First Published in: Arthur
Benz and Klaus H. Goetz (eds), A New German Public Sector? Reform,
Adaption and Stability.
Aldershot: Dartmouth 1996, 93-117
Vincent Wright and Luisa
Perrotti (eds), Privatization and Public Policy (Vol. II). The International
Library of Comparative Public Policy 13. Edward Elgar: Northampton: Mass.
Dr. Roland Czada
The Treuhandanstalt and the
Transition from Socialism to Capitalism
Politikfeldanalyse und Verwaltungswissenschaft
The transition from socialism to capitalism in East Germany has proved
to be a highly demanding task for politicians and businessmen and a major
challenge to the adaptive capacities of the administrative system.
The Treuhandanstalt, the Federal agency established as institutional trustee
(Trust Agency, or THA), was at the centre of this historical transformation
process. This quasi-non-governmental organization was set. up by
a government order of the penultimate Council of Ministers of the German
Democratic Republic (GDR) and, on 1 March 1990, it took over the entire
nationalized economy of East Germany. Thus it started to operate before
the economic integration of the former socialist system into the West German
market economy was set in motion and made irreversible with the Treaty
on Monetary, Economic and Social Union of 18 May 1990.
At the time of its establishment, the THA was said to be the world's
largest industrial enterprise. It owned approximately 45 000 permanent
establishments, which belonged to some 8500 industrial enterprises with
approximately 4 million employees. In the following months, demergers
further increased the total number of enterprises to 13 000. Little
more than four years later, by the end of 1994, only about a hundred of
them were left in the THA’s possession, the others having been privatized,
transferred to local governments or closed down. At that time, apart
from the remaining firms, vast land holdings, representing some 40 per
cent of the former East German territory, also still awaited privatization
(Sinn and Sinn, 1993: 123).
The German path from socialist economic planning to a market economy
was very distinct when compared to the transition experiences in the Czech
Republic, Poland, Hungary or Russia. By joining a highly industrialized
Western European country, East Germany became a high-wage region with
low industrial productivity. Monetary union exposed its industries
to the global market and, as a result, both politicians and managers were
quickly forced to realize the weakness of the productive base. The
GDR's national accounts and industrial statistics turned out to have been
manipulated in order to portray the country as a leading industrial economy
and it became clear that many, though not all, East German enterprises
were practically worthless. The whole region threatened to become
an industrial wasteland, unable to compete with the low-wage neighboring
countries to the east or with the highly productive and technologically
advanced producers in the west. In order to maintain competitive
jobs and harmonize standards of living in a united Germany, the former
socialist economy had to be completely modernized. However, faced
with this daunting task, very few private investors seemed willing to acquire
firms in the five new German Länder, despite the low prices at which
the THA offered firms, some of which had previously enjoyed a worldwide
reputation for quality and reliability. German Federal and Länder
governments therefore had to support the THA’s privatization policy by
providing loans, guarantees, subsidies, social overhead capital and other
incentives in an effort to win over private investors. Altogether,
more than 700 public programmes were put into place to support economic
development in Eastern Germany.
The Political Importance of the THA
The goal of establishing a market economy was given both a legal and
an organizational foundation in the form of the THA. Its legal bases
included the Trusteeship Act (Treuhandgesetz) of 17 June 1990, the
Unification Treaty, the Property Act (Vermögensgesetz) and
the Trust Agency Borrowing Act (Treuhandanstalt Kreditaufnahmegesetz),
which provided it with far-reaching regulatory powers and controls.
The former Federal Chancellor Helmut Schmidt called it a 'most powerful
second national government' (H. Schmidt, 1993: 32, 110) and a Bundestag
representative of the Alliance 90/Greens described it as a 'superministry
for the economic development of East Germany'. As a huge development
agency, the THA had no predecessor. Not surprisingly, the centrality
of its position made it the target of intense political pressure and contradictory
demands. Political parties, Federal and Länder parliaments and governments,
local governments, interest groups, businesses, former property owners
(the so-called Alteigentümer),1
the Federal Antitrust Office (Bundeskartellamt) the Federal Audit
Office (Bundesrechnungshof) and many other interested parties all
attempted to gain influence over the organization as a whole or over particular
In some cases they also sought to exercise supervisory powers over
the THA and limit its discretionary scope. The network of relationships
that emerged between the THA and these actors reveals much about the functioning
of the political system of the Federal Republic.
From the outset, the THA operated under great uncertainty, which derived
from the diverse and contradictory character of its mission and was accentuated
by the constantly changing problems it faced. It was these factors which
largely accounted for the extraordinary overburdening of the THA with what
its last president, Birgit Breuel, described as 'completely exorbitant
demands' (quoted in H. Schmidt, 1993: 108). Certainly, the THA was
taken by surprise by economic developments which it could not influence.
In this respect, the breakaway of Eastern European markets and the global
economic crisis, with all their implications for the sale of problem-ridden
East German companies, were of special importance. In the face of
growing problems, the THA’s means of response became increasingly limited.
In addition, there were the constraints associated with the need for political
negotiation and coordination involving Federal and Länder governments,
trade unions and business associations. It is therefore very difficult
to separate objective problems from those caused by institutional constraints
that arose from the complicated and time-consuming procedural requirements
imposed by the governmental system. Since the Federal government
had raised high hopes of quick economic success in the new Länder,
there was a very real danger that the blame for failure would be laid at
the door of the political institutions. Thus an important additional
task fell to the THA: to direct public disappointment and anger towards
itself and away from the elected governments at the Federal and Länder
levels. This was the 'lightning-rod function' or scapegoat role of
the THA as an autonomous administrative agency which has been stressed
by many commentators (R. Schmidt, 1991: 125).
