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Dealing with a Reunified Germany

With the fall of the Berlin Wall in November 1989, the long-awaited reunification between East and West Germany began. A mere two weeks after the fall, West German Chancellor Helmut Kohl announced a 10-point program calling for enhanced cooperation between the two sides, with a view toward eventual reunification. While no timetable was proposed, events began to rapidly accelerate in early 1990. In March, the Party of Democratic Socialism was heavily defeated in East Germany’s first free elections, which paved the way for a coalition government with a platform of speedy reunification. Second, East Germany’s economy and infrastructure underwent a near-total collapse, prompting the two German states to sign a treaty on monetary, economic and social union in May. The East German Parliament then passed a resolution on August 23, 1990, seeking accession to the Federal Republic of Germany; this was signed and then ratified by both sides. In an emotional ceremony, at the stroke of midnight on October 3, 1990, the black-red-gold flag of West Germany — now the flag of a reunited Germany — was raised above the Brandenburg Gate marking the moment of German reunification.

However, as joyous and historic as the moment was for most Germans, it also brought a host of economic and political challenges. In addition, Germany’s invitation to the European Union included the question of whether to join the Euro and how to approach ongoing free trade discussions. Donald  Kursch, the Minister Counselor for Economic Affairs and eventually the Deputy Chief of Mission in Bonn, explains the myriad issues the U.S. had in dealing with a reunified Germany, such as investing in the eastern German economy, dealing with German reluctance to fully support the Gulf War, as well as closing down the U.S. embassy in  the erstwhile capital, Bonn.  He was interviewed by Charles Stuart Kennedy beginning in September 2003.


“The costs of rebuilding East Germany had been grossly underestimated”

KURSCH: We went there right at the time of unification. The Wall had come down in November in the previous year, in ’89. I got there in August and the GDR [German Democratic Republic – East Germany] still formally existed. The reunification didn’t take place until October 3rd, but of course everyone was waiting for it to happen. This was something for which we had waited a long time. It was a time of great excitement.

And it was a very good time for the United States, because we had unhesitatingly supported German reunification, unlike our British and French friends. The French were always fond of saying, “We love Germany so much we’re glad there are two of them.” President Bush’s support for unification had created much good will among the Germans. I, myself, had never served in Germany before. I had served in Switzerland in my first tour, and I felt quite fortunate to have been assigned to Bonn in such a senior position.

Well, the mission was pretty deep. It was a large mission on my side of the house [i.e., the Economics section]….Also, as I recall, the relationship between Embassy Bonn and the U.S. Embassy in East Berlin were not very good. East Berlin was being closed with unification and the tours of those assigned there were curtailed. This was a source of unhappiness. There was also a sense in Bonn that some of the U.S. staff of Embassy East Berlin apologized too much for the GDR. This would have been a source of bad feeling.

The costs of rebuilding East Germany had been grossly underestimated from the beginning, and the amount of time that it would take to rebuild had also been underestimated. If you looked at the comparative economic statistics, East Germany, as I recall, was listed as the tenth-largest economy in the world. But the country’s basic infrastructure was rotting and the products that the GDR manufactured were totally uncompetitive. And then you had this decision to convert the East German Mark to West German Marks at the rate of 1-to-1, to give people spending money, as well as for psychological reasons. However, their productivity in the East was so low that there was no way that companies over there could survive with such an exchange rate. I’m wondering though, even if the rate had been 2-to1, or 5-to-1, how much of East Germany’s industry could have survived.

One of the things in which I took great interest was learning more about the East German economy and I started traveling over there on a regular basis. I can remember doing it with at least two of my colleagues from the Embassy’s other economic agencies. We had very senior representatives from commerce and from agriculture, so taking up where I left off in Hungary, where I used to travel around with a military attaché, I traveled to East Germany together with them. We took 2- and 3-day trips around to Eastern Germany, and took a look at the business climate.

On one trip we attended the groundbreaking for the new General Motors plant at Eisenach which was probably the most visible investment by a U.S. company in East Germany. I wanted to be able to show the Germans how much Americans and our investors were doing in Eastern Germany, because there was this sense among the Germans that the United States should be doing more helping them rebuild and that we somehow owed it to them, because of what some saw a U.S. responsibility for the long division of their country. I had a bit of problem with this point of view, but it was an attitude I encountered often, particularly among working people such as taxi drivers.

