The Art of Economic Persuasion: Positive Incentives and German Economic Diplomacy

The Art of Economic Persuasion

The Art of Economic Persuasion Positive Incentives and German Economic Diplomacy

Patricia A. Davis

Ann Arbor

Copyright © by the University of Michigan 1999 All rights reserved Published in the United States of America by The University of Michigan Press Manufactured in the United States of America c Printed on acid-free paper 2002

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No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, or otherwise, without the written permission of the publisher. A CIP catalog record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Davis, Patricia A. (Patricia Annette), 1959– The art of economic persuasion : positive incentives and German economic diplomacy / Patricia A. Davis. p. cm. Includes bibliographical references and index. ISBN 0-472-10988-X (acid-free paper) 1. International economic relations. 2. Germany—Foreign economic relations—Poland. 3. Poland—Foreign economic relations—Germany. I. Title. HF1359 .D38 1999 337.430438—dc21 99-6212 CIP ISBN13 978-0-472-10988-3 (cloth) ISBN13 978-0-472-02733-0 (electronic)

Contents

List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi List of Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Part 1. The Theory and Tenets of Economic Persuasion 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Institutional Structures and Linkages: Managed Foreign Economic Policy . . . . . . . . . . . . . . . . . . . . . . . 25 3. Extracting Domestic Resources: Reward Power . . . . . . . . . . . . . 46 Part 2. German-Polish Reconciliation: A Case Study of Applied Economic Persuasion 4. Change through Rapprochement: From Isolation to Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5. From Stabilization to Damage Limitation . . . . . . . . . . . . . . . . . . 87 6. From Ambivalent Adaptation to Normalization . . . . . . . . . . . . 105 Part 3. Conclusion 7. The Utility of Economic Persuasion: A Reappraisal . . . . . . . . . 137 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

Figures

1. Federal Republic of Germany Federal Ministry of Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2. U.S. Department of Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3. U.S. Department of Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4. Of‹cial Export Credit Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . 56 5. German Export Credit Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . 56 6. U.S. Export Credit Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 7. German Exports to Central Europe . . . . . . . . . . . . . . . . . . . . . . . . . 75 8. Polish Trade with West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . 81 9. Ethnic German Repatriates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 10. German Foreign Trade with Poland . . . . . . . . . . . . . . . . . . . . . . . 142 11. Major Creditor Nations in Commercial Bank Lending to Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 12. (a) Ideal Managed Foreign Economic Policy . . . . . . . . . . . . . . . . 154 (b) German Managed Foreign Economic Policy . . . . . . . . . . . . . . 155 13. Triangular Diplomacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Tables

1. Structural and Tactical Goals of Peaceful Change . . . . . . . . . . . . . . 19 2. Geographic Distribution of German Export Credit Guarantees . . 145 3. Polish Debt According to Origin of Creditors . . . . . . . . . . . . . . . . . 145 4. Bilateral Debt Rescheduling Agreements between Poland and Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 5. Financial Costs of Economic Persuasion . . . . . . . . . . . . . . . . . . . . . 150

Acknowledgments

Day-to-day politics sometimes have a pleasant, at other times, frustrating way of complicating a scholar’s ongoing research. Such was the case with this study. When I began, German unification seemed a remote, if not improbable, possibility. By the time of this publication, German unification had become an accepted reality. In hindsight, many pundits claim they anticipated such a development. While I cannot claim to have predicted history’s course, I can assert that I foresaw rapidly progressing peaceful change in official East-West relations. Yet no one could have predicted the courage and utter heroism of the people of Eastern Europe. What I witnessed firsthand in Poland, Hungary, and Czechoslovakia in the summer of 1989, as well as at the Berlin Wall on November 9 that year, cannot be adequately described. These were the people who made peaceful change happen. To them I am grateful and hope for their everlasting peace and freedom. On a more personal level, I have many people to thank for the successful fruition of this work. My graduate cohort from the University of Maryland has been a continuous source of emotional support; for intellectual support the list is long, as is my gratitude—my thanks to Davis Bobrow, Beverly Crawford, Peter Dombrowski, Lily Gardner Feldman, Helga Haftendorn, Peter Katzenstein, Janie Leatherman, Andy Markovits, Monika Medick-Krakau, Ben Radcliff, and last, but certainly not least, Simon Reich, a genuine mentor. And finally, to Alan and my family, without whom none of this would have been possible, all my love and everlasting appreciation. Alan was an eternal source of inspiration, wisdom, and comfort. To have such a fountain of support has been a true treasure. I would like to acknowledge that the research for this study was assisted by a grant from the Berlin Program for Advanced German and European Studies of the Free University of Berlin and the Social Science Research Council with funds provided by the Volkswagen Foundation and the German Marshall Fund of the United States.

Abbreviations

AKA BDI BIT CDU CoCoM COMECON CSCE CSU EC FDP FRG GDR GK IMA KfW KOR OA OPIC PK PUWP SED SPD UFK

Ausfuhrkredit-Gesellschaft (Export Credit Society) Bundesverband der Deutschen Industrie (Federation of German Industry) Bilateral Investment Treaty Christian Democratic Union Coordinating Committee for Multilateral Export Controls Council on Mutual Economic Assistance Conference on Security and Cooperation in Europe Christian Social Union European Community (now known as European Union) Free Democratic Party Federal Republic of Germany German Democratic Republic (also DDR) Gemischte Kommission (Mixed Economic Commission) Interministerieller Ausschuß (Interministerial Committee) Kreditanstalt für Wiederaufbau (Credit Agency for Reconstruction) (Polish) Committee for the Defense of Workers Ost-Ausschuß (Eastern Committee) (U.S.) Overseas Private Investment Corporation Polen-Kreis (Poland Committee) Polish United Workers’ Party Socialist Unity Party Social Democratic Party Ungebundene Finanzkredit (untied ‹nancial credit)

