I welcome the emergence of East Germany from Russian subjugation, and the union between East and West Germany. People of the same nation should not be divided. One of the strongest human needs is to be part of a nation. It gives a sense of security that is both wrong and dangerous to deny.

Now that union has been achieved legally and constitutionally, no one should object. The uncomfortable moment when West Germany tried to extend the border eastward into Poland has passed, but should not be forgotten.The question now is whether German unification is compatible with the economic and monetary union of Europe. I believe it is not.

The population of a united Germany will total 80 million people. It will become a formidable economic power at some time in the future. But not yet.

Chancellor Helmut Kohl has extravagantly offered one West German deutschemark for one East German ostmark, even though productivity and living standards in East Germany have been described as 40 percent of those of West Germany.

Much public expenditure will be required and much investment, both public and private, to bring the 17 million East Germans up to the present standards of West Germany. There needs to be wholesale rebuilding of roads, schools, houses and hospitals. In the process, there will be much unemployment as plants are modernized and made efficient and overmanning is reduced.

The cost of this will fall on the German federal budget. Pensions and social security payments will inevitably have to come up to West German levels, another huge expense. The federal treasury also will have to pay a greater contribution to the budget of the European Community as a result of the accretion of East Germany.

Some of this will come back in grants for regional development, but the bulk of it will be required to finance the increased burdens placed on the Common Agricultural Policy by inefficient East German farmers.

Complying with EC environmental directives in East Germany will be another major expense. In addition, West Germany has offered large credits to Eastern European countries, and lately a very large one to the Soviet Union. Whether these credits will be repaid is doubtful.

The present level of indebtedness of the East Europeans - Poland in particular - is so colossal that lending them more can only be described as extremely risky. Russia is an even worse case. It has not even yet started on serious economic reform, the Soviets have no real private enterprises and their foreign exchange already has run out. Oil is a major export, yet they are apparently unable even to maintain, let alone increase, oil production.

Eastern Europe is insisting on being paid for its exports to Russia in hard currency, and Russia is insisting on being paid in hard currency for its oil. If Russia can't supply the oil, it is Russia that comes off worse. All this makes more credit for Russia look risky indeed.

For completeness, we should add in the cost of German payments toward the Persian Gulf crisis.

So Kohl has been on a spending spree of very large proportions.

I cannot estimate the cost of all this - but it is huge. Maybe Carl Otto Pohl, head of the German Central Bank, keeps a secret tally. He would be wise to keep the cost secret. The foreign exchange markets would be alarmed if they knew the real cost.

There have already been hints that the German government itself is alarmed over the costs of unification thus far - and this is just the beginning!

What really matters are the implications of Kohl's spending spree for the rest of Europe. He is perfectly entitled to spend as heavily as he wishes. That is a domestic decision for the German government. But he has made it clear that tax increases are out. And who can blame him with elections due soon?

So the whole strain will have to be taken on monetary policy, which means heavy overseas borrowing and commensurately high interest rates in order to attract necessary funds.

All this is something which we would have to accept from a sovereign nation, pursuing its own interests, although it will have an impact on world interest rates and currency values.

However, Germany has proclaimed it no longer wants to be a sovereign nation. It wishes to promote and join the economic and monetary union in Europe, and it strongly advocates a single currency for the whole Community.

If economic and monetary union had been carried out a few years ago, and we had a single European currency now, recent German spending would not have been possible. The authority in charge of managing the single currency - the EUROFED - would never allow one part of the Community to engage in massive public spending without commensurate tax increases to finance it.

To the extent that the EUROFED allowed extra borrowing to finance Germany spending, or investment or overseas credits, interest rates would have to rise, which would of course affect all the other countries participating in the single currency.

The EUROFED, almost by definition, would not allow inflationary financing. In practice, it would be necessary for the EUROFED to have powers to limit budget deficits in member states, something Jacques Delors, president of the European Commission, believes will be necessary.

Delors' idea was withdrawn only because it proved so unpopular. But withdrawing it does not obviate the need for such powers if the final stage of the Delors plan for monetary union were adopted.

This point is sharpened by the fact that the EUROFED is to be set up free of any political control or influence and managed by the Central Bankers of the 12 member states. So Germany's ability to spend as it is doing would be limited by the bankers, who would have total control.

German unification and European economic and monetary union are thus totally incompatible.

In a few years time, when a united Germany has achieved industrial efficiency throughout what was formerly East Germany, the German currency will no doubt become a strong one again. At that time, a strong deutschemark would dominate the single currency and would cause major problems for those countries with slightly more inflationary tendencies than Germany.

Either way, strong or weak deutschemark, there is no logic in Germany's exporting the consequences of its economic policy to other member states.

1990, New Perspectives Quarterly

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