German Union Hard to Digest

GERMAN reunification is rapidly gaining recognition as one of the great bait-and-switch schemes of our times. Had Chancellor Helmut Kohl acknowledged last year the true costs of integrating East Germany into the Western economic system, his voters and his European partners might have balked at reunification's rapid pace. As it happened, a euphoric German public and a reluctant but duty- bound European diplomatic community chose to cast the bottom line aside and embrace Kohl's driving vision of immediate reunification. Kohl and his Christian Democratic Party won recent national elections in a virtual landslide. But the figures for undoing Germany's cold-war division are coming into focus. Kohl's promise that the eastern l 138>nder would be incorporated into the western system without major costs to the Germans now seems laughable. Indeed, the price tag is daunting.

A political firestorm was unleashed in late February when the government backed away from its no-taxation promise and adopted a set of tax increases that will raise an additional $33 billion in revenues between now and the end of 1992. The tax hike was ostensibly pushed to pay for the German contribution to the Gulf war. But that claim obfuscated the government's actual goal of injecting needed resources into crisis-ridden eastern Germany.

German purchasing power has suffered this year, and raising taxes to underwrite reunification and Gulf-war costs will hamper German growth. New gasoline and income taxes are slated to kick in on July 1, and inflation, which Germany will forever associate with the political upheavals of the 1930s, is on the rise.

In order to begin to raise the eastern German economy to the level of the West, its capital stock must be completely rebuilt. This will require prodigious investments over the next five to 10 years. These kinds of funds have not been made available either from the state or the private sector, and the inefficient state-owned enterprises are teetering on the edge of a financial precipice. The rapid conversion to a hard-currency accounting system and the need to pay laborers high wages have thrown eastern Germany's troubled firms into the depths of financial ruin. Unemployment is rising steadily.

Eastern Germany's economic crisis has given rise to open frustration in cities like Leipzig. Kohl, the hero of reunification, is increasingly vilified in the region as a spendthrift and political opportunist. A recent poll suggests that only 34 percent of the German electorate believes Kohl's Christian Democratic Party is the right party for the times. That figure contrasts sharply with the 71 percent rating received last January.

The effects of all this turmoil on Germany's partners are mixed. Countries that export to Germany, such as Austria, Belgium, and Holland, stand to benefit from the reunification process. These states are supplying direly needed capital goods to eastern Germany, and their trade balances with Germany are moving in a favorable direction.

Germany, however, has become a net capital importer and is drawing resources away from countries in need of international capital infusions. Italy, which has a total public debt exceeding annual GNP, must now compete with Germany for financing. The capital shortages associated with rebuilding eastern Germany are likely to drive interest rates higher and increase the burden on a number of indebted countries including the United States, Eastern European nations, and Europe's Mediterranean states. High int erest rates may dissuade western firms from the kind of direct investment that is needed in the eastern l 138>nder.

Germany's growing economic problems are fueling speculation that Germany has become somewhat self-absorbed. Recognizing a good issue, Germany's opposition Social Democrats are pushing the government to back out of a pledge to share the economic burden of the Gulf war. Wolfgang Roth, the SPD's economics spokesman, contends that the US will earn a "profit" on the war - a claim that could generate tension between Bonn and Washington.

During the reunification process, Kohl made clear his government's intention to build a European Germany and not a German Europe. Commensurate with their growing power and influence, German leaders are making stringent demands about the direction of the new Europe. Having embraced the notion of European monetary union at last year's European Community summit in Rome, the Kohl government is now hedging its position. Bonn has proposed a draft treaty on European Monetary Union that delays the creation of a European Central Bank until at least 1997, and has called on its partners to shore up their own budgetary and inflation problems before a European Central Bank is established. German Central Bank President Otto P 154>hl has warned that the German financial crisis could become European-wide if the movement toward monetary integration is undertaken with undue haste.

Germany's role in defining the European agenda has increased. But its internal crisis, its inability to define an extra-European role, and the dangerously fluid situation in Eastern Europe are indicative of the complex and diplomatically tricky European order in which the US will find itself entangled.