mountain.

"No Other Way." Canceling a scheduled trip to the U.S. for talks with President Johnson, Kiesinger instead sat down with his ministers in the longest Cabinet meeting in the history of the Federal Republic--three agonizing days and nights of debate over how to put the economy and the government's deficit-plagued finances in order. The most dramatic result was a decision at week's end to make a major cut--between 40,000 and 60,000 men--in West Germany's 460,000-man army, thus trimming 20% from the country's $5 billion-a-year defense budget by 1971. "We had great reservations about this," said Kiesinger, "but our financial position left no other way out."

The Cabinet also agreed to higher taxes, a cut in farm subsidies, and abolition of some pension and family allowance benefits.

Though vital to the budget balance required by the West German constitution, tax increases and cuts in welfare spending would normally be no way to fight a recession. Nor were they easy for Kiesinger, for he has had to contend with a delicate balance in his coalition government. The Social Democratic members of his Cabinet, and some of his own Christian Democrats as well, bitterly opposed the tax increases and welfare cuts. But some thing had to be done about government spending. Over the years, when rapid economic growth promised to produce enough cash to meet almost any demand on the federal treasury, Germany built up an ever more costly welfare system, propped up its inefficient agriculture and high-cost coal mines with vast subsidies. That spending spree, matched by consumers and fueled by galloping wage increases, kept prices moving steeply upward. When the alarmed Bundesbank stepped in with sharply higher interest rates, bank credit became so scarce and expensive that industrial expansion fell sharply, and some cautious manufacturers began shortening their work week. The ensuing downturn helped to topple Ludwig Erhard's government last year.

Economics Minister Schiller has made frantic efforts to revive plant expansion, but industry, with a quarter of its capacity idle, is fearful. The Bundesbank only reluctantly, and by timid 1/2% stages, cut its discount rate from 5% to 3%, the lowest in Europe except for Switzerland and Portugal. In the first five months of this year, industrial production slipped 5.3%, consumer goods output 9%, construction 13%. The number of unemployed in February rose fivefold from its 1966 low, to 674,000, or 3.1% of the work force, very high by German standards.

With German import buying sharply reduced, other European countries are pressing Schiller to get his economy going again. Toward that end, Schiller got Cabinet approval for $1.25 billion in new federal and state investment funds for priming the pump. That medicine could be more effective than this year's earlier dose of public works if only because Germany has at last adopted the financial discipline that it needs to put its recovery on a solid footing.

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