Germany After Unification

Head Table Guests

Duncan Jackman, Investment Officer, Personal Trust and Investment, Cassels, Blaikie and a Director, The Empire Club of Canada; Tom Jakobek, City Councillor, City of Toronto, Ward 10; Hans Vogt, Founder, Votron Electronics Inc. and Writer; Walter Homburger, First Manager, National Ballet of Canada, Manager, Glenn Gould and 25 years, Managing Director, Toronto Symphony; John Campion, Partner, Fasken Campbell Godfrey and a Past President, The Empire Club of Canada; Diane Francis, Editor, The Financial Post; Uwe Harnack, President and CEO, Canadian German Chamber of Industry and Commerce Inc.; Gerry Meinzer, President, Smart Toronto and Past President, Metropolitan Toronto Board of Trade; Ernest Lieb, President, Mercedes Benz Canada; The Hon. Roy MacLaren, PC, MP, Special Advisor to the Prime Minister, International Trade and High Commissioner Designate to United Kingdom; Mary Lou Benotto, Partner, Chappell, Bushel, Stewart and First Vice-President, The Empire Club of Canada; David Turnbull, Chief Government Whip, Ontario Government; Alan Sullivan, President and CEO, The Canadian Institute of International Affairs; The Most Rev. Michael Peers, Primate, Anglican Church of Canada; Professor Dr. Hartmut Froeschle, German Language and Literature, University of Toronto and President, German Canadian Historical Association; Andrew Brandt, Chairman and CEO, The Liquor Control Board of Ontario and Former Interim Leader, PC Party of Ontario; Douglas Derry, Partner, Price Waterhouse, President, The Empire Club Foundation and a Past President, The Empire Club of Canada; Mark Kassirer, President and CEO, Deutsche Morgan Grenfell Canada Ltd.; and His Excellency Dr. H. G. Sulimma, Ambassador, Federal Republic of Germany.

Introduction by Julie Hannaford

It is a very great honour to have the former Chancellor of Germany, Helmut Schmidt, as our speaker and guest of honour today. We are honoured to have Mr. Schmidt address us, not only because he is one of Europe's most influential statesmen and has distinguished himself by both the spoken and the written word, but also because our guest today is known as a man who never minces words. It is one thing to be prepared to speak in a public forum, and have one's words recorded for historical review. It is quite another to speak in a public forum and to say what one means and mean what one says all the time, even if what one says may not be pleasing to hear. We need more people in the latter category rather than the former, and I am pleased to say that Mr. Schmidt has promised to live up to his reputation.

Helmut Schmidt was born and schooled in Hamburg. Following the completion of secondary school, Mr. Schmidt served in the military and became a member of the Social Democratic Party in 1946. In 1965 he became a member of the Bundestag, and in 1974, he became the Chancellor of the Federal Republic of Germany, serving as Chancellor until 1982. He continued serving as a member of Parliament until 1987. In 1982, he became the publisher of Die Zeit, and since 1982, he has complemented his political career by being a prolific and at times highly controversial writer. His writings include a study of the Soviet Union from the European point of view published in 1984, a book entitled "A Grand Strategy for the West," published in 1985, and in 1989, a book that applies to all countries, entitled "Men and Power."

Much has changed in Germany and Europe since Helmut Schmidt's term as Chancellor ended. Little has gone unnoticed and each event in history has been the subject of insightful comment by Mr. Schmidt. On many occasions, Mr. Schmidt has had the courage to say that which lesser mortals would have left unsaid. For Canadians, Mr. Schmidt has been unstinting in his support of the initiative taken toward detente and disarmament. Thirteen years ago, in this same hotel, speaking to a luncheon crowd of 800 people, Mr. Schmidt told Canada that detente was a word not spoken anymore in certain circles, but that it was vital to global security. More importantly he told us as Canadians that it was "not necessary to be a member of the superpowers club in order to unite to pursue nuclear arms limitation." That was in 1983. Much has changed since then (not the least of which is the cost of lunch). The European Community has a profile today which few would have imagined in 1983. We as Canadians can ignore these changes and challenges only at our peril. A stronger European Community, with a stronger currency has already begun to affect our lives and our livelihoods. Just as we are adapting to (or perhaps not adapting to) NAF TA, we must turn our minds to the prospect of transatlantic free trade. It is therefore an honour and a privilege to have Mr. Schmidt agree to address us on these and other issues. 1 can promise you that as far as I am aware Mr. Schmidt has never been at a loss for words, except once in his life when he was invited by a less than sympathetic flight attendant half way through a transatlantic flight to partake of his cigarette outside the aircraft--perhaps on the wing. On that one occasion, Mr. Schmidt opted for silent compliance. Given the alternative available, we can all be grateful.

