(Reuters) -Greece faces severe restrictions on its sovereignty and must privatize state assets on a scale similar to the sell off of East German firms in the 1990s after communism fell, Eurogroup chairman Jean-Claude Juncker said.
A repeat of Germany's Treuhand experience may prove bitter for Greeks, who are already suffering soaring unemployment as a recession drags into its third year.
Once the world's biggest holding company, Treuhand was supposed to sell off state property at a profit but closed its books with a huge deficit and a legacy of bitterness among the legions of workers whose jobs it destroyed.
Four million Germans were employed by Treuhand-owned companies in 1990 but only about 1.5 million jobs were left in 1994 when the agency closed.
Instead of reaping profits to be distributed to all east Germans, as it was designed to do, it ran up debts of 270 billion marks ($172 billion) in the fire sale of assets.
Thought last line of this was interesting in that this same thing happened to the Germans in the early 90s. However, instead of raising the money it was promised to raise, it actually ended up costing the country both money and jobs. But how is that possible?
Lets look at how the process worked
http://www.lehigh.edu/~incntr/publications/perspectives/v14/bloomstein.pdf
"Treuhand first assumed ownership and control of the entire inventory of state-owned
enterprises and then disposed of them. When unable to sell a business in existing form or return a
company to a prior owner, measures were taken to encourage a sale (e.g., restructure to smaller units,
offer financial incentives, etc.). If still unable to sell the business, termination or closure would be
conducted prudently."
"The costs of privatizing the former East Germany were high. The net cost was DM 270 billion ($174.3
billion). Expenditures totaled DM 344 billion ($222 billion) and included debt payoffs of the former
state-owned enterprises, environmental cleanup, subsidies, and unemployment benefits, with debt
payoffs and subsidies being the largest components. Treuhand collected DM 74 billion ($47.7 billion) in
revenues. Anticipated costs of DM 69 billion ($38.2 billion) to finance successor agencies are also
included in these figures."
"The impact of these costs on the West German states has been enormous. Taxes in Germany have
already increased ten times between 1993 and July 1995 (Shales, P. A8), and Provisions have been made
to amortize the cost over the next thirty years. (Kappler, P. 233) In 1990 East German consumption
resulted in a boom in the economy. (Giouchevitch, pp. 188- 89) However, a year later, the economy was
faltering. The government raised taxes to help finance the cost of reunification and the inflation rate
increased. By the end of 1994, inflation was 4.2 percent."
And the results as mentioned in the reuters article above..
My last thoughts on this as it pertains to Greece are as follows:
-Greece's workforce and business structure is uncompetitive, who wants to buy a business in that environment? That being said, what will be the final price that is received for the 'assets' that Greece will sell? Probably a lot less than everyone thinks.
History never repeats but often rhymes. If that's the case, we can expect that Greece will not receive as much money as it expects and more importantly the economy will suffer for many years ahead after the asset sales
