Germany’s great survivor

Date: 26/10/1995

EVERY now and then, a top German policy-maker says something he shouldn't and suddenly his private thoughts are made glaringly public. When this happens to us mortals, the worst possible consequence could be the end of a friendship or marriage. For these people, it can spell the collapse of a country's monetary policy framework, the demise of a 14-year-old monetary system and the onset of a diplomatic storm.

In the past, it has been presidents of the fiercely-independent Bundesbank who have been indiscreet. Karl-Otto Pöhl famously described the economic reunification of Germany as a “disaster” in a throw-away line to the European Parliament ,while his successor Helmut Schlesinger helped sterling out of the Exchange Rate Mechanism (ERM) with some not-to-be-published musings.

This time, it was the turn of Theo Waigel, Germany's long-serving finance minister and leader of the Bavaria-based Christlich-Soziale Union (CSU), the sister party of Chancellor Helmut Kohl's Christlich-Demokratische Union (CDU).

Previously noted as a careful and well-prepared speaker with a diplomatic touch, Waigel made the mistake of saying out loud what everyone knew; Italy and Belgium, because of their enormous levels of public debt, were unlikely to join the first rank of countries introducing a single currency.

As his words were released, Waigel complained that the publication was unauthorised. His boss Helmut Kohl went on Italian television to stress that no countries would be excluded from monetary union, but it was too late. Waigel's genie was out of the bottle.

At a stroke, the massive costs of financing Italy's public debt rose as investors sought compensation for the possibility that Rome would be left out in the ecu-less void.

This 56-year-old lawyer, born in Swabian Bavaria, is no stranger to controversy but this was on a grand scale even for him. The opposition Sozialdemokratische Partei Deutschlands (SPD) warned that he would be held personally responsible for the ensuing turmoil on the currency and bond markets.

Waigel weathered the storm, partly because many people believed that what he said may have been insensitive but was true and needed saying. He remains on course to be one of the players in the run-up to the single currency, offering a political counterweight to the single-minded Bundesbank.

Before the latest controversy, criticism of Waigel centred on his handling of Germany's purse-strings.

Since entering the finance ministry in 1989, Waigel has presided over an unprecedented increase in public borrowing. Between 1989 and 1991 alone, the central government's budget deficit soared from 0.5&percent; of national income to 5&percent;. Last year, total public debt edged over the psychological barrier of a trillion deutschemarks for the first time ever.

Admittedly, this coincided with the fall of the Berlin Wall and the absorption of 17 million East Germans and their creaking industries but, to critics of Kohl as well as of Waigel, it was their political opportunism that inflated the bill. When Kohl opted to swap the old East German ostmarks for deutschemarks at a one-to-one parity in 1990, he was condemning the east's industry to collapse since it would be unable to compete at such an overvalued rate.

The only way to avoid mass unemployment and social unrest was to begin a programme of cash transfers from the west to the east to fund budgets for social security, investment and retraining. A strange alliance of the SPD and London-based banks warned that the costs would be astronomical; maybe as much as 50 billion ecu a year.

At the time, Waigel scoffed at this. “Many who are now carrying out their calculations of billions know little about the way our social market economy works. Certainly, east Germany will depend heavily on capital imports but this capital, which must above all be private capital, will flow by itself as soon as investment in the GDR becomes worthwhile,” he claimed.

Instead of worrying about costs, observers should look at the opportunities, he said. “A second German economic miracle is possible. In the light of these perspectives, all the calculations about the burden of unification will soon be refuted.” In fact, they were underestimated: the annual bill for west-east transfers eventually topped 80 billion ecu.

According to his detractors, Waigel went along with Kohl and misled the German people. They chose to fight the 1990 general election on a “no tax increases to fund reunification” ticket, with all the ensuing problems that entailed. Karl-Otto Pöhl, for one, was annoyed that people who had talked so long and dreamily about reunification were unwilling to pay for it with extra taxes when it came. Instead, Waigel began a programme of borrowing from the world capital markets that pushed up long-term interest rates while taking some huge spending items like the funding of eastern Germany's banking and railway systems “off budget” to massage the figures.

The transfers to the east, when they got under way, fed through to East German consumers and wage demands and the Bundesbank responded to the rise in inflation with a round of interest rate increases. When he finally admitted to the need for tax increases, Waigel made sure most of them were indirect which in turn fed inflation.

Ironically, despite all this, the first serious setback this great survivor has run into was in May 1993 when he decided to quit Bonn and run for the state premiership of Bavaria against his rival, Edmund Stoiber.

During what turned into a bitter struggle, the Bonn insiders' best-kept secret came out. Waigel, the leader of the country's biggest Catholic party, was estranged from his wife and had been in a long-standing relationship with former Olympic skier Irene Epple.

In the end, he failed to win the premiership and stayed in Bonn as party leader. The revelations about his private life did him no harm. Re-elected to the CSU leadership with 95&percent; of the vote, Waigel got divorced and married Epple in November last year. Ironically, this muck-raking brought the minister's domestic problems out into the open and, observers say, he is now palpably more relaxed and happier.

He has a nine-month-old child. At the Cannes summit in June, Waigel's press conference was interrupted by an aide coming to the dais with a parcel. As the briefing ended, he informed curious reporters that it was not a bribe but a pack of nappies. Impartial observers as well as those close to him say this is evidence of his easy charm and volksnah populist nature despite a high-pressure job and regular 16-hour days.

A politically unsympathetic financial journalist whose job it has been to dog Waigel's every footstep over the past five years sings his praises while putting his politics at arm's length. “He's very hearty and funny without being vulgar. He's got a certain style beyond his Bavarian down-to-earth image.”

This has made him suspect in the eyes of the CSU hard-liners who opposed his candidacy for the Bavarian premiership. “He's seen as too much of a Bonner. He's too deep in federal politics and, with his private life, too fishy for them,” an observer says.

Sceptical he may be about the possibilities of a grand single currency bloc, but Waigel has an instinctive enthusiasm for political union. This he ascribes at least in part to the death of his older brother, who was killed during the Second World War and buried in that oldest of Franco-German battle grounds, Alsace.