Please join me in welcoming Helmut Schmidt to The Empire Club of Canada.

Helmut Schmidt

Ms. Hannaford, ladies and gentlemen, let me thank you for your flattering introduction. Let me also thank The Empire Club for your invitation and particularly Mr. Hans Vogt who initiated my visit here today.

It has been proposed that I should speak about the role of Germany after unification. Let me start out by saying that it would be wrong, particularly wrong for a German, to assume that unification has enlarged the role of my country, but Germany's responsibilities have grown considerably. If the 80-million state of Germany committed a mistake now the consequences would be considerably greater than if the formerly amputated West German state had made a mistake. I would like to put Germany's role into a broader context and scope because the unification of my country has been only one element in a revolutionary, growing change in the world situation and certainly one of long-lasting historical dimensions. I'm talking of the liberation of more than a dozen European nations from communist dictatorship and from Soviet-overlord sovereignty. Even more important is the collapse of the Soviet Union and an absolute uncertainty about the future role of Russia which may remain chaotic or at least very weak in domestic, political and economic terms for over 25 years or up to half a century. But, Russia still is and will remain a military superpower with more than 10,000 nuclear weapons and millions of soldiers.

Another change is the very fast rise of China to superpower status. The size of China's gross national product (GNP) and its exports and imports will, within the next two decades, reach the size of Japan's GNP and exports and imports. Rather soon thereafter, China will equal the United States of America in the volume of its economy and its role in the world's markets.

So, the 21st century will start under the auspices of a triangle of superpowers who have not as yet learned to acknowledge this new situation, and have not as yet learned to respect each other as superpowers. Obviously quite a few people in Washington, D.C. and quite a few people in Europe still find it very hard to understand that.

The European Union may grow into world-power status or it may not. It depends on the European Union's ability and willpower to create one single currency instead of hitherto 14 currencies with floating exchange rates and floating cross rates. Furthermore, it will depend on our willpower to arrive at one foreign and security policy. This process may take decades. The single currency managed by a totally independent autonomous European central bank will most likely start in 1999. I have to admit though that there is popular resistance and also populist resistance against it and there is British resistance against it. And then, there are the so-called criteria of economic convergence regarding the overall accumulated indebtedness of future participating countries and also their annual budgetary deficits; both being measured in terms of their respective GNP--16 per cent in the case of accumulated debt and three per cent of their GNP in the case of their budgetary deficit.

You will have read a lot of that in your own newspapers but most journalists have never read, and therefore cannot ever report about the fine print in the Maastricht Treaty. In fact, the Treaty states quite clearly that these criteria of convergence are not binding and that, in 1998, the council of heads of European government is entitled to accept members to the common currency which do not meet the criteria, taking into account the general economic situation of the country. This is what the council will most likely do in the course of 1998. I assume that France, Germany, Holland, Belgium, Luxembourg, Austria and Finland will jointly replace their currencies by the new currency Euro. Perhaps some others also will join from the beginning but not Britain. Euro will represent around 180 million people--one and a half times as many as the Japanese yen. And if Italy joins from the beginning, which is possible, then Euro will represent around 240 million people--almost as many as represented by the United States of America's dollar. What will that mean for Canada? My answer is not very much indeed because Canadian enterprises are already accustomed to a global economy with three major reserve currencies--the dollar, the yen and the Deutschemark. He who holds Deutschemark assets will in the future receive interest or dividends in Euro and will be paid back in Euro, and Euro will very likely be as stable as Deutschemark has been hitherto. The same will of course apply to Canadian holders of guilders, francs, or loans denominated in francs or guilders, or what have you. It is possible that some central banks in the world will in the course of time replace U.S. dollar currency reserves with Euro as they did when Deutschemark gradually became a reserve currency.

Immediately after World War II the American dollar was the only reserve currency in the world but since the late 60s and the very early 70s this is no longer the case. So, this experience of a very slow replacement of the dollar by new reserve currencies like the yen, the Deutschemark and the Swiss franc has proved that the graduality of that process did make the consequential increase and U.S. dollar supply easy to absorb by a growing U.S. economy. It didn't create any tensions or any difficulties and the same will happen once Euro replaces the Deutschemark, the French franc and so on.

