The Gospel According To Bonn

It was a wrenching political about-face. On Oct. 25, French President Jacques Chirac flew to Bonn to reassure an impatient German Chancellor Helmut Kohl that the French were committed to European monetary union. The next day Chirac went on television to announce a radical shift in government policy: Cutting France's huge budget deficit, not unemployment, was now his top priority. Two weeks later, French Prime Minister Alain Juppe backed up his President with a package of welfare reforms and other spending cuts.

That Germany would call many of the shots on EMU has never been a secret. But in recent weeks, Bonn and Frankfurt have stepped up their strong-arm tactics. On top of needling the French, scolding the Italians, and muffling complaints at home, Germany has made already strict requirements for membership in monetary union the starting point for a distinctly German vision of European economics and politics.

Bonn's mounting demands clarify the price that Germans will exact for sacrificing the Deutschemark for a new Eurocurrency. If EMU is to go forward as planned in 1999, Germany insists that the resulting union be made in its own image, with a rock-solid currency and conservative monetary policy. And monetary union may be only the beginning. Germany ultimately favors political union for Europe. By setting the terms for EMU, Germany is ensuring that the economics of a political bloc would have a distinctly German stamp. "This is part of a broader objective of a strong move toward political union," confides a central banker involved in monetary union.

But Germany has more immediate reasons to push hard for EMU. Europe's existing money system has caused German business untold grief, as an appreciating mark and competitive devaluations around Europe has eroded its export profits. Indeed, the strong mark is largely responsible for Germany's slowing growth--now estimated at only 1.5% for 1995. A stillborn EMU presents another monetary nightmare. If progress seems to falter, investors are likely to drive the mark into the stratosphere. That would nullify all German industry's efforts to boost competitiveness.

So the Germans are playing hardball as never before. German Finance Minister Theo Waigel bluntly let Italy know that thanks to its high deficits and debt, it wouldn't be among the founding members of the single-currency club. And France's capitulation followed a series of communiques between Bonn and Paris in which German officials expressed anxiety over Chirac's job-creation schemes.

The Germans want to enforce their tight-money rules far beyond 1999. On Nov. 7, Waigel proposed a "stability pact" to govern fiscal policy after EMU starts up. It would require member countries to aim for budget deficits even lower than the criteria for entrance set by the Maastricht agreement. Countries that loosened their fiscal grip would face sanctions or steep fines.

The demands are designed to reassure outsiders and Germans alike that EMU won't dilute Germany's vaunted monetary and fiscal discipline. Already, investors in the mark are fleeing to the safe Swiss franc to escape an expected weakening of the German currency. But the Germans' real fear is that they won't be able to sell monetary union to their own people. German voters abhor the idea of giving up their stable mark.

SLOW SWITCH? Officials are so worried about sentiment at home that they are trying to keep any opposition quiet. Bundesbank President Hans Tietmeyer publicly attacked Dresdner Bank chief economist Klaus Friedrich when a comment Friedrich made was misreported to suggest that the criteria for EMU membership should be softened. And when inefficient German savings banks complained that they couldn't afford to develop the internal systems for a quick transition, the Frankfurt-based European Monetary Institute soothingly proposed stretching out the switch for up to 3 1/2 years.

Of course, Germany's ability to shape the future will be limited by economic reality. Europe's slowing recovery could make it impossible even for Germany to meet the Maastricht criteria in 1999. That already has officials suggesting a delay. But German leaders have learned that by dictating tough rules, they can keep EMU momentum going without spooking the financial markets. Even if the dream of monetary union is deferred a few more years, it will ultimately translate into a German kind of reality.

How Germany Is Throwing Its Weight Around

-- Finance Minister Waigel raises the hurdle for joining EMU: If members don't keep lowering their deficits after signing on, they face heavy fines.

-- German officials embarrass the spendthrift Italians, announcing at a major meeting that Italy won't make the fiscal cut for EMU.

-- Heavy pressure on Paris leads to a complete about-face in French policy, from cutting unemployment to cutting the deficit.

By Bill Javetski, with John Templeman, in Frankfurt

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