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Bonn mulls even mark exchange

Government sources said Thursday that West Germany has tentatively decided that the only way to prevent an exodus of millions of East Germans is to exchange relatively worthless East German marks for the stable West German mark at a 1-to-1 rate _ a move that could eventually cost Bonn more than $100-billion. Halting the mass movement of East Germans into the West by giving people powerful economic reasons to stay home is the primary goal of Chancellor Helmut Kohl's offer to unify the German economies in the coming weeks.

But replacing the almost useless East mark with the stable West German mark will raise the hopes of East Germans only if they get enough West German money to begin working toward a Western lifestyle, Bonn officials have concluded.

A 1-to-1 exchange of the 180-billion East marks now thought to be in circulation or in savings accounts would be a massive, unprecedented undertaking. The solution now winning favor, several Bonn sources said, is to allow East Germans initially to exchange only some of their savings at the liberal 1-for-1 rate, perhaps 1,000 to 5,000 marks per household. East Germans would then be allowed to trade the rest of their savings only after a waiting period of one or two years.

Although East Germany has set the official exchange rate at three East marks to one West German mark, the street exchange rate is about eight or nine to one.

The enormous expense of currency conversion has made markets around the world nervous, pushing up German bond rates and fueling the global rise in interest rates this week, financial experts and West German government economists said Thursday.

"There is legitimate concern among our neighbors and allies," a high-ranking Bonn economic official said. "They are worried about rising interest rates and about the inflationary impact of monetary union. But they know we have no alternative."

West German officials negotiating with East Germany's caretaker coalition government learned this week that East Germans _ who earn only about one-third the income West Germans do _ nonetheless have enormous savings, largely because there are few products available on which to spend money.

The immediate replacement of 180-billion East marks could be a dangerous drain on West Germany's economy, analysts said. That's why Bonn initially considered exchanging currencies at a rate of four or five East marks to each West German mark.

But Kohl's advisers feared that such a high rate, which would slash savings and eat away at wages, would encourage hundreds of thousands of East Germans to pack their bags and head West, exacerbating the social problems that West Germany is already suffering from an influx of nearly a million people in the past 15 months.

At a high exchange rate, Bonn economists believe, East Germans would watch their life's savings evaporate overnight. They would quickly realize how much less money they earn than their counterparts in the West; many would decide that staying in the East, with its low salaries and shortage of consumer goods, makes no sense.

According to this argument, a 1-to-1 exchange rate would encourage East Germans to stay home by persuading them that their purchasing power could grow rapidly without depleting their savings.

But a 1-to-1 exchange is seen as having a dangerous downside as well: East German businesses would find themselves unable to pay high enough wages and unable to compete with West German companies. Unprofitable businesses would quickly begin laying off workers, leading to massive unemployment. And inflation would jump markedly as East Germans rush to spend their new Western money, depleting stocks of consumer goods and forcing prices to rise.

The expected frenzy of buying once East Germans get access to the goods they have long ogled on West German television will begin what Bonn expects to be a post-unification boom.

But currency reform will nonetheless be a strong drain on the West German economy at first. Bonn would have to subsidize East German pensions and wages, as well as establish a fund to pay unemployment compensation to East Germans who lose their jobs as a result of the switch to a market economy.

Kohl has already promised West Germans a tax cut this year, and while aides say he has ruled out a tax increase to pay for unification, two sources said Thursday that the tax cut is likely to be indefinitely postponed.

"It looks like we are going to have to go to the markets to get the money to pay for currency union," a top economic aide said. "But that will not be a problem. Once investment starts flowing into East Germany, the boom will begin."