Uncertainty also resulted from the information and communication gap
between the THA and the individual enterprises it owned. Plant managers
and staff often felt that they were subject to arbitrary decisions of the
THA central office and its regional branches; the latter, in turn, frequently
did not know what exactly was happening in the companies that still tended
to be managed by the old cadres - often under the influence of prospective
buyers from the West. The market value of the enterprises typically
had to be assessed by West German economic consultants and auditors who
might be tempted to act in collusion with plant managers and investors
to mislead the A. Thus the THA itself has estimated that there were about
1000 cases of dubious contracts and fraudulent gain. Of course this
represents a relatively mall share of the approximately 50 000 contracts
concluded by the THA within a three-year period, which included not only
the price of purchase(with total proceeds of DM43bn), but also job pledges
(1.5 million jobs), investment pledges (DMI8bn), details on the execution
of contracts, arrangements in respect of inherited ecological burdens (Altlasten)
and provisions relating to outstanding debts of GDR firms. In this
connection it is interesting to note that, when the THA was first set up,
it was still assumed that the conversion of GDR enterprises into private
companies would involve little more than an act of bookkeeping, which could
be managed by 150 lawyers and financial experts from the former finance
ministry of the GDR in cooperation with West German consultants.
The THA between Länder and Federal Governments
Through the formation of formal and informal networks, an encompassing
and complex system of interrelationships evolved around the THA.
Of special interest were the problems that a centralized body of institutionalized
trusteeship, created by the GDR government, faced in adjusting to the federal
structure and the pattern of relationships between the state and interest
groups that predominates in the Federal Republic. The THA further complicated
the interlocking political nexus of Federal and Länder governments
in Germany and put to the test the 'neo-corporatist' integration of economic
interest groups into the Federal Republic's political processes.
Overlapping Federal and Länder jurisdictions have always been
a characteristic of the German federal state, and they place powerful constraints
on the political negotiating process (Lehmbruch, 1978; Scharpf, 1993: 35).
The Federal Republic has been called a 'semi-sovereign state' (Katzenstein,
1987: 371f) because of its complex interlocking of domestic powers - an
arduous political gearbox that has been lubricated by effective rules of
compromise and consensus democracy. These rules have evolved during
the postwar period and proved highly adaptive in the face of the political
conflicts and economic crises of the 1970s and 1980s. Even by the
mid-1990s, however, it is still an open question whether they can also
meet the challenge of the conversion of a socialist planned economy into
a market economy (H. Schmidt, 1993: 105ff; Hankel, 1993: 179f; Lehmbruch,
1991: 592f; M.G. Schmidt, 1993: 448f).
In the run-up to German unification - notably in the negotiations on
the Unification Treaty, the Treaty on Electrical Power (Stromvertrag),
the Trusteeship Act and the Legislation concerning municipal property -
the Federal Republic's intergovernmental negotiating system was temporarily
bypassed in order to reach prompt decisions (Lehmbruch, 1991: 586).
Only after the new Eastern Länder had been established and their resource
needs could no longer be ignored, did, the question arise as to the future
shape of the intergovernmental system in unified Germany. At issue
here were both the political and fiscal status of the Federal government
vis-a-vis what were now 16 Länder and the horizontal redistribution
of revenues (fiscal equalization) between the old and new Länder (Mäding,
1992). The THA, directly subordinate to the Federal government, played
a decisive role in this respect, since it was confronted by tasks that
fell under the jurisdiction of the new Länder, notably as far as implications
of THA activities for regional structural development policy were concerned.
In view of the centralist intentions of the Trusteeship Act and the fiscal
problems of the new Länder, the situation in 1990 understandably gave
rise to concerns about the possibility of greater centralization in intergovernmental
relations (Seibel, 1992; Mäding, 1993; Lehmbruch, 1991: 592f; M.G.
Schmidt, 1993: 453).
THA President Rohwedder, who was murdered by terrorists in April 1991,
had anticipated this political development, and signaled his willingness
to the Länder to make concessions while, at the same time, he sought
to stake out areas of autonomy vis-a-vis the Federal government.
This is also the context for the creation of a permanent presence for the
THA in Bonn. Established in April 1991, the chief of this office
was to represent the interests of the THA before Parliament. Thus,
during its first two years, the THA Bonn office responded to some 2000
requests for information, mostly from members of parliament, and held more
than 30 events to provide information on the THA’s activities.2
The Bonn office thus occupied the curious position of a lobbying institution
of a Federal agency at the seat of the Federal government and Parliament.
Institutions of THA-Länder Coordination
The constitutional position of the Länder vis-a-vis the THA was
made particularly clear in the Principles for the Cooperation of the Federal
Government, New Länder, and Trust Agency in the Economic Uptum of
East Germany of 15 March 1991 (Principles) (Grundsätze zur Zusammenarbeit
von Bund, neuen Ländern und Treuhandanstalt für den Aufschwung
Ost, in: Treuhand Informationen No. 1, May 1991; see also R. Schmidt,
1991: 31 ff.). These principles stated, 'The radical change of systems
in the new Länder requires unusual measures in a concerted collaboration
of the Federal government, the new Länder and the Trust Agency.' Furthermore,
the Principles established the role of the THA as a 'service-provider'
in the development of regional economic structures in the new Länder.
The THA agreed to provide the Länder with all relevant information
concerning enterprise closures and redundancies, including what particular
measures would be taken (demolition, recycling, and land Conservation and
rehabilitation); what their employment effects would be; what contribution
THA enterprises would make to job creation programmes; and what their land
holding assets were. All of these data would be conveyed to the relevant
Länder ministries. In addition, the seats reserved for the new Länder
on the THA governing board (Verwaltungsrat) were to be filled by
the Länder Minister-Presidents themselves; in this way, they would
be kept informed of organizational developments, the general plan of action
and all major decisions.
In addition to the governing board, the Principles also specified some
additional institutional linkages between the THA and the new Länder,
including THA economic cabinets (Treuhand Wirtschaftskabinette),
advisory boards for the branch offices and direct contacts between government
and administrative offices, on the one hand, and the THA’s enterprise divisions,
charged with privatization, on the other. THA economic cabinets were
constituted in April 1991 on the basis of paragraph 8 of the Principles
in each o t e new Länder. The sixth session of the THA cabinet
in Saxony provides a typical example of the range of participants.
