Germany Takes Charge

A few months after the Berlin Wall fell in 1989, Chancellor Helmut Kohl summoned two dozen of Germany's top CEOs to a meeting in Bonn. Hands clasped behind his back as he moved across the room, the 6-foot, 4-inch Chancellor unfolded his vision of a united Germany and detailed how business should meet the historic challenge. Recalls one participant: "He looked just like Bismarck."

To many Germans, that's truer than ever. Like the legendary 19th century "Iron Chancellor," Otto von Bismarck, Kohl wants to make Germany more than just an economic superpower. He wants to shape Europe's very destiny. But that does not mean subjecting Europeans to a harsh Bismarckian rule. "What I want," says Kohl, "is a United States of Europe."

Whether or not Kohl achieves that end, Europe will inevitably take on a more Germanic flavor. Decisions made within the Bundesbank's concrete walls already set what the French pay for car loans. Plans laid in Wolfsburg determine whether Volkswagens will roll out of factories manned by Spaniards or Czechs. "There's no way around it," says the Brookings Institution's Wolfgang H. Reinicke. "Germany is not only the dominant economic player but also the major political power in Europe."

TAME TIGER? That gives many Europeans reason for concern. Germany's abuse of power plunged Europe into two world wars and the tragedy of the Holocaust. Now, some fear the Germans may be once again firing up their ambition to dominate them politically as well as economically. Concedes former French Foreign Affairs Minister Jean Fran cois-Poncet: "Germany exists and is powerful, and there's nothing we can do about it."

The reality is more complex. Instead of domination, Kohl is offering Europe a chance to tame the tiger by submerging Germany in a closer-knit European Community. In return, Europeans will have to cede much of their own sovereignty to the EC. The payoff from such German tutelage is the chance to become globally competitive against Japan and the U.S. by adopting Germany's brand of capitalism--more open-market than France's but with higher levels of social welfare than Britain's.

There's a risk to Europeans if they balk. A newly assertive Germany might go ahead and pursue its own national interests anyway. For the first time in decades, Germany has the power to do so. The European Community was created in 1956 to act as a brake on German power. For decades, the Franco-German alliance dominated the EC, with Germany providing the economic muscle and France the political brains. But now, the Germans are increasingly calling the shots in the very apparatus once intended to contain them. With unification reforming the map of Europe, Kohl wants to influence the political process by harnessing Germany's might to forge the framework of European unity.

The Germans argue that, if for no other reason, they must step out of their shell to protect themselves and their allies. Worries about stability outside the country's borders are real: From Poland to the former Soviet Union, a political power vacuum, economic collapse, and a possible wave of immigration loom on Germany's eastern flank. Meanwhile, elections are coming up in France, Britain, and Italy, where governments are dogged by domestic concerns. And at the same time, American troops are pulling out of Europe at a rapid clip.

Even a Germany deep in debt over reunification is the only European power able to bankroll stability. As the post-cold-war world takes shape, Germany has replaced the former Soviet Union as the European power on the way to Asia. Only a few months ago, President Bush offered Germany a "partnership in leadership." Now, U.S. Ambassador to Bonn Robert M. Kimmitt, a confidant of Secretary of State James A. Baker III, has begun citing the value of a new "German assertiveness" in the pursuit of common goals.

Indeed, Germany is tiring of being an economic titan but a political dwarf. It is growing more comfortable with pursuing national goals--even if that makes allies uneasy. For example, sky-high German interest rates (chart, page 54), imposed out of fears that the country's post-unification spending boom will set off a wave of inflation, are pushing Europe into recession. Yet in December, Kohl railroaded through the EC summit his plan to create a single European currency--modeled on the mark and governed by a Euroclone of the Bundesbank. As if that weren't enough to rattle Kohl's allies, the monetary move came even as the Chancellor was forcing his reluctant European partners to follow his lead in recognizing the breakaway Yugoslavian states of Croatia and Slovenia.

There is one constraint on how far Germany will go: It can't yet achieve most of its aims without allied backing. The fate of the GATT world trade talks is now in the balance after Kohl failed to persuade France to cut its farm subsidies. So Germany is marshaling the Group of Seven leading industrial nations to step up pressure on Paris. It's clear that the new Europe will largely be forged in the workshops of Stuttgart, the laboratories of Munich, and the banks of Frankfurt--and not the back rooms of Brussels--as Kohl tries to turn economic clout into political power.

All this guarantees that Germany will be the driving force as Europe scraps internal trade barriers at the end of 1992 and pushes for greater integration. This poses a dilemma. If the Germans speak out--as the Americans have urged them to for years--they are quickly criticized. But if Europe's leading economic power refuses to lead, the entire region's prosperity could be endangered.

RUFFLED FEATHERS. Even more dramatic economic and political initiatives will be coming from Kohl. More accustomed to German politics than the niceties of diplomacy, the hulking Kohl sometimes ruffles feathers. On national television recently, the Chancellor dismissed allied concerns over a resurgent Germany as largely "envy." To foreign reporters, Kohl has bragged that by 2000, Germany will be an even more powerful "world economic heavyweight" alongside the U.S. and Japan.

That wouldn't stick in the allies' craws if Germany were still helping stimulate their economies. But for the moment, Europe's monetary and fiscal house is tilted toward helping achieve German reunification. After four increases since unification, German interest rates are the highest in the Bundesbank's 43-year history. That alone will slow German expansion--and the EC's growth, to 1.5% or less this year from 2.5% in 1991.