PART 1

The Theory and Tenets of Economic Persuasion

CHAPTER 1

Introduction

In January 1989 Mieczyslaw Rakowski, who was to be the last Communist prime minister of Poland, made a visit to West Germany to celebrate former chancellor Willy Brandt’s seventy-‹fth birthday. Using this “private” occasion to disguise his real purpose, the Communist of‹cial appealed to both German politicians and business elites for massive ‹nancial aid to restructure the Polish economy. Rakowski felt con‹dent German of‹cials, both private and public, would respond favorably to his pleas for economic support. To an outside observer this seemed a truly remarkable event. Only twenty years earlier Bonn and Warsaw had no diplomatic relations and did not even recognize the legitimacy of each other’s regime. Indeed, in the eyes of the Polish elite, West Germany was a revisionist nation, while Bonn considered Poland to be a country unlawfully occupying German territory. Moreover, commercial relations between the two nations were minuscule. A comparable scenario might be Fidel Castro traveling to Washington, D.C., asking, and then expecting, members of the U.S. political and business communities to support him in carrying out reforms under Cuba’s communist regime. Yet, what seems highly unthinkable in the U.S.-Cuban case became the reality in the case of German-Polish relations—two former adversaries perceived it to be in their interests to embrace collaboration and were willing to support one another in their national objectives. The Polish government wanted economic support for its reform process; of‹cials in Bonn wanted political support for its goals to improve conditions for ethnic Germans in Poland as well as to nurture the reform process in East Germany. How did bitter adversaries become cooperative neighbors? What strategy enabled the West German government to effect such a fundamental shift in relations? How was it able to implement this strategy? This study looks at the utility of economic persuasion as a strategy to promote peaceful change. It looks at ways in which government of‹cials use economic instruments for foreign policy gains. In particular, it examines the means by which a government can magnify its efforts at economic persuasion by inducing domestic business to increase and sustain commercial 3

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The Art of Economic Persuasion

economic exchange with the target nation. The goal of this book is to improve our understanding of the domestic conditions under which the state can use commercial economic incentives to achieve foreign policy goals, especially where these incentives are meant to induce cooperative behavior from another state. From Economic Coercion to Economic Persuasion between Adversaries Most scholars tend to rely on theories of military force or coercive diplomacy to explain foreign policy “successes.”1 I suggest, however, that what happened between 1969 and 1991, that is, the normalization of relations between two adversarial nations, was not a matter of prudent use of military force nor coercive diplomacy, but was instead the result of economic persuasion.2 Also referred to as positive economic statecraft (Baldwin 1985) or economic linkage (Mastanduno 1992), this strategy uses economic incentives (the provision of bene‹ts or the promise to furnish them in the future) as the means for the end of peaceful change (persuading or convincing the opponent to revise his/her views of the adversarial nature of the dispute). Thus, German of‹cials engaged in a foreign policy aimed at expanding economic exchange as a means of inducing peaceful change in its adversary. In particular, economic tools, both commercial and public, were instrumentally employed by the West German government to facilitate and maintain economic transactions with Poland. That is, German of‹cials made use of such economic inducements, or “positive economic sanctions” (Knorr 1975; Baldwin 1971), as commercial trade promotion and credit extension to achieve political normalization. Key to the success of this strategy was the German government’s ability to align the German business sector behind this policy of according economic incentives toward Poland. In other words, Germany succeeded in one of its major foreign policy goals through a long-term process of proffering economic carrots instead of brandishing sticks. That this topic is of growing importance can be seen by the fact that the U.S. government has recently engaged in its own policy of offering economic “carrots” as a means of inducing changes in political behavior. Indeed, Washington successfully “persuaded” Ukraine to relinquish control and ownership of nuclear weapons by extending the government ‹nancial “rewards.” In the case of halting nuclear proliferation in North Korea, too, economic incentives played a role in convincing North Korean of‹cials to forgo certain policies. It would seem, then, that economic incentives can be successful in achieving desired political outcomes. However, in both cases the desired outcome was short-term in nature and involved a singular, explicit change in policy. Neither, for example, con-

Introduction

5

cerned long-term, evolutionary transformations in behavior. Moreover, in both cases, the economic incentives offered were primarily public in nature, that is, involved of‹cial monies. Neither involved the more common types of inducements—increased trade and technology transfer, for example—that generally involve the private commercial sector. Thus, the conclusions that would be reached by looking at this type of economic persuasion could hardly be generalized to include hypotheses regarding how to achieve long-term, evolutionary changes in political behavior with economic instruments. Indeed, most of the literature investigating the utility of coercive economic statecraft is also limited by this shortcoming. Largely con‹ned to the study of negative economic sanctions, for example, boycotts and embargoes, these scholars primarily consider cases concerning coercive short-term or explicit policy changes, such as the Soviet withdrawal from Afghanistan (Hunter 1991); the release of American hostages by Iranian terrorists (Alerassool 1993); or the Iraqi evacuation from Kuwait (Cordesman 1997). Even the literature that does include cases involving long-term goals such as attempts to “force the Soviets to their knees” by means of strategic and economic embargoes is not suf‹cient (e.g., Mastanduno 1992). This literature is for our purposes inadequate in that it does not consider cases where a foreign policy “success” for the sender government would still permit the targeted government to remain in power. Typical coercive strategies demand compliance from the target regime, which in many cases means removal from power. The means are threatening and the goal is coercive. In other words, it cannot provide us generalizations for foreign policy goals that pursue such objectives as reconciliation, con›ict reduction, or con‹dence building. Above all, applying lessons learned from these types of coercive foreign policies cannot be useful for understanding the utility of economic persuasion in that governments in market economies can forbid commerce but they cannot command it. That is, negative economic sanctions are relatively simple to legislate and implement since governments are empowered to do so as part of their authority to govern foreign commerce. Yet these same governments are not empowered to command from business that they engage in trade and lending with other nations or foreign ‹rms. Hence, economic boycotts and negative sanctions are far easier to impose than policies of economic linkage or “positive” sanctions. Economic Persuasion as an Underdeveloped Concept Once a foreign policy strategy shifts from threat or use of force (coercion) to peaceful change the most pro‹cient means of achieving this outcome is,

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The Art of Economic Persuasion