They included, on behalf of the THA, the division for the State of Saxony,
representatives of the enterprise divisions affected by particular items
on the agenda and the THA regional branch offices. For the State
of Saxony, participants included representatives of the ministries of economics,
finance and agriculture, the director of the Office for the Regulation
of Unresolved Property Questions (Amt zur Regelung offener Vermögensfragen,
Property Office), the chair of the economics committee of the Landtag and
other members of the Land parliament.
The monthly talks (Monatsgespräche) between the Land economic
ministries and the representatives of the THA enterprise divisions, as
well as the sectoral talks (Branchengespräche) and the company
reorganization talks (Sanierungsgespräche) were closely related
to the economic cabinets. They convened either directly after economic
cabinet meetings or separately, with their own list of participants. The
sectoral talks usually followed a uniform pattern in that they provided
information on, first, enterprises, their starting position and situation,
and their appraisal by the Supervisory Committee (Leitungsausschuß)
of the THA; second, the state of privatization and interested parties;
third, investment plans; fourth, means of funding; and, finally, further
with Länder parliaments and committee members were also part of the
sectoral talks. By means of this preliminary provision of information,
the Land divisions of the THA hoped to minimize the number of necessary
responses to parliamentary requests for information. Länder
governments were informed first, and on a regular basis, of any business
closures or staff redundancies in the framework of an 'early-warning system',
which was a product of the framework Principles adopted in the spring of
Länder aid for THA enterprises became an increasingly prominent
part of the collaboration between the THA and Länder governments.
The latter attempted to prevent further job losses, especially by using
funds of the traditional Federal-Länder joint task programme for the
promotion of regional economic development and funds of the European Commission
designated for regional economic aid and by means of a diverse range of
special programmes. Agreements with individual Länder show that
the THA thoroughly approved of such initiatives as a way of reducing its
own responsibilities. Thus, in the Breuel-Schommer agreement of 24
April 1992, the Saxon government pledged 'to support regionally important
business enterprises, which it defines as such, with its entire set of
instruments, and especially with GA4
funds and with guarantees ... to promote the necessary public infrastructure
measures and to make its labour market policy instruments available for
specific purposes'.5 In return,
the THA intended to grant the enterprises supported by the Land government
'the necessary entrepreneurial and financial room for manoeuvre', even
if the approved plan 'requires a modernization process of several years'.6
The collaboration with the Länder resulted in various programmes for
the joint promotion of regionally important enterprises, of which the Saxon
ATLAS Project became the best known.
The THA as a 'Second East German Government'
The extent to which the THA’s activities should be assigned to the fields
of economics, politics or public administration is debatable. According
to the Trusteeship Act of 17 June 1990, the Agency was set up as a concentration
of stock companies under the supervision of a governing board. Another
open question concerns the degree of autonomy it enjoyed vis-à-vis
the Federal government, the Länder governments, the European Commission
and the major interest groups.
Even before unification the stock company model had been replaced.
A few stock companies which owned almost the whole economy would have carried
on the old socialist combine structure. This approach threatened
to preserve the GDR as an economic entity. Another factor was that
the stock companies would have come under the German codetermination act
of 1976. It is true, the THA owned a great number of legal stock corporations
which have been codetermined by union and workers representatives.
However, these were not powerful groups of affiliated companies.
In accordance with the Trusteeship Act a plan of July 1990 provided for
only four huge stock companies covering the fields of heavy industry, the
capital goods industry, the consumer goods industry and services with a
portfolio of up to 2,500 subsidiaries each.
On 24 August 1990, immediately after taking office as president, Rohwedder
outlined the key features of a completely different organizational structure.
Instead of a few sectoral stock companies below the THA office, responsibilities
became divided between the central office in Berlin and 15 regional offices,
with the former responsible for big firms and the latter for medium-sized
and small ones. This was a violation of law and in September 1990
Rohwedder apologized in front of the GDR parliament using a traditional
proverb: 'Real life comes before the letter of law'.7
In legal terms, the THA was not a business enterprise and, in factual
terms, it was not a conventional state agency. Certainly, its legal
form as an agency of public law directly accountable to the Federal government
permitted no conclusions to be drawn about the actual role it played in
the political system of the Federal Republic. Its mission and its
way of operating placed it at the interface between state and economy.
Speaking in legal terms, it could be defined as an 'organization in the
area of overlap of two le al spheres' in which a mandate under public law
and its discharge under private law coincide (Schuppert,' 1992: 186). It
functioned as an agent of the state for developing the private economy.
In this sense - and in its legal form - it was reminiscent of the Reconstruction
Investment Bank (Kreditanstalt für Wiederaufbau), which emerged after
the Second World War out of the administration of the Marshall Plan funds
of the European Recovery Programme. Both were in control of a special fund
of the Federal government and under the supervision of a governing board
that consisted largely of representatives of industry. The THA, of
course, was conceived as a government agency, but, with the coming into
force of the Trusteeship Act, its entrepreneurial character became more
prominent, although when the Act was passed no one anticipated the political
role it was gradually to assume. The THA’s growing engagement in
labour market policy, in particular, reflects the extent of its political
Between 1991 and 1993, the THA progressively lost much of the autonomy
and room for manoeuvre that it had initially enjoyed. This occurred
in the context of the increasing diversity of its tasks, the growing need
to coordinate its actions with the Länder, and tighter controls by
the Federal Antitrust Office, the Federal Audit Office, the Bundestag and
Federal ministries. In 1993, the division responsible for company
liquidations alone estimated that 1000 man-days were spent on answering
requests for information from ministries, the Federal Audit Office, and
Federal and Länder parliaments (Süddeutsche Zeitung, 22
July 1993: 17). When, in 1993, THA directors, branch managers and
divisional heads were surveyed on external restrictions in the exercise
of THA tasks, 58.8 per cent reported an increase in external influences
on the activity of the THÄ between 1991 and 1992, 31.5 percent reported
no change, and 9.7 per cent answered that external influences had decreased.
