Swapping Germany's 'Hard' Mark for a 'Marshmallow' Euro

Germany's top leaders tried a sleight of hand to revalue gold reserves to help the country meet targets for Europe's unified currency. The incident reveals German angst over the demise of the cherished deutsche mark.

Americans are sometimes said to worship the almighty dollar. But for an example of a people with a truly reverential relationship with their currency, consider Germans and the deutsche mark.

Before they had a flag, before they had a national anthem, before they even had a Federal Republic, postwar Germans had the deutsche mark.

It's not that Germans are necessarily more materialistic than others. But the stable, sturdy mark symbolizes the qualities and achievements in which Germans take pride: industriousness, stability, reliability. This is a country whose "economic miracle" in the 1950s is the national founding myth, the equivalent to "taming the frontier" in America.

So when Chancellor Helmut Kohl asks Germans to trade in their marks for the coin of a new multinational currency along with its neighbors, he's asking a lot. He's been able to win limited popular support on this only by insisting that the new euro would be just as strong as the mark.

His credibility, however, disappeared after his finance minister, Theo Waigel, tangled publicly with the Bundesbank, the country's stubbornly independent central bank this week. Many observers say this episode has all but ensured that the new currency will be "soft" (subject to devaluation) like the Italian lira rather than "hard" like the deutsche mark.

"This turns the euro into a marshmallow," says Paul Horne, chief international economist at Smith Barney in Paris.

But the other side of this coin is the likelihood that a softer euro will be one in which almost all European Union countries participate from the start, except for Greece and "opt outs" like Sweden and presumably Britain.

Mr. Waigel's woes with the Bundesbank began when he announced a plan to help close the government budget gap by revaluing German gold reserves up to current market prices and dumping the resulting extra money into public coffers.

He had more reason than most finance ministers to be concerned with his country's deficit: Part of the German plan to keep the euro "hard" has been to insist on strict standards of fiscal discipline. Participants' budget deficits are to be held at 3 percent of gross domestic product.

But Germany, which has proved less able than many of its neighbors to cut back on social benefits and is still adjusting to reunification, has had trouble meeting its own standards.

Bundesbank President Hans Tietmeyer said, in effect, "No way!" to Waigel's gold plan. Most economists and most of the business world concurred.

Waigel, backed by Chancellor Kohl, stood firm at first, but backed off Tuesday. Considerable damage has already been done, however. Waigel's plan shows that even mighty Germany, the biggest economy in Europe, has had to resort to the same kind of "creative bookkeeping" to qualify for currency union that Germany has so often, and so publicly, criticized in other countries.

The bottom line: a serious loss of credibility for German leadership on economic matters.

That may not be all bad, however. Many voices are being heard - even in Germany - to suggest that the important thing about the "convergence criteria" for currency union is not the criteria but the convergence. A euro launched with everyone's budget deficit (including that of newly humbled Germany) a little above 3 percent may work all right, as long as efforts are made to keep bringing deficits down.

Why was this economic marriage so fraught with difficulties brought to the altar in the first place? For Germany's neighbors, notably France, currency union was the price of consent to the reunification of East and West Germany, insurance against German economic domination.

Germany's Bundesbank is Europe's de facto central bank. The effects of its actions in defense of the mark reverberate across the Continent. A common currency regulated by a European central bank - modeled on the Bundesbank but giving all participants a voice - is preferable to domination by the mark. And Kohl and his generation, with memories of World War II, have a profound moral commitment to a peaceful Germany anchored in a united Europe. A common currency is an important tool in achieving their goal.

Meanwhile, the budget deficit that prompted Waigel to try his gold-revaluation scheme in the first place must be addressed. The Free Democrats, junior partner in Kohl's ever more fragile coalition, are holding out against tax increases to balance the books. Kohl's coalition could yet fall and be replaced by some sort of government led by the left-of-center Social Democratic Party.

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