I argue, economic persuasion. A more articulate understanding of the concept is therefore called for in order to appreciate its utility. What does economic persuasion embody and how does it contribute to the outcome of peaceful change? What is it, and what purpose does it serve? Numerous studies abound on the theory and logic of economic persuasion.3 Baldwin (1985) de‹nes what he calls the strategy of economic statecraft as attempts made by governments to in›uence other nations by means that rely primarily on resources that have a reasonable semblance of a market price. His is an instrumental approach in that he argues that in many cases country A can indeed more often successfully induce country B to do X with positive sanctions than it can compel B to the same action with negative sanctions. Baldwin (1971) enumerates fourteen means by which positive sanctions, as opposed to negative sanctions, can make a difference in the behavioral consequences of actor B. Two examples of successful economic persuasion efforts include aftereffects and side effects. A side effect would be what is known as the “spillover effect” on B’s relations with A with respect to other issues. “While positive sanctions tend to enhance B’s willingness to cooperate with A on other issues, negative sanctions tend to impede such cooperation.” An aftereffect may be that “If A uses positive sanctions today, B will tend to be more willing to cooperate with A in the future, but if A uses negative sanctions today, B will tend to be less willing to cooperate with A in the future” (Baldwin 1985, 32–33). Here the logic is relational in that economic incentives are a function of the political situation; they are meant to in›uence preferences, not exert power. Positive sanctions are thus de‹ned as “actual or promised rewards to B; negative sanctions are de‹ned as actual or threatened punishments to B” (Baldwin 1971, 23). Baldwin himself relies on the pathbreaking work carried out by Lasswell and Kaplan (1950) for a further re‹nement of the concept of positive sanctions: A sanction is positive when it enhances the value for the actor to whom it is applied and is negative when it deprives her/him of values. Furthermore, according to Lasswell and Kaplan, control over B’s well-being can be a potential power base for A. On this premise, Baldwin reasonably assumes that this would then imply A has the ability to add to B’s well-being, and not just subtract from it (as most theories of economic sanctions would have us believe). While appearing to be economic acts, these policies are, in effect, political acts because the state is attempting to affect the actual or potential behavior of another state. Hanson (1989), too, claims that economic persuasion belongs to the domain of political strategies. The purpose of such a strategy would be to establish closer contact and thereby in›uence the attitudes and perceptions of an elite in the target nation. “A strategy in this

Introduction

7

context would be a stance somewhere along the spectrum between commercial détente and economic warfare, adhered to consistently over many years . . . a strategy closer to the détente end of the spectrum would be based on the belief that a long period of expanding commercial relations would be in the political interest of the nation pursuing that strategy” (5). In its most manifest form, economic persuasion could include, for example, governmental subsidization of East-West trade.4 Similarly, the contributors to Reinhard Rode and Hanns-Dieter Jacobsen (1985) investigate the utility of what they call economic détente in affecting East-West relations. Their fundamental de‹nition of such a strategy is “frequent attempts to in›uence the political conduct of a country or group of countries by measures intended to affect their external economic relations. Such attempts to exert in›uence may be positive as in the form of economic aid, reduction of trade barriers, etc.” (93). In its crudest form such a strategy is bribery for political concessions, but in its more ideal form it would create mutual dependencies, thereby lessening the probability of resort to violence to solve what they see as inevitable con›icts. In his extensive treatment of what he calls “economic doctrines” Van Ham (1992) takes a functionalist approach, which holds that a certain amount of commerce between East and West may over time result in a situation where both trading partners perceive a certain extent of mutual dependence (or interdependence). It is expected that East-West economic interdependence will decrease the probability of con›icts, since both parties have economic bene‹ts to lose. (23) It is perhaps Mastanduno (1992) who provides the most precise and nuanced de‹nition of economic persuasion. In his study of CoCom he distinguishes four possible economic strategies that a state may pursue: economic warfare, strategic embargo, tactical economic linkage, and structural economic linkage. Here we are most interested in his de‹nitions of linkage strategies since they are not meant to deny or weaken the target state but instead rely on some magnitude of bene‹cial economic exchange. This strategy is also meant to in›uence the behavior or policies of target governments. The critical difference between these two types of positive economic statecraft is the degree of conditionality imposed on the target state. A strategy of tactical linkage can condition or calibrate trade according to changes in target behavior by rewarding, or promising to reward, good behavior. It also punishes, or threatens to punish, bad behavior. Structural linkage, on the other hand, relies exclusively and unconditionally on trade expansion. By developing or intensifying economic relations

8

The Art of Economic Persuasion

the sender government hopes to induce or reinforce desirable changes in the policies of the target government.5 The “Power” of Economic Persuasion Going beyond these theoretical conceptions of the logic of economic persuasion we need also to examine the actual utility of economic incentives. What is the utility of employing economic instruments for political ends? Much like the case with negative sanctions (i.e., measures meant to punish or harm) economic incentives can serve a broad range of purposes. These purposes can range from the relatively modest (e.g., send a signal) to the more dif‹cult (e.g., extract political concessions). By stipulating that the instrument used have a tangible market price, economic instruments are distinguished as separate and discrete tools of foreign policy, as distinct from military or diplomatic tools, for example. Such economic means range from threats or actual use of economic punishment (e.g., embargoes, boycotts) to promises or actual awarding of economic rewards (e.g., loans or grants). Hence these tools include negative as well as positive sanctions. Increased bilateral economic exchange, for example, could be used as a basis for political cooperation between states and across issues or it could be used in exchange for anticipated future political gains. Other positive sanctions include favorable taxation policies, granting most-favored-nation status, tariff reductions, investment guarantees, and so on. Two primary examples of instruments used as a means of economic persuasion include purchase and free trade. Purchase, or direct monetary payment, is “one of the most common ways for some people to get other people to do things they would not otherwise do” (Baldwin 1985, 43). In this sense, purchase could include options ranging from debt forgiveness to concessional grants (which do not require repayment) to ‹nancing favored political foundations by means of endowments. The West German government tried all three of these examples in its strategy toward Poland (discussed in the empirical chapters in part 2). Second, manipulating the legal and political framework can also be carried out in order to in›uence the pattern of international trade. A commitment to free trade or reducing discrimination is such an instrument in the sense that such a policy can be used to pursue a number of foreign policy goals, such as promoting economic recovery, ensuring access to strategic raw materials, stimulating economic development, creating markets for exports, or even creating an international atmosphere conducive to peace and security. Baldwin (1985) discusses three signi‹cant types of “bargaining behav-

Introduction

9

ior” for which such economic incentives are particularly useful, the ‹rst of which focuses on images and symbols. Since statesmen usually behave as if others were watching (that is, they usually try to gauge the effects their behavior may have on outside observers), economic signals can be used to clarify the statesman’s values and intentions for others. For example, Jervis (1970, 7–8) argues that goodwill, prestige, and saving face are important goals and that these are “aspects of a state’s image that can greatly contribute to its pursuit of other goals. . . . For if they succeed they can bring rewards all out of proportion to their costs by in›uencing the psychological environments and policies of other decision-makers.” Next, economic incentives function as indicators of intention. Positive or supportive orientation can be implied by economic rewards. (Of course, the reverse is also true: Refusal to engage in economic intercourse with another country projects an image of disapproval and hostility.) At the same time, techniques of statecraft per se vary in the degree to which they enable states to make ambiguous and limited commitments. For example, when sender country A grants economic aid to target country B it signals more than mere verbal support. At the same time, A’s demonstration of political support by means of economic aid signals less support than military aid would. Likewise, negative economic sanctions are “often designed to deter and reassure simultaneously. Techniques that enable policy makers to demonstrate ‹rmness while reassuring others of their sense of proportion and restraint can be highly useful” (105).6 Finally, economic incentives can enhance credibility. “Talk is cheap.” While economic diplomacy will usually cost more than propaganda or political diplomacy, its costliness also lends it more credibility. In terms of sanctions’ expressive utility, using economic diplomacy can be used to signal approval (e.g., by not revoking MFN status, or by renewing trade treaties, sender A can signal “business as usual” to target B) or disapproval (e.g., by imposing a boycott or embargo against target B or by lowering quotas). These examples aptly correspond to the case study under review since the psychological phenomena of symbols, commitments, and credibility were necessary for Bonn to pursue its objectives of gaining trust and rehabilitating its reputation. Sanctions also have the advantage of allowing for small, measured steps over a longer period of time, not always an option with military force. In other words, as Baldwin notes, “Quicker is not always better.” Using a “salami tactic” of slow, cumulative series of negative economic in›uence attempts, none of which alone crosses the threshold that makes the commitment operative, can be very successful. This is especially true in mixed-motive games in which applying pressure and avoiding the evocation of an armed response are both important goals, making economic