The Supervisory Committee, the Ludewig Round and the Bundestag
Leaving aside, for the moment, the requirement of official approval
for certain financial and policy-shaping decisions and the informal understandings
reached in daily contacts with the Bonn ministries, especially the Ministry
of Finance, there were two key institutions linking the THA and the Federal
government: the Supervisory Committee (Leitungsausschuß) of the THA
and the so-called 'Ludewig Round', named after Johannes Ludewig, the head
of division in the Federal Chancellery entrusted by the Chancellor to deal
with questions regarding the development of East Germany.
The institution of a Supervisory Committee can be traced back to the
time of currency conversion in the GDR. At that time, a first group
of auditors was sent to Berlin by the Federal Ministry of Finance to check
on the use of funds. The start of currency union on 1 July 1990 allowed
8000 industrial enterprises to submit applications to the THA, specifying
the operating funds they required in Deutschmarks, broken down according
to wage payments, social insurance contributions, completion of orders,
investments and so on. Since the THA was not, at the time, directly
accountable to the Federal government, these applications had to be examined
primarily in terms of business management criteria rather than legal prerequisites.
Auditors and business consultants were commissioned to carry out this assessment
exercise. After unification, they provided the core of the THA Supervisory
Committee under the chairmanship of Horst Plaschna. The decision
of the Federal government to approve only 41 per cent of the requested
operating funds in the first phase was based on their expert appraisal.
This constituted an early disappointment, and many managers of GDR firms
laid the blame at the door of the central office of the THA. From
this time on, the Supervisory Committee - as an autonomous advisory body
to the Federal Ministry of Finance which was active in the THA but not
incorporated into it - examined all entrepreneurial schemes submitted to
the central office and issued recommendations on how they should be acted
The prime function of the Ludewig Round was to act as a high-ranking
political coordinating body. It convened for the first time on 13 May 1991
and then at intervals of several weeks (and sometimes more frequently),
usually in the Berlin branch office of the Federal Chancellery. Its
mission was to attend to, and also to monitor, the implementation of the
resolutions on the development of East Germany passed in the first months
of 1991. From the beginning of 1992, the meetings also served to
prepare the talks of the Federal Chancellor with the Minister-Presidents
of the new Länder and the governing mayor of Berlin. The participants
in the Ludewig Round included the THA executive manager (Generalbevollmächtigter),
the heads of the Minister-Presidents' offices of the new Länder, and
the Federal Chancellery, represented by Johannes Ludewig and the director
of the Chancellery's Berlin office. The chief issues discussed included
the financial requirements of the new Länder, current economic questions,
initiatives for the development of East Germany, administrative assistance,
trade with Eastern Europe, Federal export credit guarantees ('Hermes' credits),
jobcreation programmes and other controversial questions, such as the transfer
of Federal land holdings to the Länder or the operations of the criminal
prosecuting authorities at the THA.
The Ludewig Round was set apart from other coordinating bodies in which
the THA took part by its multilaterality, its high rank and binding character,
and the frequency and regularity with which it met. It linked the
political control centres at a working level below that of the heads of
governments and the THA executive (Präsidium). Unlike the Chancellor's
Round on the development of East Germany in Bonn, which met informally
and much less frequently, the political executives in the Ludewig Round
coordinated their plans and interests in a small circle without the participation
of societal interest groups. In those instances where talks were
held in coordination with the meetings of the Chancellor and the Minister-Presidents
of the new Länder, important decisions were often agreed, concerning,
for example, the criteria for the award of Hermes credit guarantees and
a draft of the Property Transforrnation Act (Vermögensänderungsgesetz).
In this way, as well as through direct contacts with the Bundestag and
the individual Federal ministries, the THA played an active role in shaping
legislative initiatives. Thus the THA initiated, for example, a number
of regulations of the Property Allocation Act (Vermögenzuordnungsgesetz),
the Investment Priority Act (Investitionsvorranggesetz), the amended
Jobs Development Act (Arbeitsförderungsgesetz) and the Trust
Agency Borrowing Act (Treuhandanstalt-Kreditaufnahmegesetz).
Parliamentary oversight of the THA was initially assigned to a subcommittee
of the budget committee of the Bundestag. In comparison to Federal and
Länder governments, this committee played a minor part in the monitoring
and regulation of the THA. Partly this was because the normal regulatory
mechanisms and conditions of approval that are granted to Parliament under
its budgetary powers were not fully applicable to the THA as an entity
enjoying the legal status of an incorporated public law institution (Spoerr,
1991: 15). Partly the committee's lack of impact reflected the prevailing
affirmative attitude vis-à-vis the THA on the part of the majority
of its members. This may, in part, have been a reaction to the early
severe criticism of the THA by the Alliance 90/Greens, which, in June 1991,
went as far as presenting a draft for a new Trusteeship Act. The
committee did not want to be seen to encourage in any way their demands
for organizational reform, greater parliamentary controls, debt reduction
and reorganization of THA companies, especially since what influence the
committee possessed was largely dependent on the agreement of the THA.
The Trust Agency Borrowing Act of 3 July 1992 set a credit ceiling of DM3Obn
per fiscal year for the THA, and required approval by the Bundestag budgetary
committee for this facility to be fully used in 1993 and 1994. In
response, the THA expanded its briefings of the committee, frequently inviting
the committee members to on-site inspections in Berlin or at industrial
locations in the new Länder.
It was only in February 1993 that a separate Bundestag committee to
deal with the Trust Agency was created, which covered the entire scope
of THA activities. This committee was regularly informed by the THA
of its operations, contract supervision activities, company reorganization
plans, new approaches to privatization and THA expenditure. On 16 June
1993, the THA informed the THA committee that it wanted to raise DM8bn
more on the capital market than its established credit limit and sought
- through the Federal Ministry of Finance - the approval of the budget
committee. This amount had already been agreed upon in negotiations
between the Länder and Federal governments on the Federal Consolidation
Programme, that is the Solidarity Pact on the development of East Germany.
The money was intended, above all, to secure and renew industrial centres.