What will happen if the single Euro currency does not come about? In that case, nobody will immediately suffer except my own country Germany. I'll come back to that a little later. Nobody will suffer because the markets will take it in their stride. The markets will push up Deutschemark which today is an overvalued currency thereby creating additional difficulties for German industry and for maintaining jobs in my country. In the long run, all the member nations of the European Union (right now 15, and quite a few waiting in the wings to become members, notably Poland, Hungary and the Czech Republic) will suffer from such a failure because it might very well mean the end of the integrative process in Europe and it might very well mean a deterioration of the European Union into merely a free-trade area.

If one looks backs to the beginning of that integrative process it was started in 1950 by a proposal made by Winston Churchill in his famous speech in Zurich, Switzerland in 1946. The start was instigated by a great Frenchman, Jean Monnet. The following are motives for Churchill, four years later for Monnet, and then Truman and also the German leader of that time, Adenauer. The first motive was to bind Germany into a greater community and the second to create a barrier against further westward expansion of Stalin's imperialism and of communism in general. The first motive is still valid particularly so because then Germany, West Germany, was only 48 million. We are now greater than 80 million. The second motive--building a barrier against Soviet imperialism--doesn't play any role today. But in the meantime a third motive has become very important--the economic motive. Many people in Europe have seen that the members of the European Community have done much better economically than non-members. The economic advantage is the motive for instance for Ireland, Sweden, Finland and Austria to have become members. A fourth motive, at the end of the Cold War and after the replacement of the duality between Moscow and Washington by a triangle of superpowers, is the insight that not even major European countries like France, Italy, or Germany could stand alone against the weight and power of one or all of the three superpowers of the 21st century. Only jointly will they be able to defend their interests whether it is in the World Trade Organization, the field of tariffs and trade, the field of the network of currency, the field of the hazardous developments in the financial markets, etc.

The plan originally comprised only coal and steel and branches of industry which were rightly considered to be the key industries for the rebuilding of Europe after World War II, but since then the community has grown. It now comprises not only all the industries it did in the 50s but also agriculture, energy policies, environmental polices, anti-cartel policies, what have you. It's a unique undertaking in the world's history that a group of nations voluntarily unites; nations most of which are almost a thousand years old and at least two of them, Greece and Italy, more than 2,000 years old. The process has been very gradual. In the beginning we were six countries; now we are 15. We may soon be 21 or more. It has been managed in a pragmatic English way, one step at a time. First we come to a bridge; then we cross it; then we see the next bridge coming, the next river and then we have to prepare to cross the next river and build the next bridge. If that process were to fail, at the end of this century Germany would be the greatest loser; also Poland, by the way, and to a much lesser degree the few others in the east of central Europe. Why would that be so?

Germany is a very small country in the middle of a very small, very narrow continent. We have nine immediate territory neighbours. We have open borders. Poland has seven immediate territory neighbours--open borders as well. Canada has just one neighbour--lucky for you. The British have no neighbours at all--even luckier than you. It's not always easy to live in peace with your immediate neighbour. If you have seven of them like Poland, it is more difficult. If you have nine of them it's even more difficult. Among these nine neighbours I have not counted Russia, I have not counted Britain and I have not counted Italy. Although they have played a great role in German history over the last millennium they are not immediate neighbours. If I counted them we would have 12.

If one looks back over the last millennium, one will see that if the Germans in the middle of that narrow continent were weak, other nations, states and forces from the fringes of Europe would push into the centre--the Asian hordes on horseback, the Vikings, the Swedes and the most evil of all, Napoleon. On the other hand, when the Germans felt strong they pushed to the edges and the outskirts of Europe, the last time in the most bloody imperialist way under Hitler. Here lies the root of Churchill's and Monnet's initiative lest history should be repeated. It's necessary to bind Germany into a united Europe and in order to do that France also has to bind herself into that same union.

These motives were prevalent in the minds of the statesmen in the late 40s and early 50s. They are prevalent today in the minds of political leaders in Europe because today Germany is much stronger and much bigger than it has ever been--80 million people. By the way, the territory is very small, about the size of British Columbia. Think of 80 million people on the soil of British Columbia. Germany seems to be very big if looked upon by our neighbours and a little bit too big for some of them. And of course, nobody will forget Auschwitz and the Holocaust.

