Kohl Offers 1 to 1 Exchange Rate for E. German Money

Bowing to political pressure, the West German government Monday proposed that East German wages and pensions be exchanged into deutschemarks at a highly favorable 1-to-1 exchange rate as part of a German currency union planned in July.

The exchange rate, which effectively will determine the wealth of individual East Germans, has become the first major potential flash point between the two Germanys as they move toward unification.

The West German Bundesbank had proposed changing East Germany’s overvalued ostmarks for deutschemarks at a 2-to-1 rate, except for small savers and pensioners.

The decision would appear to meet most basic demands of the newly elected East Berlin government and the hundreds of thousands of East Germans who took to the streets to protest in favor of a 1-to-1 rate after the Bundesbank’s recommendation was leaked to the press earlier this month.

The West German government’s proposal also offered 1-to-1 exchange rates on savings of up to $2,500 per person, twice the level recommended by the Bundesbank.

All other East German savings, credits, debts or other monetary assets would be exchanged at a 2-to-1 rate, according to the plan.

The 1-to-1 rate will give East German wage earners and pensioners an effective increase of around 500%, if compared with current black market exchange rates of around 5 ostmarks for one deutschemark.

But more than that, it will give them the freedom for the first time to shop without restrictions with a hard, Western currency.

Like all former Communist Bloc currencies, the East German ostmark is neither wanted nor freely convertible in the West.

However, attempts to slow the exodus of East Germans to West Germany and to meet expectations for a 1-to-1 rate awakened by Chancellor Helmut Kohl’s campaign rhetoric before last month’s East German national election apparently led to Bonn’s decision.

“It’s a historic offer for the people of the German Democratic Republic (East Germany),” said Volker Ruehe, chairman of Kohl’s Christian Democrats.

Fearing German inflation, European financial markets reacted negatively to the news, with German stocks, bonds and the deutschemark itself all declining in value.

In East Berlin, the proposal was greeted cautiously. A government spokesman described it as “an interesting negotiating offer.”

Helga Mausch, the leader of the powerful East German FDGB trade union, told United Press International that the proposal was an acceptable place to begin negotiations, but she said East Germans will need additional breaks to offset the loss of subsidies and the introduction of price reforms.

But Wolfgang Ullmann, a vice president of the East German Parliament and a leader of the Democracy Now movement, said the West German offer fails to consider a large portion of what East Germans had saved.

“If this is the final decision, there should be sharp protest because a large part of savings will not be considered here,” UPI quoted him as saying.

East Germany’s new prime minister, Lothar de Maiziere, meets with Kohl today in Bonn to discuss the currency union and other key elements of the planned state treaty that will be the cornerstone of German unity.

It is the first summit of two democratically elected German leaders and is expected to be a private meeting, without aides.

Both leaders have said they want to have the state treaty in force by early July, a timetable that means agreement on its component parts--the social, economic and currency union--must be reached within the next 3 to 4 weeks.

While East Germans seemed generally pleased with the 1-to-1 exchange offer, Western economists questioned how long this pleasure would last.

They predicted that a 1-to-1 rate on wages would likely break far more of East Germany’s already weak, obsolete industries as they try to compete with the West. The 2-to-1 rate would have given East German industry more competitive wage levels, they noted.

Monday’s decision marked the second time in two months that the Kohl government has rejected the Bundesbank’s advice in connection with the planned monetary union.

In February, Kohl came out in favor of a currency union with East Germany on the same day that Bundesbank president Karl-Otto Poehl advised against such a move.

The two incidents severely dent the Bundesbank’s once-powerful reputation as the premier example of a central bank’s success in resisting political pressure.

According to news agency reports, West German government spokesman Dieter Vogel said that the government-run Bundesbank accepted the proposal without dispute. He said the proposal was motivated by the needs of the “economic and social development in both parts of Germany and the stability of the German mark.”

“The Bundesbank has also accepted that the economically prettiest solution cannot always be taken,” he added.