However, the budget committee of the Bundestag only approved DM7bn,
a decision which prompted the THA to announce that it intended to curtail
its participation in companies subsidized for purposes of job maintenance
(Beschäftigungsgesellschaften or job maintenance companies)
in the metal and electrical industries. This announcement also had
a collective bargaining component to it. It was designed to induce the
metal workers' union to extend the application of the so-called 'hardship
clause' to THA enterprises (Frankfurter Allgemeine Zeitung, 3 July
1993: 12), which allowed for the reduction of wages in enterprises that
suffered acute economic difficulties. The union had previously refused
the use of this clause in the case of THA enterprises, since THA firms
were maintained by public funds. In this situation, the budget committee's
resolution was to be understood as a Signal that THA firm managers, works
councils and the trade unions would not be allowed to prevent the application
of the hardship clause at the expense of taxpayers, without having to bear
the consequences in terms of factory closures and unemployment. Here the
interlocking of the parliamentary arena with the THA and interest group
politics became especially clear. The THA responded to the parliamentary
limitation of its financial discretion by threatening to cut back its job
maintenance measures. This decision immediately raised a problem
for trade union policy. In 1993, collective bargaining and employment policy
became the politically most significant and explosive problems facing the
Interest Groups and Public Administration in the Trust Agency Complex
The privatization activities of the THA resembled a balancing act, in
that it had to balance investment and employment objectives, the assumption
of inherited debt, participation in environmental clean-up projects and
privatization receipts in such a way that the greatest possible consideration
was given to the interests of the respective Federal and Länder ministries,
business associations and trade unions. Of course no ideal solutions
existed, particularly when the aims of job preservation and the promotion
of investment became embroiled in conflicts of interest between trade unions
and business associations. In addition, the representatives of industry,
who held the majority of seats on the THA governing board (Table 5.1),
were also concerned about the level of investment assistance the THA gave
their Potential competitors in the new Länder and the industrial structure
which would emerge as a result of the THA privatization approach.
Table 5.1 Representation on the Treuhandanstalt's governing board
(Verwaltungsrat) (number of seats)
THA Organisationshandbuch, rule no. 1. 1. 1. 1.
Representatives of industry were, at times, the most uncompromising
opponents of an entrepreneurially active trusteeship policy. They
criticized key marketing concepts of THA enterprises (such as the Leipzig
Trade Fair 'Made in Germany') and expressed their fear that govemment assistance
in the east might jeopardize companies in the west, especially in the precarious
economic situation of 1992 and 1993. On the other hand, the new Länder
and the trade unions occasionally advocated highly risky modernization
strategies, primarily for reasons of regional and social policy.
All major privatization plans had to be approved by the governing board,8
as did certain executive decisions in such areas as organization, privatization
guidelines, financial dealings and annual economic plans. Most resolutions
tended to be unanimously approved after preliminary clarification, though
they were also subject to approval by the Federal minister of finance and
the European Commission. Originally, the governing board was not
supposed to be a vehicle for the representation of interests. The
Trusteeship Act mentioned neither representatives of interest groups nor
the participation of the Länder; instead, economic expertise was laid
down as the sole appointment criterion. Formal regulations calling
for the representation of Länder governments were first found in Article
25 (2) of the Unification Treaty, which established additional seats on
the governing board. By contrast, trade union representation was
solely at the discretion of the Federal government.
As part of the process of providing Länder, social groups and
local authorities with better access to the THA, advisory boards to the
regional branch offices were created in March 1991 on the basis of a directive
of the THA central office. According to the directive, the aim was
to 'bring about accord with the political, economic and societal forces
of the region'. The composition of the advisory boards differed greatly
from one regional branch office to the other. In Chemnitz, Cottbus,
Dresden, Berlin and Halle, industry was particularly strongly represented;
in Frankfurt/Oder, Leipzig and Rostock, the trade unions; in Erfurt and
Frankfurt/Oder, the churches; in Gera, the municipalities; and in Neubrandenburg,
citizen action groups played a major role (see Table 5.2).
Table 5.2 Representation on the 15 regional branch office
boards of the THA (in number of seats and percentages), as of March
1991 (June 1991 for Berlin)
|Industry, chambers of commerce
|| 9 (7%)
|Citizen action groups
|| 9 (7%)
THA-Office in Bonn, Appendix to the Report, 'Cooperation between Länder,
the Federal Government and the THA' of 28 November 1991. Data on
Berlin: Protocol of the constitutive meeting of the advisory board of the
THA branch office in Berlin of 11 June 1991.
Labour Market and Industrial Relations
In the Principles for the development of East Germany, mentioned above,
the establishment and funding of job maintenance companies were made the
exclusive responsibility of Länder governments and the Federal Labour
Office.9 This created problems,
since such companies could usually only be accommodated in the buildings
of THA enterprises, make claims on the established subsidies of these enterprises
and, in part, perform clean-up and reorganization operations on their behalf.
Also, by implementing redundancy plans, the THA could trigger job maintenance
measures at any time. The political conflict over job maintenance
companies - involving the Federal government, the THA, Länder governments,
trade unions and business associations - intensified until the middle of
1991, when the THA agreed to a compromise. Its basic features were
adopted by the THA and representatives from the two sides of industry on
1 July 1991. The compromise resulted in a formal framework agreement
between the trade unions, employers' federations and the THA, which was
signed on 17 July 1991 and was to serve as the basis for the creation of
Companies for Job Development, Employment and Structural Development (Gesellschaften
zur Arbeitsförderung, Beschäftigung und Strukturentwicklung,
or ABS companies).
From the very beginning, the THA would only take part in job-securing
measures if they did not jeopardize its privatization mandate. For
this reason, the THA insisted, in agreement with the business associations,
on ending job maintenance employment in THA enterprises and on 'establishing
a new legal relationship of a special kind' in ABS companies, which would
reduce its responsibilities as an employer. Moreover, the legal construct
of these companies would also make it easier to release employees.
The THA declared its willingness to pay the managers of ABS companies for
up to six months (and in special cases for up to a year) and to provide
consulting and management assistance. The same held true for initial
administrative tasks such as wage and salary accounting or social insurance
payments. Finally, the THA had prefinanced numerous ABS companies, which
resulted in reimbursement claims against the Länder governments.