If the integrative process fails, Germany will become dominant. In the case of failure of the common European currency, Deutschemark will become the dominant currency in Europe thereby leading to the dominance of the German central bank, the German private bank, the commercial banks, insurance corporations and so on. That would easily lead to a situation as in 1914 where the others in Europe coalesced against Germany. It is therefore the vital strategic interest of my nation to bind ourselves into that union and to make the European integrative process a success.

This was understood by Adenauer 46 years ago. It was understood by all his successors, myself, my successor Willy Brandt, and the present Chancellor in Bonn, Dr. Helmut Kohl. Although we have been fierce political antagonists, I am assisting him in bringing about one single currency. In the same fashion every French president after de Gaulle has pursued the same policies for the same overriding strategic motive.

I expect the integrative process in Europe to be continued. Why do I expect that? Because I have seen it developing for more than four decades. I've been participating in that process and so far we have been able to overcome five major crises of the process. The strategic motives have been strong enough to overcome all these crises. I guess we'll also be able to overcome the present crises--the post-Maastricht crises.

I've been asked what would be the effect of one currency in Europe on Canada's agricultural interest? Let me say that the common agricultural policy of the European Union, in my view, is and has been from the beginning a grave mistake and is a mess right now. The change of currency to Euro will not have any effect on this agricultural nonsense. There is an inter-governmental conference underway in Europe between the 15 member governments in order to review the institutions of the European Union, particularly, under the aspect of enlargement--of taking in Poland, Hungary, the Czech Republic and maybe others. This review will quite certainly lead to the insight that the financial costs for the agricultural policy cannot be maintained, particularly if new members join the community. Therefore I have some hope that not the common currency but this inter-governmental conference, so-called Maastricht Two, will at least diminish the impact of our agricultural policies on the rest of the world and also on you.

I've also been asked about the Trans-Atlantic Free Trade Area and its auspices--so-called TAFTA. Well let me frankly say I regard this to be merely a trial balloon. The British like it of course because they want the whole European Union to be demoted to merely a free-trade area. The other 14 members of the European Union, however, want to give high priority to the common currency, to the institutional reform of the European Union and strategic priority to the continuation of the integrative process inside the European continent. Right now the greatest concern in Europe is not trade. The greatest concern in almost every country in Europe, including my own country Germany, is unemployment. People understand the necessity to reign in public spending and deficits as in Canada and the United States, but this in itself will not decrease unemployment. It will certainly not decrease unemployment soon. All of them are looking for strategies that might lead to a diminution of unemployment. Germany is in a particular predicament here. Every year since unification we have been transferring budget money and social insurance money from West Germany to East Germany in the order of 150 billion Deutschemarks, equivalent to a $150 billion Canadian. On top of that the West German private enterprises have been transferring a considerable sum of almost 100 billion Deutschemarks to East Germany, partially for investing in real investment, partially for subsidising existing enterprises every year. This is an enormous burden.

In addition to this particular German problem we have another problem--our high wage levels, compared to those of our new competitors in the Far East, in South East Asia, in China, in India or even in the United States, Canada and Eastern Europe. Therefore, in Germany unemployment is slowly on the rise and will even rise if we get back to considerable economic growth in GNP There will be some cuts in welfare benefits and of course in the labour-related social fees and in taxation. There will be some slowing down of the habitual upward movement of our wage levels but we will certainly not allow ourselves to create a new underclass of working poor like the United States of America. We might do away with the exaggerations of the welfare state like Sweden, Holland and others in Europe but we are not going to do away with the welfare state on principle.

Our problems are found to some degree in all developed industrialised economies. If one puts this into historical perspective, it seems to me that over at least the last half of the 19th century and over the first three-quarters of the 20th century, Europe and North America had two great advantages over the rest of the world--first, an enormous lead in scientific and engineering knowledge capabilities and second, a high degree of savings and capital formation. Within the last 50 years Japan entered this group of privileged nations. In the last 25 years, some others as well have joined this group, Korea and Singapore, for example. Since the middle of the 70s the globalisation of markets for manufactured goods and financial markets has been erasing those two advantages which we have enjoyed in the latter half of the last century and in the first three-quarters of this century. Many countries nowadays, given globalisation, easily acquire western knowledge and capabilities. In addition, the free-flow of capital in all its forms has erased the advantage of high-capital formation at home in our own countries.