10

The Art of Economic Persuasion

tools even more attractive. Hanson, too, argues that the success or failure of a particular foreign economic policy must be appraised by its cumulative effect over a lengthy period of time. “The usual approach is to judge ‘sanction episodes’ as self-contained short stories, each with its own sad or happy ending” (1988, 71). This logic is particularly important for those foreign policy goals that aim for a positive modi‹cation of attitudes and beliefs. The reverse of the salami tactic—not slicing off resistance bit by bit, but adding credibility step-by-step—would suggest that steady positive inducements would be the best means of gaining trust. This thesis is supported by Goldstein and Freeman (1990) who ‹nd that “single-shot initiatives do little to promote long-term cooperation; initiatives which are maintained for long periods of time, even if sporadic, appear to be best suited for eliciting long-term cooperation in this environment” (5). I consider this to be a very important insight in light of Bonn’s need to continually reassure its neighbors of its benign foreign policy intentions. Above all, one important advantage in using economic persuasion to facilitate peaceful change lies in the appreciation of its larger power base. The scope of application is larger than that of purely negative sanctions. According to the concept of the “third face of power,”7 understanding power entails not just looking at policy decisions, but also at the creation of political structures and political cultures. It is the cultural values and norms of a society that determine what its actual interests are. Thus, a study of the utility of a particular foreign policy strategy cannot limit itself only to instances of behavioral compliance. Whereas most scholars take it for granted that determining what actor B would “otherwise do” (in the absence of actor A’s in›uence) can be gauged on the basis of actor B’s preferences, Lukes (1974, 34) claims that the proper variable to measure is actor B’s interest. “A exercises power over B when A affects B in a manner contrary to B’s interest.” This suggests that the third face of power does not necessarily involve measurable con›ict, since “is it not the supreme exercise of power to avert con›ict and grievance by in›uencing, shaping, and determining the perceptions and preferences of others?” (Lukes 1978, 669). Likewise, Mastanduno (1992) suggests that unconditional expansion of trade will “enhance a sanctioning state’s security by restructuring the choices, the incentives, and ultimately, the behavior of a target state” (55). Effecting changes in attitude or changes in preferences implies longterm change versus short-term or single acts of compliance, which are usually singled out as case studies of economic embargoes. An important key, then, to understanding the usefulness of economic statecraft is recognizing that a long gap in time may occur before success is observable. Moreover, affecting attitudinal change also implies employing different means. The

Introduction

11

power to do so, the power to affect pride or respect through integrative behavior, is just as signi‹cant as the military power of a nation to wage war: It is integrative power that is the most dominant and signi‹cant form of power, in the sense that neither threat power nor economic power can achieve very much in the absence of legitimacy, which is one of the more important aspects of integrative power. Without legitimacy, both threat and riches are ‘naked.’ The great fallacy, especially of political thinking in regard to power, is to elevate threat power to the position of dominance, which it does not really possess. (Boulding 1989, 10) Institutional Anatomy of the Trading State If we accept the liberal premise that increased economic exchange between nations can lead to reductions in tensions and possibly to long-term peaceful change, then how can a government initiate and sustain such exchange? How does a state successfully employ a strategy of economic persuasion? The primary purpose of this study is to evaluate the utility of economic persuasion, or the use of economic incentives, to achieve foreign policy goals that are noncoercive and long-term in nature. Using an institutional analysis, it provides insights into the process of foreign policy making. It assumes that instead of following the path of a traditional “military-territorial state” (Rosecrance 1986), of‹cials can employ a strategy of economic persuasion to achieve foreign policy goals. In other words, state of‹cials can instead adopt the stance of a “trading state,” that is, a state that pursues “peace through trade.” However, embracing a strategy of economic linkage does not imply the ability to implement it effectively. Mastanduno (1992) argues that structural economic linkage is quite dif‹cult to implement since “the strategy requires both the mobilization of private economic interests and their long-term subordination to political considerations” (54). So we need private business to support it. A state must also possess the capacity to implement such a foreign policy. Klaus Knorr (1975) in his seminal work on economic power persuasively argues that for nations trying to favorably affect foreign policy outcomes the “power” of positive economic engagement can be quite useful. Yet he then claims that it is nearly impossible for market societies to implement this strategy successfully. As in the case of trade restrictions, the use of the trade carrot is more easily employed by state-trading than by capitalist states. It is institu-

12

The Art of Economic Persuasion

tionally dif‹cult for the latter to channel trade expansion in a politically desired direction. (Knorr 1975, 164) A state must, therefore, also be able to “guide” private wealth. How does a state channel private resources in a desirable direction? In this book I suggest that institutional capacities determine the utility of economic persuasion. Here capacity is understood as both the actual mechanisms of commercial diplomacy (i.e., instruments and levers) as well as the institutional structures that can help shape the interests and actions of public and commercial actors. In particular this means that the state must be able to enlist the resources of the private sector in order to employ economic instruments. In other words, business interests must be aligned with the interests of the state. Under what conditions, then, can public of‹cials in market economies succeed in utilizing public and private economic incentives for desired political outcomes? What factors enable state policymakers to rely on, indeed secure, the support of the private sector to increase economic exchange with the target state? I propose that an analysis of institutional structures can provide the answer to these questions. In particular, the degree to which two particular conditions are present can be important in determining whether economic persuasion can be usefully implemented: (1) functional autonomy, coordination, and continuity within the bureaucratic process and its relations with the institutions of capital; (2) state capacity to extract and channel domestic resources to target countries. These key attributes, which I label managed foreign economic policy and reward power, affect policy outcome. Why are these factors important? Because they determine the institutional capacity of the state to maintain a strategy of providing economic incentives to the target nation. Institutional capacity includes knowing what the business community needs in order to facilitate economic exchange and possessing the actual levers to effect that exchange (e.g., export credit guarantees, technology transfer), as well as the ability to shelter the provision of these levers from excessive politicization by external forces. By institutions I mean “the formal rules, compliance procedures, and standard operating practices that structure the relationship between individuals in various units of the polity and economy” (Hall 1986, 19). This follows the view that certain institutional features have a particular impact on the successful design and implementation of policy. Hall discusses two particular structural features that he argues play a crucial role in explaining policy outcome: organizational position of important actors in decision making and the actual organization of that decision making. The organizational position of a particular policymaker is important in that it