The latter, in turn, called for a stronger financial commitment on the
part of the Federal government and the Federal Labour Office.
A completely new perspective opened up with the insertion of paragraph
249h into the Jobs Development Act. The new regulation, which came into
being as a result of the efforts of the THA, made it possible for the Federal
Labour Office to provide wage subsidies for a period of up to five years
to those companies in the new Länder that contributed to environmental
improvement, youth welfare services or other social services. On
this basis, the THA pledged, in an agreement with the Chemical Workers'
Union, to endow an accreditation programme for chemical workers (Qualifizierungswerk
Chemie) with DM75mill. and to administer it in close cooperation with the
Chemical Workers' Union. Thus the THA made available earmarked funds
to equip the companies taking part in the retraining programme with materials.
The social compensation plans (Sozialpläne) of THA companies in the
chemicals sector were to ensure that employees received compensation in
the form of wage payments after being assigned to a company subsidized
for purposes of reorganization (Sanierungsgesellschaft, or reorganization
company). These reorganization companies received assistance from
the employment authorities according to paragraph 249h of the Jobs Development
The THA concluded a similar framework agreement with the Miners' and
Energy Workers' Union. Here mine workers from the potash and lignite mines
were to be retrained as landscape gardeners and employed in large-scale
land rehabilitation programmes. The two initiatives, covering as
many as 40 000 jobs, demonstrated the willingness of the THA to support
job creation programmes if they were primarily investment-related, facilitated
the privatization of THA enterprises and did not prevent a return to normal
conditions. In the second half of 1993 alone, the THA earmarked a
total of DMI.2bn for measures in accordance with paragraph 249h of the
The politics of interest groups and wage agreements represents a further
area that provides clear evidence of the close involvement of the THA in
labour market and social policy issues. From the very beginning,
the THA had trouble preventing its plant managers from making concessions
to their employees. Only a few months after unification, it became
clear that, with the help of West German consultants, many company agreements
on redundancy protection and social compensation plans had been agreed
upon which, in some cases, provided for extraordinary settlement sums.
In one instance, the full salary was to be guaranteed until retirement
age, while, in another, severance pay was set at DM 1 56 000 for every
worker to be made redundant. In both cases, the THA was expected
to bear the full costs (Hanau, 1993; Frankfurter Allgemeine Zeitung, 29
January 1991). Only the first framework agreement, concluded on 13
April 1991 by the THA with the Federation of German Trade Unions (Deutscher
Gewerkschaftsbund) and the German Union for Employees (Deutsche
Angestellten-Gewerkschaft) provided for consistent provisions regarding
redundancy. However, this agreement only became possible after the
Federal Ministry of Finance had approved an endowment of DM10bn to fund
social compensation plans.
THA guidelines on company wage and pay agreements and on the membership
of THA enterprises in employers associations aimed to prevent the proliferation
of company agreements.10
According to the guidelines, its enterprises should join employers associations
which were able to create an effective social consensus with the trade
unions. Clearly, the THA preferred industry-wide collective bargaining
agreements to company wage and pay contracts. Membership of an employers
association was thus almost obligatory for THA enterprises, especially
since in some businesses - for example, in the steel and shipyard industries
- the works councils had such membership contractually guaranteed.
Moreover, THA enterprises promoted the establishment of employers associations
in the new Länder in so far as they paid their dues on time, in contrast
to some privatized companies, but did not demand a strong voice in association
matters. The THA also worked with the trade unions to try to ensure
that foreign investors would maintain the employers association membership
of privatized companies and did not enter into wage and pay agreements
at the company level.
Municipalities, Former Property Owners and the Priority of Investment
The THA executive always endeavoured to present itself as its companies'
executive management. That a public enterprise was involved was obvious,
not only from the THA’s array of relationships with external institutions
and the impact of political considerations, but also from the public powers
which had been bestowed on the THA. This applied, in particular,
to its legal powers concerning the restitution of municipal properties
and the property rights of former private owners, where priority was accorded
to investment rather than restitution. In both cases, legally binding
administrative acts were carried out by the THA, in particular its legal
affairs division in the executive sector (Präsidialbereich)
and the division for municipal properties and water regulation.
The directorate for municipal property had its own sections for each
of the new Länder which were independent from the executive level,
and there was also a liaison office for contacts with the main local government
associations. The head of the division for municipal property was
delegated from the German Association of Cities (Deutscher Städtetag)
and maintained close contacts with this organization and with the cities
and also with the Association of Counties (Deutscher Landkreistag)
and the Association of Towns and Municipalities (Deutscher Städte-
und Gemeindebund). Moreover, the municipal property division
maintained close links with the Federal and Länder interior and justice
ministries whose administrative regulations largely shaped its activities.
The municipal property division was also integrated within a wider
relational network with Parliament and other parts of public administration.
Requests for information were frequently received from the THA Committee
of the Bundestag, there were daily calls from the Federal Ministry of Finance
and frequent requests for information from local, regional, Länder
and Federal politicians. In addition, the division, together with
other THA divisions and the regional finance directorates (Oberfinanzdirektionen),
which had local jurisdiction under the Property Allocation Act, was repeatedly
represented at local government conferences, which were held by the Federal
Ministries of Finance and the Interior. Finally, the municipal property
division itself also organized its own local govemment conferences at the
district level in order to report on the procedures and state of property
restitution. These conferences focused on the west-east transfer
of institutional know-how and problem-solving approaches related to the
local provision of basic social services in the new Länder.
These multiple links allowed the THA to take part in the development of
the new Länder's local and state administrations.