With West Germans…many felt that somehow that the U.S. was partially to blame for the fact that their country had been divided, and now we had an opportunity to in there and lead the pack on new investment investing and helping Germany to meet the enormous expenses of re-unification. And so, what I did was to start collecting information on all the American investment that had taken place in East Germany, and getting this in to the Ambassador’s speeches, especially after Ambassador [Robert] Kimmitt got there in 1991. We were able to make a very credible case that the United States was, in fact, the leading foreign investor in Eastern Germany. So we were able to show, in fact, that we were helping to turn the place around.

I think it was clear that East Germany was going to have the highest per capita income in the former East Bloc because of the assistance from the West. There were also significant tax breaks that the German government was offering to investors. Many American companies felt that it was important to establish a presence in this market of 17 million people. We also pointed out that the East Germans had a fair amount of expertise in dealing with the other countries of Eastern Europe and the former Soviet Union. There were personal connections; there was knowledge of the Russian language. And for basic consumer products such as automobiles, for example, this is what people were spending their money on. Indeed, this Opal plant that General Motors put in at Eisenach had a big demand for its products. All these East Germans were taking this money they were getting at 1-to-1 and buying cars. That was one of the more spectacular transformations, watching the disappearance of the old Eastern automobile stock and its replacement by world-class automobiles.

One small example, though, that sticks out in my mind, highlighting East Germany’s low productivity was that Wartburg, which had its factory in Eisenach, produced 70,000 cars a year, with a workforce of 10,000. GM’s plan was to produce 150,000 cars a years with a workforce of 2,000. This figures underscored to me the magnitude of difference in productivity between East and West….

We had this situation in eastern Germany where the authorities were trying to privatize a lot of the state properties. Of course, the German companies wanted first whack at this stuff and the most attractive deals. Despite all this talk of “Where are you Americans and why won’t you come here and invest?,” there was frequently a tendency by the Germans to leave us the scraps that they didn’t want themselves. We had a long fight over the privatization of the coal fields and properties around Leipzig. We had set up this small consulate general in Leipzig, which was very, very effective. Todd Becker was the consul general over there.

I went over there a number of times, but we pushed very hard to make sure our U.S. companies got equal treatment and that their proposals would be handled on a level playing ground. One thing I particularly remember doing with the help of a friend in the Chancellor’s office is smuggling the Ambassador onto Chancellor Kohl’s helicopter as they went down to dedicate this General Motors facility in Eisenach.

Ambassador Kimmit, who spoke reasonable German, made the pitch to the Chancellor in the helicopter. He’d prepared this very carefully, and indeed, we were successful in winning that bid. I felt very good about that because the Chancellor, I was told, gave the word that, “Hey, don’t treat the Americans like this. Give them an equal shot.” At least that was the feedback I got.

So that was one concrete example I can think of how we probably made a difference. I don’t know if the company ever appreciated that. But it gave me satisfaction….

When Richard Holbrooke was Ambassador, he set up this American academy in Berlin, which seems to be quite successful and quite active. Holbrooke organized something called a New Traditions Conference in 1993. He brought in Henry Kissinger and Chancellor Kohl attended. It was really quite spectacular. He brought in some of the top figures in American business: the Chairman of IBM, Lou Gerstner; Jack Smith, the Chairman of General Motors. He really did get big names. The whole idea behind this was how could we establish a different kind of relationship to deal with the inevitable changes….

Dick Holbrooke…was a very colorful figure in his own right, a dynamic figure….He had more experience in Asia than in Europe….And Holbrooke had also wanted to go to Japan as ambassador, but former Vice President [Walter] Mondale had been tapped, so the Germans felt that they were a bit shortchanged.

One of the things I told Holbrooke when he came out was to make the Germans aware of his own German heritage, as his grandfather had fought for the Kaiser in WWI. He had this picture of his grandfather in uniform with one of those spiked German helmets. So I said to him, “Make sure that sits in your living room in a corner somewhere, but not too prominently. If they can see that, then they won’t ask you why you don’t speak German.” And, indeed, I can still remember some military officer looking at that picture and they said, “Who’s that?” I said, “Oh, that’s the Ambassador’s grandfather.”…

“The whole idea of sending troops to war was still very strange”

I think there was the realization that this was going to be a very big project. There was also the realization which was somewhat slow to come or filter down, that our special relationship from the days of occupation were over. We immediately drew down the number of U.S. forces we had in Germany, from 300,000 to about 100,000, and I’m convinced that we kept that 100,000 because it was a still six-figure number. That was a big change.

Yet I guess we had significant confidence in ourselves, as unification had come out so amazingly well for us. Here we had a united Germany that was in NATO. The first President Bush talked about “partners in leadership”, that this new, united Germany would become the major partner for the U.S. in continental Europe. I think we were quite upbeat about those possibilities. That continued into the Clinton administration…But these were pretty heady times.