Introduction

13

in›uences the actor’s de‹nition of his/her own interests by establishing his/her institutional responsibilities and relationship to other actors. In particular, organizational position can be decisive in determining the likely direction of that actor’s pressure. Within this context governmentbusiness relations comprise one particularly crucial structural component. How these relations are patterned is critical to understanding the success or failure of economic linkage since they can shape and mediate how foreign interests are de‹ned and how foreign economic policy is designed and implemented. Second, the actual organization of policy-making is also important because it affects the degree of power that any one set of actors has over the policy outcomes. “In this way, organizational factors affect both the degree of pressure an actor can bring to bear on policy and the likely direction of that pressure” (Hall 1986, 19). Organization is particularly acute in the case of the trading state since policymakers must be able to carefully calibrate policy outcomes. Most literature discussing the utility of military force claims that the greater the military capability, the more in›uence it will have on coercing the opponent to behave as desired. This study assumes in a parallel manner that the greater the intensity of economic exchange, the more likely peaceful change will occur. The intent, then, is to increase levels of economic exchange between nations in the hope that this constructive behavior will in turn foster peaceful change in the target’s policies and behavior. I use recent de‹nitions of political cooperation to identify means of economic cooperation. Martin (1992) simply de‹nes cooperation as “any joint activity among states.” Putnam and Bayne (1984) take a much more nuanced approach to cooperation, claiming it to be episodes in which the policies of one or more states are modi‹ed to reduce the costs (or increase the bene‹ts) that those policies entail for the welfare of other states, so that national policies differ from those that would have been expected from purely unilateral or autarkic policy-making. International co-operation in this sense is a matter of more-or-less, not yes-or-no. Co-operation may vary in intensity, scope and duration. (2) Economic cooperation then becomes an issue of episodes, or activities, that are designed to bene‹t the welfare of the other state. As such not all cooperative efforts are always aimed directly at the target state; inducements can also be seen in gestures such as support for membership in international economic organizations, acting as an advocate in ‹nancial (e.g., the Paris Club) or trade (e.g., the European Community) forums.

14

The Art of Economic Persuasion

However, most economic inducements are measurable: volume of trade and investment; amount of foreign aid; number of commercial agreements; amount of credits, public and private; and so forth. From this we see that not all economic inducements are under the control of government of‹cials, that is, some involve commercial transactions. The decision to trade, invest, transfer technology, extend credits, and conduct other economic transactions are matters for the private sector. The instruments, or economic levers, which the state controls are limited. To increase the level of economic cooperation, then, the state must rely on the support of the business sector. How to generate business support then becomes a matter of domestic politics, that is, state-business relations. Thus, the successful use of economic incentives to evoke peaceful change in a target state is to a large degree dependent on private actor support. Sometimes the performance required of business (e.g., trade and investment) is automatic. That is, if the transactions with the target state are potentially pro‹table, then business will likely perform without encouragement from the state. However, in many cases (especially those that involve commerce with centrally planned economies or, now, countries in economic transition) the economic and/or political risks are too high for business. In some cases the government in the target state may hold a monopoly on economic activities (i.e., communist regimes), putting business at a disadvantage in conducting commercial relations there. Here we observe commercial actors exercising a type of pocket veto over the sender state’s efforts. In those cases the private sector limits the volume of economic exchange desired by the target government in that business chooses not to perform. In these instances, then, some type of encouragement or risk-assumption may be necessary on the part of government of‹cials. In other words, should potential pro‹tability be small due to high transaction costs, political risks, etc., then governmental domestic economic policy must be able to induce business performance. As a result we need to look at the ways in which a sender government can magnify its efforts by inducing business to support this policy of increased economic exchange. A primary goal of this book, then, is to improve our understanding of the domestic conditions under which the state can use private sector economic incentives to achieve national goals where these inducements are meant to facilitate cooperation with another state. Once these conditions are met, what emerges is a vastly more nuanced and complex relationship between business and government. It is not a case of government demanding performance from business to support its interests. The relationship can also progress beyond business supporting the state in its more narrowly de‹ned interest of increased economic

Introduction

15

exchange, to the point where private of‹cials can, at the behest of government, substitute for or act in the spirit of public of‹cials. Members of the business community can actually compensate for restricted interstate relations. For example, in times of political con›ict between two states, where one state reduces its diplomatic exchange with the other, business can still conduct economic exchange with the target state. Under these conditions continuity in economic exchange can keep dialogue open between the two feuding governments, albeit in a much more discreet manner. Such was the case of German business in Poland during the period of martial law in the early 1980s after most Western nations had imposed a diplomatic embargo against Warsaw as punishment. Under these conditions commercial operators can function as a type of third-party mediator in that they provide a means of communication and political exchange between both parties in disagreement. Normalization of German-Polish Relations as a Case Study Forty-‹ve years after its “temporary” division at Potsdam, Germany was united as a nation. For years scholarly consensus maintained that the uni‹cation of Germany was, at best, a prospect for the distant future.8 Even after the Berlin Wall was breached on November 9, 1989, predictions were that two sovereign German nations would continue to exist side by side, establishing at the most some type of confederation. Poland in particular wanted to believe in the permanency of two German states. Meeting with Polish foreign minister Krzysztof Skubiszewski the day after the Wall opened, West German foreign minister HansDietrich Genscher reassured his colleague that Bonn would not exploit the situation in East Germany or East Europe for its own purposes. Bonn would not seize the initiative for a reuni‹cation, and there would be no return to the old Germany. Political leaders in Bonn insisted that the issue at stake was the reuni‹cation of the German nation, not the reuni‹cation of Germany. Indeed, Chancellor Kohl’s original pan-German policy, introduced in late November, envisioned a German confederation with possible reuni‹cation after a span of ten years. Yet even this relatively benign vision was met with mild alarm in most European states (East and West). From a historical perspective it deserves noting that the Western alliance was originally designed with a dual purpose in mind: to contain the Soviets and the Germans. As one of its founding fathers nonchalantly declared, NATO was meant to “keep the Americans in, to keep the Russians out, and to keep the Germans down.”9 A French of‹cial expressed a

