Reunification Is Pricey, but Worth It
LAST summer, officials at the Bundesbank, Germany's central bank, told economist J. Paul Horne that he was exaggerating when he said that nation's budget deficit would reach 130 billion deutsche marks ($78 billion) this year. As it turns out, the Bundesbank was wrong and the Smith Barney, Harris Upham & Co. economist was closer to the truth. Today the German government is counting on a deficit of 155 billion DM - and that after a tax hike of 35 billion DM and spending cuts of 15 billion DM. German reunification is simply expensive. Estimates of its total costs to Bonn run from 800 billion DM to 1 trillion DM over the next five years. That's manageable for a prosperous economy the size of Germany's. Total output of goods and services ran 2.5 trillion DM ($1.5 billion) last year. Nonetheless, reunification expenditures are having an impact on other major economies.
For one thing, the Bundesbank has raised interest rates to slow down the German economy and prevent a burst of inflation. Higher German rates have forced some European nations among the 15 that tie their currencies to the deutsche mark to push up their interest rates to prevent a devaluation of their currencies. That is not popular in such nations as France, which find their economies already slowing.
However, Germany's export surplus will diminish drastically this year. More of its export goods will be heading into what was East Germany. And neighboring countries will be able to boost their exports to Germany, giving their economies something of a boost.
Is all this unification discombobulation necessary?
Yes. Chancellor Helmut Kohl may not have been frank with Germans in his early estimates of the cost. And like President Bush, he had to back off from a promise to citizens of no new tax increase. But it is impossible to raise immediately the standard of living of the 15 million people of former East Germany without paying for it. In manufacturing, for example, the workers in the eastern part of the country are being paid 66 percent of wages in West Germany, while their productivity is probably only arou nd 20 to 30 percent.
The gap must be made up by subsidies. Moreover, most east German factories are finding it tough to find customers for their outdated goods. Indeed, the business situation in the East German states could go downhill for perhaps another year before turning around.
Still, Mr. Kohl was right to grasp that historic opportunity to unify Germany. Considering the current unhappiness of the Soviet armed forces, it probably would be much more difficult to get Soviet permission today for German economic and political unification.
Though East Germans may be disappointed that they have not sprung into prosperity at a single leap, they now have freedom and the prospect of prosperity several years down the road.