From the German prospective, what was interesting was how they weren’t really quite ready for making broader international commitments. Because at that time, we had the first Gulf War.

I can remember this one instance; I must have been charge d’affairs and was making my initial calls. We had received a request from the State Department to obtain foreign assistance to help move the Egyptian Third Army to the Gulf. We were supposed to talk to German officials about this. I remember being at the Ministry of Transportation making a courtesy call, and my interlocutor was the acting minister at the time because of the summer vacation.

I asked him for help or any thoughts he might have in dealing with Washington’s request. He provided me with a list of Hamburg shipping companies.

Finally, Secretary [James] Baker came and appealed directly to Chancellor [Helmut] Kohl and received a 10 billion DM [Deutschmark, the former German currency] commitment from Germany to help with the expenses of the first Gulf War. But this was classic checkbook diplomacy from the German side. The notion that they could write checks and get out of a commitment of personnel was quite strong.

The whole idea of sending troops to war was still very strange and unacceptable. I remember having lunch with a friend who was then the head of the American Studies Department at the University of Bonn, shortly before the Gulf War started. He said to me, “But surely you’re not going to go to war. People don’t go to war anymore.” I answered, “Well, you heard what the President said and you heard what the Secretary said, and unless Iraq pulls out of Kuwait, I see no alternative.”

He said, “You can’t go to war over this.” I replied, “But that’s what’s going to happen.” And this person was not a reflexive anti-American; but rather a conservative Christian Democrat. But it was an interesting reflection of the mentality at the time. There has been a big change since then. And the fact that the Germans today are one of the leaders of our joint military action in Afghanistan just shows the enormous transformation that has taken place in a relatively short time….

Q: Did you feel that our military success in Desert Storm, the first Gulf War, also helped in a way? Did that resonate in Germany?

KURSCH: I think it resonated in a couple of ways. First, there was this strong pacifistic mentality, which was not just present on the left.… There was a broad attitude that you can’t solve problems through military means, and of course I think we demonstrated in the Gulf War that sometimes you have to do that. And we had been very successful, with a minimum of casualties. So, we came out of that affair somewhat vindicated. It also showed the Germans that they had to play a broader role in the world. Of course, when the Balkan crisis came up later, they did. They sent troops down to the Balkans. So that was a big change in their attitude….We had the horrible spectacle of Saddam pulling out and burning all the oil wells in the Gulf, which was a great environmental catastrophe. The environment is big politics in Germany. So, I think on the whole we were vindicated.

I did have one unpleasant incident there. It’s the closest I’ve ever come to getting killed in the Foreign Service, to my knowledge. Right on the eve of the war, I believe it was Ash Wednesday, 1991, terrorists shot up our embassy. The Red Army faction shot at the Embassy with about 200 armor-piercing bullets, and missed me by about a foot. I didn’t realize it at the time how close they came to, but we hit the floor in our offices. It was about 7 o’clock at night and the bullets—you could see tracers, coming over our head. But we didn’t realize they came right through the walls of the Embassy as well. One of them hit my secretary’s computer. The secretary’s computer was decorated by Ambassador [Vernon] Walters the following day as a war casualty….

[Overall] I think we still benefited from the afterglow of a traditional relationship. When I think of my dealings with German military and the Defense Ministry — I was DCM for the last year and a half that I was in Germany — so much of the German military, in fact all the German pilots, had been trained in the United States. They still have a large base out in New Mexico. You just had all these personal ties. I think our military commanders in Germany, in general, did a terrific job in reaching out to the communities they were stationed in. The level of goodwill in places like Nuremberg between the people of the city and the military commands were quite striking to me….

Fighting for Free Trade

One of my top responsibilities was to get support from the German government for the successful completion of Uruguay Round trade negotiations [in the General Agreement on Tariffs and Trade or GATT]. We were pushing this very, very hard. Carla Hills was the U.S. Trade Representative. The Germans used to call her “Crowbar Carla,” because she was a pretty tough lady. Still, the Germans, within the EU [European Union] context, were among the most committed free traders.

We had a coalition of Christian Democrats and Free Democrats and the Free Democrats controlled the Economics Ministry. They were quite committed to free trade and liberal economic policies. So, one of the things that I had to do was to try and push those connections as much as possible to try and get the Germans to speak out in an EU context and try to come up with positions that would be compatible with ours or at least provide a basis for further negotiations. It was clear that unless we in the EU reached an internal agreement, the Uruguay Round never would have been concluded. So I spent a lot of time on that….