16

The Art of Economic Persuasion

similar sentiment when he quipped that he loved Germany so much he was glad there were two of them.10 Indeed, former German president Richard von Weizsäcker himself emphasized that overcoming partition does not mean uni‹cation. . . . For the former we will ‹nd understanding almost everywhere and for the latter almost nowhere. Most Europeans dislike the wall about as much as they do the idea of a large German state in the center of Europe. (P›üger 1990, 180) Yet despite these disclaimers, German reuni‹cation did occur on October 3, 1990, less than a year after the Iron Curtain draped over Berlin was lifted. Why then, despite this almost overwhelming consensus about the nondesirability of a uni‹ed Germany (the United States being the one notable exception), did uni‹cation occur? If the predominant postwar image of Germany was that of a nation that needed to be contained, then a fundamental transformation of international sentiments must have occurred in order for uni‹cation to take place in 1990 with so little resistance. An analysis of Polish-German normalization serves as a crucial case study (Eckstein 1992). Characterizing it as a least likely case, I can use German policy toward Poland as a test of validity. In the case of analyzing the utility of economic persuasion, no other set of bilateral relations represents a better example of what Kriesberg (1987) calls “mutual accommodation from a high level of antagonism” (405). In other words, this is not a case study of “war-ending” but de-escalating agreements that resolved “contentious issues on terms that do not constitute surrender by one side, but rather re›ect mutual acceptance.” How was this manifest change in image produced? I submit that it involved the task of convincing the larger international community that Germany had shed its historical legacy of being a wanderer between East and West (based largely on Bismarck’s Schaukelpolitik and later con‹rmed by the secretive Hitler-Stalin pact), that it was indeed a reliable nation, worthy of trust and credibility (Berechenbarkeit). To achieve this broader, complex goal, I argue, West Germany chose the instrumentality of reconciling with one of its historical adversaries— Poland—in order to demonstrate its benign intentions to the larger international community. German of‹cials pursued the objective of reconciliation in order to resolve contentious issues peacefully. The means used for this political reconciliation process were overwhelmingly economic. More speci‹cally, how did the West German government change the behavior and policies of their most distrustful neighbors—the Poles? I argue that

Introduction

17

Bonn recognized the utility of economic and political cooperation in winning the trust of the Polish elite in order to evoke long-term transformations in political attitudes and images. This was crucial since the objective of reconciliation was to become the linchpin for Bonn’s larger Ostpolitik, just as earlier Franco-German reconciliation had been the linchpin for Bonn’s larger “Westpolitik” (i.e., integration in the West). In their move to regain autonomy in the 1950s and 1960s West German of‹cials envisioned West European integration in the form of the European Community (EC) as a stepping-stone. Key to the European integration process was French support. Thus, in the early postwar period Bonn granted economic concessions during the creation of the European Community’s Common Agricultural Policy in exchange for France’s political blessing for further integration (Bulmer and Patterson 1987, 72 and 225 ff.) To this extent, in the 1950s and 1960s German membership in the European Community served a dual purpose in Bonn’s foreign policy. The ‹rst objective was symbolic: it signaled a break with Germany’s destabilizing nationalist past. Thus, membership in the European Community helped Bonn gain international legitimacy. Second, it provided predictability: it provided a stable political and contextual framework for Bonn’s foreign policy. By making the parameters of Bonn’s foreign policy transparent, it made Germany a more predictable factor in its partners’ calculations. I suggest that similar goals motivated German of‹cials in the 1970s and 1980s. They envisioned rapprochement with Eastern Europe as a means to avert isolation in the West and lessen the hardships of Germany’s division while still holding open the option of uni‹cation. Within this larger strategic context, Germany’s policy toward Poland ful‹lled multiple objectives. For example, one important component of the rapprochement process concerned legitimizing the territorial status quo. Here Poland played a key role, for con‹rmation of Poland’s western border had been a stumbling block to closer relations between Bonn and all of Eastern Europe. I suggest that Bonn exchanged economic concessions for political concessions from Warsaw. More speci‹cally, I argue that it was critical for Germany that Poland be willing to accept an important legal conditionality attached to the 1970 border treaty as well as the 1975 Helsinki agreements. While agreeing to the nonviolability of Europe’s borders, this conditionality speci‹cally allowed for the peaceful revision of such borders. Moreover, Bonn was able to expand its political autonomy by improving its international image. In a manner similar to its EC policy, Bonn’s “Poland policy” was instrumental in symbolically demonstrating its break with the past and its future predictability in Eastern Europe.

18

The Art of Economic Persuasion

Chancellor Willy Brandt, kneeling in 1970 before the memorial to the Warsaw Ghetto uprising, was able to symbolize atonement for the atrocities committed under Nazi occupation. By renouncing the use of force in any future territorial settlements, Bonn was able to make its policy toward the Polish western border, and thus its goals in Eastern Europe, eminently more predictable. The magnitude of Bonn’s need to demonstrate predictability cannot be underestimated, for it was only after the Poles were reassured of Germany’s intentions that the uni‹cation process was allowed to continue in 1990. While Poland had no actual veto power over Germany’s eventual reuni‹cation, international consensus did recognize the right of the Poles to guaranteed borders; without this guarantee there could be no uni‹cation. Furthermore, this juridical guarantee by the Germans would only be plausible if there were faith in Germany’s intentions vis-à-vis Eastern Europe. Table 1 provides an overview of what German of‹cials understood as “peaceful change,” in terms of both structural and tactical goals. I match those goals with what became the prevailing strategy of the government. Consequently, it is important to analyze the evolution of GermanPolish relations over the past twenty years in order to understand the underpinnings of German uni‹cation. That is the dynamic this study illuminates: the process of West Germany gaining Poland’s trust, how it was able to reverse of‹cial Polish attitudes regarding West Germany as they went from complete mistrust of Germany to grudging trust to desiring economic cooperation, all as a conscious long-term strategy of overcoming the status quo in order to achieve reuni‹cation. This analysis suggests that three fundamental developments transpired in the course of German-Polish relations in the past twenty years: ‹rst, there was a reversal in German policy toward Poland (and all of Eastern Europe for that matter) from one of confrontation and isolation to accord; second, this strategy became mainly a matter of economic, if not ‹nancial, cooperation; and third, this economic cooperation was ultimately successful in facilitating reconciliation and normalization, although that success had its price in terms of German domestic and economic politics.11 The Argument in Brief The primary task of this book is to understand how, and under what conditions, states can harness the domestic economic resources under the control of private business in their pursuit of foreign policy goals. I suggest that institutional capacity, as determined by the degree of coordination and autonomy within the bureaucratic process and the degree of coordi-