Former property owners (Alteigentümer), their interest representatives11
and local governments frequently turned to the THA in connection with Article
3a of the Property Act. At issue here was the suspension of THA restraints
on the disposal of landed holdings and enterprises on which former owners
had entered a claim. The Property Act, in its original version of
23 September 1990, turned out to be an impediment to investment.
Accordingly, at the hearings to prepare a Federal Act on the Removal of
Impediments to Investment (Hemmnisbeseitigungsgesetz), the THA called
for the right to reject reprivatization claims in cases where former owners
were only interested in property holdings and not willing, or able, to
continue to run a business. As early as March 1991, with the insertion
of Article 3a in the Property Act, the THA was empowered to establish the
priority of investment over restitution. This provision transformed
the claim to the return of property into a claim for compensation Once
the THA instigated investment priority proceedings, the restitution process
by the responsible Land government Office for the Regulation of Unresolved
Property Questions was legally discontinued.
In the conflict between the investment, employment and development
interests of the THA and decisions on restitution claims by the property
authorities, administrative competition arose which was supposed to be
defused by means of joint working sessions between the THA and the property
authorities. Nonetheless, in the eyes of several property authorities,
the THA was their greatest enemy. Others were more open in their
response to the priority of investment, especially since, in the assigning
of property to former owners, they were dependent upon the previous work
of the THA, notably the reprivatization division. Despite precautions,
both legal and informal, restitution rulings sometimes conflicted with
decisions by the THA, and the THA usually took legal action against decisions
of property offices if they conflicted with THA privatization plans.
This was especially the case if former owners attempted to stop important,
large-scale projects in an attempt to increase the amount of compensation
they would receive.
Amongst the public powers of the THA, mention should also be made of
the Special Assignments unit of the THA, which was vested with the powers
of an investigative department of a public prosecutor's office. It was
staffed primarily by prosecuting attomeys and police detectives delegated
by Federal and Länder governments. In close cooperation with
district attomeys and auditors, its four departments investigated cases
of managerial abuse of trust, the unlawful dismantling of enterprises,
subsidy fraud, unification-related criminality, corruption breach of entrepreneurial
secrecy, defamation and environmental offences. They were also involved
in the internal audit of the THA. Prompt investigative work made
it possible to secure some 90 percent of the total of DM3bn at issue in
the investigations of fraud up to December 1992.
Conclusion: Privatization in Interwoven Decision Making Structures
The major goal of the THA was to create efficient property rights through
what might be called 'negotiated privatization'. Neither auctions
nor direct sales in favour of former socialist managers played any significant
role in the East German road from socialism to capitalism. Even restitution
to former property owners was conditional on the THA’s assessment of their
entrepreneurial abilities. Thus, from July 1992 onwards, the THA
could authoritatively allocate property rights to competent investors if
former owners were not willing to invest or not able to present appropriate
business plans. This power was based on the Investment Priority Act.
In one sense, the THA did not really sell its firms; rather, it bought
business plans and investments. Many THA firms achieved only negative
contract prices and, in five years, the Agency ran up enormous debts, amounting
to DM270bn (including DM70bn in old debts, which had been converted into
Deutschmarks through monetary union). Since 1 January 1995, these
debts have had to be met by the Federal budget, together with other unification
costs, amounting to some DM450bn. Thus the German taxpayer will have
to finance interest and capital repayments of about DM40bn per annum for
an estimated 30 years.
With only minor exceptions, unification policies tried to preserve the
System of government, public administration and political economy of West
Germany by transferring it to the new eastern Länder. This has
turned out a risky but promising endeavour. As far as the political
economy is concerned, the 'German model' (Scharpf, 1987) had proved itself
in West Germany. It is characterized by collective bargaining autonomy
and cooperative interest group politics, monetary stability, free trade,
a consensus on industrial competitiveness, and welfare state provisions,
including codetermination in industry or social security schemes which
are mostly linked to labour contracts. The transition from socialism to
a market economy in East Germany was a process of rapid and comprehensive
institutional adjustment to the functional conditions and customary pattems
of problem solving found in West German politics.
This process of institutional transfer can be seen very clearly in
the evolution of the THA from a central economic agency of transformation
created by the GDR government into part of the complex political system
of the Federal Republic. As an intermediate institution between the
Federal government and the new Länder, it functioned as a third level
of cooperation in Germany's intergovernmental system. Thus both Federal
and Länder governments were represented on its governing board and
numerous coordinating committees, as were representatives of industry and
the trade unions. The THA’s scope for manoeuvre and the conditions
of success were shaped by this relational network. Early assessments
of the THA, which assumed that it would strengthen central state power
because of its dominant economic role in East Germany (Seibel, 1992: 194),
therefore need to be qualified. How did the THA’s intermediary position
in the bargaining arenas of federalism and of interest group politics affect
its success? This question is not easily answered, as technical restrictions
need to be distinguished from institutional ones. Undoubtedly, many
of the THA’s problems simply resulted from the diversity and contradictory
character of its responsibilities. Conflicts between different substantive
goals and economic constraints that hampered the policy transformation
existed independently of the institutional configuration of the agents
of transformation. As problems, time constraints and the pressure
to succeed grew, the THA’s room for manoeuvre shrank. Accordingly,
the correct question to ask is whether, in the words of former Chancellor
Helmut Schmidt, its condition, which was overburdened in any case, really
worsened by the large number of bodies interfering with the agency', or
whether, on the contrary, the THA’s network of external relations helped
it to cope with its excessive responsibilities.
In answering this question, it should first be noted that the interlocking
of decision makers in the transformation process lessened the legitimation
problems of the THA. This was, in fact, the effect the THA aimed
for with its strategy of cooption and the opening to political and interest
groups. Of course, this strategy raised the danger of capture by pressure
groups, and many critics complained of the privileged position of business
interests within the THA. However, the cooption of all relevant actors
contributed to checks and balances between political, economic and trade
union interests and to the better coordination of objectives.
The Trust Agency complex is a classic example of the way an encompassing
network of coordination and control arises out of the confrontation of
mutually dependent political and interest group actors. Ultimately,
it was the THA itself that linked much of this network of transformation
policy making together. Its legal status and the strategy of cooption
it consistently pursued allowed it to gain the commitment of powerful actors
and, at the same time, helped to create common areas of action. Where
it entered into relationships - whether on the basis of the Principles
for the economic recovery of East Germany, framework agreements with unions,
internal guidelines, or through the many coordinating committees - the
THA relied on the common interest of all participants in the success of
economic reorganization and tried to garner the widest possible support
for its line of action.