What was interesting in Germany at that time as that the trade unions were also free trade oriented, because Germany is the big exporting country of the EU. I remember going up to call on the head of the German trade union movement to make the pitch that they should come out and strongly support the Uruguay Round agreement. And, it seems to me, we got the trade unions and the Confederation of German Industry to sign a joint letter supporting this. Together they wrote to Chancellor Kohl and encouraged the conclusion of this agreement….

I’m happy to say that at the end of the day, we were successful. Although the French did not give the Bush administration the satisfaction of concluding an agreement on its watch; this was subsequently done in the next administration. I had very, very good ties with the German Ministry of Economics which was a very professional operation. This Ministry had been founded by Ludwig Erhard after World War II, and it was a real honor to work with those people. When I think back at the level and quality of the people that I could deal with at my own rank, it was really a great privilege for me.

The French would make these very strong appeals to European solidarity. On economic issues, the French, of course, had a rather protectionist outlook anyway, and I think they would appeal to Germany on for solidarity. The people I dealt with on the whole I think were more sympathetic intellectually to our positions on trade and economics. But they had to figure out how to bridge these gaps.

Agriculture was a tricky issue, though, because the German agriculture is even more inefficient than that of France, so when you dealt with the German agricultural ministry, their priority was to protect small German farmers, particularly farmers in Bavaria, where there was a strong agricultural lobby. The CSU [Christian Social Union] of Bavaria was a key coalition partner for the Kohl government so there were always these kinds of elements. Our agricultural attaché did not have an easy time. But I felt that the Germans had more of a feeling for us. We also were benefiting from the afterglow of all the support we’d given to Germany during the Cold War, and our unhesitatingly backing of German unification.

But Chancellor Kohl would say things such as, “Well, you have to understand that with France, you must take off your hat to Marianne [the female symbol of France] three times before you can salute your own flag.” And if I complained about the French to the Germans, they’d say, “What are you complaining to us for? We have to deal with them every day.”…

There was a big internal German debate on [the Euro]. And one could sense, politically, the Euro was not popular, as the Deutschmark had been the key success symbol of the Federal Republic, of the Bonn republic. Emotionally, the Mark was not something the Germans were keen to give up. On the other hand…this was an opportunity to take Europe to a higher and more visible level of unity, and basically Kohl probably acted against the advice of many of his economic advisors. I recall that Mr. Tietmeyer, who was the head of the Bundesbank and probably then the most respected economic expert in Germany, was not enthusiastic about the common currency. But Kohl provided the political leadership to make this happen. It made sense: if you have a common economic area, to have a common currency.

I was, and probably still am, a believer in the bicycle theory:  if you don’t move forward, you move backwards. The temptation of various EU Member States to play games with their currencies and engage in competitive devaluations for the purpose of promoting their export industries might have been difficult to overcome. As we see how southern countries, or even the French, have played games with inflation over the years and devaluations of their currencies, this could have been a real danger. So, it seemed to me at the time, that this move towards the creation of a common currency made sense.

Now, what the Germans didn’t see at the time was the enormous difficulty they would have in rebuilding the East, and what a major drag that this would be on their overall economy. Now, it’s also a drag, and we’re seeing this now, on their ability to provide economic stimulus internally.

The End of an Era — Closing Down Embassy Bonn

Perhaps the things I felt best about in my accomplishments as DCM was pushing to close the American embassy in Bonn, because there didn’t seem to me any real need to continue this great embassy on the banks of the Rhine. We had a thousand people in it. Ambassador Holbrooke had also pushed very hard to reopen our consulate general in Dusseldorf, which the State Department didn’t want to do. So, Dusseldorf became a Foreign Service commercial service post. But, it’s there.

In trying to determine if we should maintain a presence in Bonn I went through and I sent questionnaires to every conceivable agency in our embassy. I asked them how many people would they need in Berlin, and how many people would they need in Bonn if we were going to have to split operations? Of course, I came up with a greatly expanded staff.

If I remember right, I think it was the U.S. Air Force liaison office, telling me they’d need to double the size of their presence:  they had two in Bonn but they would now need four, two in Bonn and two in Berlin. So, I got all these questionnaires together. I said, “This is ridiculous. I think it’s crazy for the State Department to maintain a large embassy in Bonn for a couple of single agencies who could make other arrangements. So, I announced at one of the big weekly staff meetings day, that I saw no reason for the embassy to remain in Bonn when we moved to Berlin. And, boy, you could see these colonels — I had eight full colonels at my staff meeting —running for the telephones.

That’s the way it ended up.…We decided that we had to find a way to reduce our presence. And we succeeded.