[clari.news.hot.east_europe] German monetary union will affect European system

clarinews@clarinet.com (HERMAN SAEN) (02/08/90)

	BRUSSELS, Belgium (UPI) - The proposed monetary union between West
and East Germany will inevitably cause complications in the European
Community's monetary system, financial experts said Wednesday.
	The West German government agreed Wednesday to start immediate
negotiations with East Germany on a monetary union, a step seen as
leading to the reunification of the two German states, divided since the
end of World War II.
	``Of course this will have consequences for the European Monetary
System,'' a European diplomat said Wednesday. ``Consultations between EC
member states will be very important in this respect.''
	West Germany and eight other EC countries have linked since 1979
their currencies within narrow fluctuation margins in the European
Monetary System. At the same time they float jointly against other
currencies such as the U.S. dollar.
	The West German mark, the strongest currency in the EMS, is the
linchpin in the system. Financial experts are trying to determine how a
monetary union between the strong West German economy and the deeply
troubled East German economy will affect the crucial West German mark.
	``All ideas about this are still very speculative,'' said an expert
from Kredietbank, one of the major Belgian banks.
	``We see some positive factors which indicate the West German Mark
may even get stronger in the future,'' he said. ``Not only the expected
economic growth in West Germany, but also the expectations of growth
possibilities following German unification, are factors we should not
underestimate.
	Under the terms of the proposed monetary union, West Germany would
introduce its mark into East Germany, which would give up its monetary
sovereignty.
	Financial experts said the move would attract foreign investors to
East Germany.
	But they warned it would also force East Germany to transform its
state-run economic system into a market-driven system -- a difficult task
made harder because the government had been subsidizing certain consumer
products.
	The East German economy is also saddled with outdated, inferior
trade goods and low productivity.
	``They will have to make an enormous effort to catch up,'' the
Kredietbank expert said, adding that West Germany will have to heavily
subsidize East German efforts toward economic reform.
	``This increase in West German expenditure will inevitably reduce
the West German external balance surplus,'' he said. ``The increased
demand might even boost inflation in West Germany.
	``Whether these negative factors eventually will result in a weaker
position of the West German mark, and reduce its influence in the EMS,
will depend on whether world trade is confident West Germany can
generate ... an economic miracle,'' he said.
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