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 The East German economy is also saddled with outdated, inferior trade goods and low productivity.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. -- This, and all articles in this news hierarchy are Copyright 1990 by the wire service or information provider and licenced to Clarinet Communications Corp. for distribution. Except for free samples, only paid subscribers may access these articles. Any unauthorized access, reproduction or transmission is strictly prohibited. We will reward the first provider of information that helps us stop violators of this copyright. Send reports to reward@clarinet.com.