Edition: U.S. / Global

Reluctant Giant: Germany Balks at Leading Europeans to Unity

Published: August 1, 1993

Germany's shoulders, it turns out, are not as broad as either the Germans or their neighbors thought they were.

Ever since the unification of Germany in 1990, supporters of European unity, Germans most of all, have been telling themselves that Germany would lead the way. Built on the idea of Franco-German reconciliation, this unified Europe would forge a strategic and economic partnership with the United States, with the powerful German economy pulling the rest of Europe to prosperity.

There were fears, of course, fears that 78 million Germans would dominate their neighbors economically, monopolize trade with the formerly Communist countries to the east and throw their weight around in ways uncomfortably reminiscent of the past.

But if Germany dominates Europe today, it is by its unexpected weaknesses rather than by its strength.

This weekend, the European Monetary System that was to lead to a common European currency by the end of the decade was in turmoil because Germany's central bank, the Bundesbank, acted in accordance with its national charter instead of meeting European expectations. [ Ministers of the European Community gathered in an emergency session in Brussels to seek a way out. Page 16. ] Preserving Mark's 'Stability'

The crisis flared on Thursday after the Bundesbank adhered to the letter of its charter, which requires it to preserve the "stability" of the German mark against inflation. The charter does not provide any room for tolerating a little bit of inflation to help the French franc, the British pound or any other European currency. The French had hoped the Bundesbank would agree to lower German interest rates, which would indirectly bolster the franc.

Instead, the bank declined to reduce its key short-term interest rate, and plunged the franc into a crisis. The Bundesbank's president, 67-year-old Dr. Helmut Schlesinger, described the situation as a "dilemma."

Politically, Chancellor Helmut Kohl and his Government regard the alliance with France as the political core of European unity. But the Bundesbank, which is legally independent of the Government, was, like many other European national institutions, being called upon to bear more weight than it was ever designed to carry.

The crucial overload came from the Treaty on European Union that was agreed to by the leaders of the 12 member nations of the European Community in the Dutch city of Maastricht in December 1991. The treaty laid down a path to a common European currency as early as 1997, and committed the community to the goal of a common foreign policy as well. A Surprising Hesitancy

Second thoughts have since abounded all over Europe, but Germany has been the main scapegoat for what has gone wrong. And for all the fears of Germany throwing its weight around, it has been the hesitancy and reluctance of Mr. Kohl and his Government to assert leadership that has most often surprised their European and American allies.

The great sobering experience for the Germans was the unexpectedly huge social and economic cost of absorbing East Germany, which threw the German economy into an inflationary cycle and led the Bundesbank to impose the high interest rates that have been choking the rest of Europe for two years.

The high interest rates make it more costly to borrow, and thus reduce spending, which helps contain inflation. But those high rates also make the mark strong against other currencies, because they attract investors.

And that creates problems for the rest of the community, because many currencies are linked through the European Monetary System and its exchange rate mechanism. The mechanism requires the nine currencies to fluctuate within narrow ranges, and when the mark is kept strong by high German interest rates, other nations are required to keep their rates higher than they would like in order to keep their currencies within bounds.

Germany's political system was not designed to make crucial strategic or military decisions, which were left to the United States and the NATO alliance, and it has not been able to solve this economic riddle, or some political ones. Prometheus Bound

After unification, Germany had the biggest standing army in Western Europe, but -- far from being a military colossus -- it seemed more like Prometheus bound. Germany declared itself unable to send troops to the Persian Gulf, to the war-torn Balkans, or anywhere else beyond its borders because the Constitution of 1949 barred it from any military action abroad.

Germany's one attempt to throw its political weight around, just after the Maastricht treaty was signed, backfired disastrously. Believing that recognizing the independence of Croatia and Slovenia in late 1992 would deter Serbia from attacking them, Germany railroaded its allies into going along in the name of the common foreign policy they had just agreed to in the treaty.

Many now blame premature recognition of Bosnia and Herzegovina for inciting Serbian attacks there, and say the Germans bear special responsibility for the tragedy. When Secretary of State Warren Christopher pointed the finger at Germany again, in June, German diplomats reacted with strong protests.

But the fact remained that, whatever Germany might or might not have done to lead its European partners into a mess in the Balkans, it was unable to do much to help them get out of it. Devaluation an Embarrassment

At the Bundesbank, Dr. Schlesinger and other leading officials have always argued that if matching Germany's high interest rates was undesirable or too painful for neighboring countries, all they had to do when speculators started attacking their currencies was realign their values against the mark.

But for every other currency but the mark, "realignment" means "devaluation," which is very definitely embarrassing to people like Prime Minister John Major of Britain or Prime Minister Edouard Balladur and President Francois Mitterrand of France.

As for the Germans, many have no idea what devaluation means. The mark has not been devalued against other European currencies since the European Monetary System was established in 1979.

The underlying problem is that Europe's economies run on very different cycles. Britain was deep in recession when Germany was booming three years ago. France kept booming long after Germany sunk into recession. Now France is plunging deeper while Germany hopes it has bottomed out. Britain, which was able to cut interest rates after leaving the exchange rate mechanism, has been able to stimulate its economy and has started to emerge from recession.

Tying currencies tightly together when national economies are far apart simply does not work, yet that was the aim of the European Monetary System. As the weekend crisis proves, a united Europe is still a long way off.

And though it was the last thing the Germans say they wanted, Germany's special national problems and interests have probably made monetary union and the Maastricht treaty itself a dead letter for the rest of this century.