Strategy

Tactical linkage

Structural linkage

Intent

Change specific domestic or foreign policies of target country

Induce or reinforce desirable changes in behavior of target country

Unconditional expansion of trade and commerce, financial reward or promise

Conditional expansion of trade and commerce, financial reward or promise

Instruments

Conceptual Framework of Mastanduno (1992)

TABLE 1. Structural and Tactical Goals of Peaceful Change

• Normalize diplomatic relations • Convince Polish elite of stability and predictability of German foreign policy • Stabilize détente in Eastern Europe • Keep unification open as a viable option

• Facilitate repatriation of ethnic Germans from Poland • Improve living standards of ethnic Germans in Poland • Settle reparation and compensation demands from Poland • Confirm status quo of Poland’s Western border as nonviolable yet revisable

Intent: Reconciliation with Poland in order to:

• Normalize commercial relations through treaties and agreements • Facilitate commercial exchange through trade fairs; trade missions; etc.

• Provide export credit guarantees • Provide official credit

Instruments

German Foreign Policy Goals

20

The Art of Economic Persuasion

nation between this bureaucracy and the institutions of capital as well as the amount of “reward power,” is signi‹cant in explaining the success (or failure) of implementing economic persuasion as a strategy designed to facilitate long-term peaceful change. This analysis is organized around two general questions stemming from the empirical case study of German-Polish relations from 1969 to 1991. Under what conditions did it successfully utilize private instruments of economic power to accomplish its long-term objectives vis-à-vis Poland? What enabled the German government to use private resources to achieve its public foreign policy goals? In answering these questions I suggest that German policymakers exhibited a perceptive understanding of foreign policy and foreign policy making. First, German decision makers recognized the utility of foreign economic policy as an effective strategy in pursuing national interests. Economic tools were especially effective in rehabilitating its tarnished image and gaining the trust of other nations. Second, these same elites were able to do so by harnessing the economic resources at their disposal, that is, the commercial economic sector. All this was accomplished in a manner that allowed Bonn to work within the international constraints imposed upon it after World War II, as well as its own self-imposed constraints. This is the complex story of how the German government was able to implement such a policy by engaging the support and collaboration of the German business community. Thus, the study’s primary purpose is to move beyond the mostly abstract concepts of economic statecraft found in traditional studies of economic diplomacy (e.g., Rosecrance 1986; Knorr and Trager 1977). I empirically demonstrate the process by which the German government translated the economic and monetary capacity of its private economy into political leverage. If it is true that “for Bonn, economics became the continuation of politics by other means” (Hanrieder 1989, 24), then it must be understood how this process works in a liberal market economy. This inquiry therefore applies an institutional approach to the study of foreign policy making at the domestic level. The empirical portion of this book centers on demonstrating that speci‹c institutional structures in the German political economy enabled state of‹cials to implement an economic strategy using private resources to successfully advance those interests. I make explicit comparisons with the U.S. strategies of linkage with Eastern Europe (and Poland in particular) in the 1960s and again in the 1970s. These strategies were in many ways remarkably similar to the German one, yet the outcome for the United States was different. In general, U.S. of‹cials did not succeed in substantially changing U.S.-East European relations. In chapter 2 I illustrate how foreign economic policy is “managed” in

Introduction

21

Germany while making comparisons with U.S. foreign economic policy, considered to be balkanized. The chapter examines the institutional structures of German and U.S. foreign economic policy. In the case of Germany, I reconstruct the process whereby both public and private interests converge in pursuing a policy of economic persuasion. This analysis reveals the high level of coordination and autonomous decision making among German officials, which in turn supports their relations with the private of‹cials in the commercial sector. Indeed, this mutually supportive relationship is deeply institutionalized. In the case of the United States the opposite situation generally prevails, where relations are antagonistic or merely rent-seeking for the most part. In this chapter I argue, then, that certain institutional features in the German political economy are pivotal in understanding the successful use of economic persuasion. These features involve above all the symbiotic relationship between public and private actors engaged in foreign economic affairs. On the one hand, we ‹nd highly autonomous and centralized state of‹cials who work closely with the private economic sector in making policy. On the other hand, these same business elites are centrally organized within certain functional institutions12 that are endowed with semipublic authority to implement foreign economic policy. These institutionalized links between government and business in the Federal Republic enable public of‹cials to overcome the manifest constraints associated with economic linkage. Chapter 3 analyzes the capacity of the German government to extract and direct resources from its private sector as a means of magnifying its efforts at increasing economic exchange with Polish markets. It examines the instruments and levers that were at the disposal of German of‹cials in guiding its strategy of economic linkage and compares them to those instruments used by U.S. of‹cials. In particular it looks at the nexus of public decision making and private implementation actors in the Federal Republic. Failure to suf‹ciently understand the limitations of a state’s coercive powers vis-à-vis its own domestic political economy can convey a false message when judging the feasibility of positive economic statecraft. Indeed, a major weakness of much of the literature advocating use of economic incentives in foreign policy is that they falsely assume that the state possesses the levers (or at least unlimited control over the levers) to attempt acts of economic in›uence unilaterally. Yet it is not obvious how, in a liberal market economy, a state can command performance from its private business sector. As noted earlier, the extent to which a state must induce business to perform in support of its political objectives is, to a large degree, goal dependent. That is, in those cases where the objective is less challenging,