Capital today is seeking its profits worldwide--not just at home. At the same time, the savings rates in the western countries is decreasing. We are not saving as much as we did 20 years ago, 30 years ago. That's true of your country, true of my country, true of the United States, true of all the industrialised countries with one exception--Japan.

These developments have enabled high real investments in the upcoming developing countries including China, India, Indonesia, and Vietnam and have benefitted Hungary, Czech Republic, etc. It's good for all these newly arising economies as long as they can manage to keep their own production costs, such as wages, below the level in our industrialised societies. They will become fierce competitors for ourselves, for yourselves. Our societies' industrial enterprises are downsizing and cutting jobs and new jobs are going to be created in the benefitted countries overseas.

It seems to me that the old industrialised countries now regard Canada as belonging to their world as you have belonged to the Group of Seven for 20 years now. The old industrialised countries have a choice among three avenues. They can accept high unemployment plus a general decrease in their average real standard of living for their people or secondly, they can revert to protectionism including regulation of capital outflow, for instance, and creating barriers against imports of cheap goods from East Asia. There are temptations to do that and you can see this almost every week in Washington. You only need to listen to the speeches that are being made in the House of Representatives and in the Senate. But the United States is not the only one that is being tempted to go for protectionism once again. The third avenue would, of course, be the best one, namely to try to considerably enhance again the national savings rate and even more important to enhance basic scientific research, plus the application of the results to our own industries in order to enable ourselves to produce and offer manufactured products and offer services which the newly upcoming economies cannot offer as yet. It doesn't seem to me that this third way is being applied quickly enough and sweepingly enough so I have the sad feeling that for a couple of years or so unemployment will stick with us and the temptation for going protectionist will loom large. The average unemployment rate in the European Union right now stands a little above 10 per cent which many people find unacceptable.

Germany is a special case again in this scenario because the people in East Germany, the former Communist GDR, have never experienced a democracy in their lifetime. Except the few people who are in their middle-80s and grew up before Hitler's dictatorship, they have never experienced a market economy in their lifetime. They have lived only under dictatorships. In 1990 they were told democracy is the one good thing and the market economy has led to high hopes and illusory expectations. Today, there is deep disappointment particularly due to the loss of more than 40 per cent of the East German jobs that did exist under the Communists and that have been eliminated because the products that were produced in those jobs were not good enough for competition with the European Common Market--not good enough compared with West German, Dutch, Belgium, France, Italian, Danish products, what have you. As a result, there is an enormous degree of unemployment in the eastern part of Germany today. I am convinced we are going to overcome that but it will take between 10 and 15 years until we come to equality of productivity and standard of living between East and West Germany.

The political psychology inside this newly united country will also change. This psychological change is hampered by the fact that, since 1990, Germany has taken in millions of refugees from Russia, from the Balkan peninsula, from Turkey and from several countries in black Africa. Of course, if you have unemployment at home due to many foreigners--uninvited foreigners--then quite a few people get angry, particularly young people who can't find jobs for themselves. But mind you, there is no chance for Communist resurgence nor is there any chance of resuscitation of Nazism.

Whenever you read stories in your papers or listen to them on your electronic media about an alleged rebirth of Nazism or of neo-Nazism in Germany don't take it seriously. It is just sensationalist reporting. The one outstanding neo-Nazi distributing Nazi propaganda inside Germany is an American sending his propaganda into Germany by international mail. He incidentally is on criminal trial and deserves to be sent to jail.

Now ladies and gentlemen, let me conclude my long story by stating that there is high regard in my country for Canada, particularly for Canada's participation in and contribution to NATO as well as for Canadian contributions to the United Nations and to its peacekeeping operations in various parts of the world. The sympathy for Canada is common in Germany not only among the political class but also among the people and the man in the street. Everybody knows about the liberal climate of your democracy. Everybody also knows about the good bilateral economic and cultural relations between Canada and Germany. I must have been a visitor to your country more than a dozen times. About a half a million German visitors come to Canada every year and spend about a $0.5 billion, which is a little contribution to your balance of payments.

Well, ladies and gentlemen I look forward to the continuation of our good relationship and I wish you Canadians all the best. Thank you very much.

The appreciation of the meeting was expressed by Douglas Derry, Partner, Price Waterhouse, President, The Empire Club Foundation and a Past President, The Empire Club of Canada.