To Bonn and Frankfurt, these punishing rates are necessary to defeat inflation. Bundesbank President Helmut Schlesinger, for example, fears that double-digit pay demands by 10 million unionized German workers, from bank tellers to civil servants, risk fanning a "wage-price spiral" in his homeland. Even a last-minute deal on Feb. 3 giving 100,000 steelworkers a 6.4% increase on their $23 an hour leaves Schlesinger behind on his quest to keep hikes well under last year's 6.5%-to-7% range.

Some European leaders feel that Germany's backing of a single EC currency will inevitably force it to pay its neighbors greater heed in economic decision-making. Therefore, despite the short-term discipline these allies are suffering, they will gain an important long-term say in German policy. But that influence may be a while in coming. With a population of nearly 80 million, reunified Germany is 40% larger than Britain, France, or Italy. In fact, with more Europeans speaking German as their native tongue than any other language, Kohl has demanded that it become an EC working language alongside English and French.

One irony is that even though its allies perceive Germany as flexing its muscles, many Germans see themselves as grappling with acute economic headaches. The government is struggling to finance $100 billion of annual transfers to eastern Germany as well as commitments of $38 billion to the Commonwealth of Independent States and $19 billion to Eastern Europe. Coming up with even more cash is becoming harder as German growth slows and its once mammoth payments surplus turns to a $20 billion deficit.

For its part, German business, facing the highest wage costs, shortest work year, highest taxes, and stiffest environmental controls in the industrial world, is in a funk about its competitiveness. Getting Germany's economy back on track has to be Kohl's No.1 priority if he wants to achieve his ambitions.

That's certainly the perspective of many foreign manufacturers, who view Germany's vast domestic market as key to their survival. But the dependencies work both ways. Says Chairman Jean-Louis Beffa of French glassmaker Saint-Gobain: "Germany needs Europe as much as Europe needs Germany." In aerospace, electronics, and other high-tech industries, he reasons: "Even Germany isn't big enough to compete by itself with the U.S. and Japan."

MEXICAN MERCEDES? To that end, German manufacturers are spreading their influence--and marks--more widely than ever in a bid to remain competitive. Just as Kohl is attempting to remake Europe, German industry is mounting a drive to remake itself--and Europe--for brutal global competition. Take Daimler Benz. It's searching the world for cheaper alternatives to paying its German auto workers $25 an hour. In fact, Daimler's next Mercedes-Benz auto plant may go up in Mexico. "Only if it makes economic sense," vows CEO Edzard Reuter, "will we stay in Germany."

Then, there's the headache of reunification. After imploding, eastern Germany's economy is likely to grow 10% this year. But nearly 40% of the labor force is unemployed or in make-work jobs. The Treuhandanstalt, the agency privatizing 8,000 state companies, is awash in red ink. By the mid-1990s, its cumulative deficit may be $280 billion. "It's a time bomb," warns Deutsche Bank Managing Director Ellen R. Schneider-Lenne.

All the same, there are glimmers of hope. VW and General Motors Corp., for instance, are opening plants with cutting-edge manufacturing techniques to make them the most efficient in the world. With union wages in the East set to rise to Western levels by 1994, the Treuhand has little choice but to woo high-tech investors as the area's salvation. Conceding that even powerful Germany can't rebuild the East without foreign investment, the Treuhand is twisting the arms of Sony Corp. and other Japanese giants to move advanced research and development east.

Revived trade with the former East bloc also highlights Kohl's desire to maintain his country's role as the economic bridge between East and West. Despite the woes besetting the crumbling former Soviet Union and Eastern Europe, eastern German companies have already filed applications for $44 billion worth of government-guaranteed export credits to the region. Existing German commitments are fanning concerns among Bonn's allies that the former East bloc will end up as a cheap workshop for Germany. Already, a third of Czechoslovakia's 3,000 joint ventures are with Germans.

Meanwhile, in Western Europe, the Bundesbank's sound-money vise is tightening as Europe's promised one-currency era draws near. In return for surrendering the mighty mark in or around 1997 and subjecting themselves to the oversight of a new central bank already dubbed the Eurofed, Bundesbank board members are lobbying Kohl to insist on closer political cooperation within the EC. They argue that a loose grouping of states can't run a currency. Pressure is also increasing to locate the Eurofed in Frankfurt, part of a German campaign to make the city rival London as Europe's money center.

SAFE HAVEN. To attract the foreign investors necessary to make Frankfurt a leading global bourse, Kohl and Finance Minister Theo Waigel are clamping down on Germany's lavish social spending, enacting probusiness tax cuts, and slashing $75 billion in subsidies to wealthy western states. Kohl can dare to take such risks. Other than two state contests on Apr. 5, Germany--and Kohl--have no elections to worry about until the state, federal, and European Parliament contests in '94. If he wins a fourth term, he could well shape Europe until the end of the century. That would give Kohl the time to horse-trade for more of what he wants, such as making the EC more democratic by giving its regions and Parliament more power. But in turn, Europe's monetary and economic policies would follow Germany's lead.

Far surpassing the goals the World War II victors set for rebuilding Germany, Kohl and his predecessors have delivered more than four decades of peaceful and prosperous democracy. Now, Kohl and his European allies have to figure out how to harness German energy and determination. Like Kohl, French Finance Minister Pierre Beregovoy insists that "a united Germany must be integrated into Europe." But in so doing, Europe is going to become more German, whether it wants to or not.