There was a constant danger of conflict inherent in the precarious
dual role of the THA as an employer and agent of transformation, on the
one hand, and a key player in labour market and social policy, on the other.
The only realistic option open to the THA was to meet this challenge in
the spirit of compromise, as it would otherwise have quickly been destroyed
in the clash of forces between the Federation, individual Länder,
business associations and the trade unions. A process of mutual accommodation,
which from the outside might have looked like helpless 'muddling through'
(see Lindblom, 1959), was the only promising solution in the confusing
situation that posed a constant threat to the very existence of the organization.
Such 'muddling through' can be understood as a logical consequence of the
interlocking nature of the institutions of the German system of government.
Even in a situation characterized by far simpler problems, it would have
been difficult to attain a greater degree of control in this differentiated
system. Nonetheless, programmatic coherence and calculable procedures
remain the aim of all rational attempts at problem solving, especially
in the internal realm of major organizations. Such coherence and
reliability, however, proved unattainable. This was in part the result
of the network of political relations in which the THA had to operate,
the complexity of the problems it faced and the need for flexibility in
dealing with investors. Perhaps more importantly, almost all participants
in the transformation process shared the notion that the path from the
plan to the market could not itself be planned, and that there were, accordingly,
limits to a rationally calculated and routinized mode of problem management.
Where governance through markets or hierarchies does not yet function,
or cannot guarantee satisfactory solutions to specific problems, the principle
of political compromise to be found in informal social networks and interlocked
decision making structures can be invoked. In the face of a severe
economic and political crisis - when it was evident that most of its firms
were not saleable - the Trust Agency moderated its strict market approach
and learned to take advantage of semi-bureaucratic, informal procedures,
and its organizational boundaries became blurred. The THA did not really
sell its firms any more, but bought concepts of private investors and subsidized
their rescue operations to the extent of negative net contract prices.
Thus the THA came to act as a development agency.
If it is true that governments cannot plan, but only support, the way
a market economy functions, then the Federal Republic was better designed
to face the risks involved in the transformation of socialist economic
Systems than a unitary state. Its political institutions are geared
to negotiations and the balancing of political interests (Czada and Schmidt,
1993). They are not hierarchically structured, but are oriented towards
the constant mutual readjustment of their parts. The THA of the GDR
government represented a
Figure 5.1 THA successor organizations
'faulty construct' (Helmut Schmidt) for this system, which first had
to free itself from its set 'planning targets' in order to find its place
within the bargaining democracy of the Federal Republic. When it
had succeeded in this task, it was time to consider ending its institutional
By 1 January 1995, the THA itself was transformed and organizationally
restructured into a new political body called the Federal Agency for Special
Tasks Related to Unification (Bundesanstalt für vereinigungsbedingte
Sonderaufgaben - BVS) and several smaller administrative units (Figure
5.1). The control of contracts, future privatizations of public lands,
the handling of several closed-down nuclear power plants and many other
tasks will remain for a longer period.
The Treuhandanstalt did not break up the ordinary framework of German
administrative law. The unique and sovereign nature of its tasks,
however, made it an autonomous though not independent body of political
decision making and administration. Its operations were not so much
determined by law or by governmental order nor by parliamentary oversight
as one should assume in view of its legal foundations and vital political
importance. So far, the Treuhandanstalt could possibly serve as a
mode] for a project-oriented public administration operating in informal,
network-like structures which go beyond the public-private boundary.
Although informal policy making has been ubiquitous due to overlapping
political responsibilities for a long time, the infiltration of a private
sector culture into government is weakly developed in Germany compared
to other industrialized countries. In this respect, the THA has to be considered
as an exception. This is also indicated by the fact that it lost
some of its flexibility because of growing demands for coordination and
a process of bureaucratization imposed by the Federal Audit Office, Federal
ministries and the European Commission. To conclude, the Treuhandanstalt
revealed considerable adaptive capacities of the German political and administrative
system. Yet for the same reason it did not significantly change the operating
principles of this system.
1 These are former owners
of property in the territory of the former GDR who filed claims for the
restitution of their erstwhile property.
2 See THA-Büro
Bonn, 'Zwei Jahre "Büro Bonn der Treuhandanstalt"', Ms, 29 April 1993.
3 See 'Schwerpunktaufgaben
der Länderabteilung Sachsen-Anhalt', 17 January 1992, THA-Archiv,
SAN 5: 49.
4 GA funds consist
of Federal and Länder monies allocated to the Joint Task Regional
Economic Development (Article 9 la of the Basic Law).
5 The Breuel-Schommer
Agreement of 24 April 1992 (named after the THA president, Birgit Ereuel,
and the Saxon economics minister, Kajo Schommer), quoted in the letter
from THA President Breuel to Saxon Minister-President Kurt Biedenkopf,
27 April 1992, on 'Cooperation Between the Trust Agency and the Free State
of Saxony', THAArchiv, SACH: 198-201.
7 Volkskammer der Deutschen
Demokratischen Republik, loth legislative period, 35th session, 13 September
1990, shorthand report, page 1680.
8 According to the
THA7s rules of procedure (paragraph 15), governing board consent was obligatory
if any two of the following criteria applied: the total balance involved
exceeded DM100mill., turnover value exceeded DM300mill., or the enterprise
had more than 2000 employees.
Aufschwung Ost, Treuhand Informationen no. 1, May 1991: 11, paragraph 5
10 See Richtlinie
für Betriebsvereinbarungen und Haustarifverträge, vol. 1, September
11 They included
the Association of Central Germans (Bund der Mitteldeutschen), mainly refugees
from the former GDR living in West Germany and the Organization of Owners
of Berlin Wall Land Plots (Organisation der Besitzer von Berliner Mauergrundstücken).
In addition, the Diet of German Industry and Commerce (Deutscher Industrie-
und Handelstag) and other business associations also played a limited role.
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