22

The Art of Economic Persuasion

only rudimentary action on the part of the government is necessary. Business performance is less important. In other cases, more demanding objectives make governmental interaction with business quite extensive (and costly). In other words, if the intent toward the target government is only to communicate or signal, fewer economic incentives are needed. However, if the intent is to reward or extend conciliatory gestures, greater economic exchange may be necessary, requiring more cooperation from the business community. Chapters 4, 5, and 6 present the empirical evidence for my arguments. Here I present case studies of economic persuasion as implemented by the German government. The three chapters represent three critical phases in German-Polish relations. What they illuminate is the nature of the changing objectives the German government pursued and how the strategy of economic persuasion was adapted to ‹t those changing goals. These chapters, then, discuss the objectives of German foreign policy and how economic incentives supported those political goals. Second, they examine the role of business. Did it need particular inducements, or did lowering transaction costs suf‹ciently stimulate economic exchange? Third, I ask whether the strategy succeeded and determine why or why not. Thus, these chapters are designed to answer these questions as means of providing insight into the utility of economic persuasion. In particular, they assess the dif‹culties of implementation. Chapter 7 gives a reappraisal of economic statecraft by examining the costs and bene‹ts of such a strategy. I determine under what conditions German policymakers were able to employ economic incentives successfully, in particular, how and to what extent Bonn was able to overcome the domestic obstacles it encountered while employing economic persuasion as a foreign policy strategy. Above all, I claim this study takes us beyond rudimentary interest-based arguments of foreign economic policy, that is, the perspective that holds that private interest groups control the behavior of states. In terms of state of‹cials employing economic incentives by using private resources, state-business relations are much more nuanced. It is not just a question of who manipulates whom and how. Last, I ask whether the German model can be replicated elsewhere by looking at the case of the United States. What I ‹nd is that the United States attempted to establish some of the very same economic organizations in Poland as did Germany; however, U.S. of‹cials were not successful in winning the active support of business. I show that this was at least in some part due to institutional failure. The prevailing normative order de‹ning relations between American business and the American state proscribed such action. Moreover, the institutional structures that could have altered those norms were also absent. I also incorporate other recent

Introduction

23

examples of German success employing the strategy of economic statecraft. I provide examples from the case of German uni‹cation, in particular the success of German of‹cials in gaining Soviet political support for German uni‹cation by utilizing economic instruments supplied by the private sector. Special export credit guarantees also aided in overcoming other East European resistance. In the end, my evidence supports four important conclusions. First, business was not always able to in›uence government to change its policies to ones favoring business. That is, the interests of political elites did not always coincide with those of business, and in most cases where they diverged, political elites prevailed. It took nearly twenty years for the con›uence of interests to appear. From the very beginning (the early 1950s), German business was opposed to what it called the “politicization of trade.” Yet it was not until 1970, nearly twenty years later, that the most restrictive commercial legislation was amended. Pressure from the private economic sector increased particularly during the 1960s when German business perceived it was losing markets in Eastern Europe to less restricted West European ‹rms. Nonetheless, German of‹cials held ‹rm and did not fully liberalize relations (indeed, Bonn supported the U.S.-led pipeline embargo in the early 1960s, an act it refused to repeat twenty years later!).13 Second, although German of‹cials did not always have to “manipulate” business into performing since it already wished to increase economic exchange with Poland, what is clear is that once political elites chose a course of offering positive economic incentives, the German government did need to at least lower transaction costs for business. In some cases, this meant merely signing trade agreements to lift existing barriers such as quotas or export restrictions. However, in some cases it also meant negotiating more contractual agreements, such as bilateral investment treaties (BITs). In those cases, the government did have the choice of negotiating a “weak” agreement, that is, one that did not necessarily favor the needs of business. For example, while a government would want to limit the amount and types of risks it must guarantee against, a preferable BIT for business is one that protects against economic and political risk. At the same time, state of‹cials would want the target government to guarantee as many rights and privileges for its business community. And it was precisely the outcome most favorable to business that political elites in Germany successfully sought. In contrast, U.S. of‹cials either negotiated substantially less favorable agreements or were quite slow in even conducting such negotiations. Third, under these types of conditions my study shows that institutions matter in that government needed to know what it is that business needed to normalize/expand its economic exchange with the adversary. In the case of the German government and business, the institutionalized

24

The Art of Economic Persuasion

links between them facilitated precisely the type of communication needed during foreign policy negotiations. Indeed, German elites conferred with business to ensure that its needs were being met during the process of political bargaining with Poland. Finally, and more important than refuting simple interest-based analyses, my evidence points to a far more sophisticated relationship between government and business. It is not a case of coercion or in›uence but of mutually bene‹cial collaboration, or what Volker Berghahn (1987) calls “interdependence.” Many times German state and business elites were willing to support one another in furthering their distinct goals. For example, in direct correlation to its decision to break political relations with Poland in the aftermath of martial law in 1981, political elites in Germany recognized the need to continue economic relations (albeit restricted ones) for the sake of German business. Thus, Chancellor Schmidt was able to ensure that private debt rescheduling negotiations continued although state ones were halted. At the same time, German political elites were able to ‹ll the ensuing diplomatic vacuum under the guise of “private” business institutions. Private business forums were used to conduct back-channel relations with Poland. This study also points out the dual nature of economic statecraft as a foreign policy tool. By consistently offering carrots or expanding trade a sender nation can also put itself in a position of dependence or vulnerability. In this case, Polish ‹nancial nonsolvency in the 1980s potentially threatened banking stability in Germany due to the overexposure of German banks. This illustrates the limitations of such a strategy. However, I provide evidence to demonstrate that Bonn was able to successfully manage that exposure through its domestic institutional structures. This supports the thesis by Crawford (1993) that some states are more capable than others of reducing economic vulnerabilities. In addition this study demonstrates that being in a position to provide economic incentives does not always translate into a successful political outcome. When the German government offered inducements for Poland to begin servicing its debt in the mid-1980s, they did not succeed. This illuminates a shortcoming in the utility of economic statecraft. However, it also points out a weakness in realist literature in that even though Germany consistently had more “power” relative to Poland, it could not always get its desired outcome by means of inducement or even pressure. If the inducement is too small, or if economically viable alternatives exist, then the utility of positive sanctions is reduced. Yet, this tells us nothing less than what we already know: in cases of military confrontation, if the amount of force used is not threatening enough or does not in›ict enough damage, then it, too, will fail in changing the behavior of the other state.

CHAPTER 2

Institutional Structures and Linkages: Managed Foreign Economic Policy President Mitterrand of France or Chancellor Kohl of Germany do not hesitate to jump on a plane to promote French or German industry at all corners of the world. Now we, too, plan to be more supportive and aggressive. Former U.S. Secretary of Commerce Ronald Brown, June 13, 1993 The strategy [of economic linkage] requires both the mobilization of private economic interests and their long-term subordination to political considerations. (Mastanduno 1992, 54)

Periodically during the 1960s and the 1970s the U.S. government chose economic carrots as a means of inducing change in East-West relations. For example, in 1969 the U.S. Export Administration Act (EAA) declared U.S. policy to favor expansion of trade with the Soviet Union. In legislative terms it implicitly treated the ability to export as a right to be limited only under a few explicit circumstances. Indeed, all language implying that trade restrictions might be used to promote economic warfare was deleted (Seppain 1992, 217). In 1977 the EAA was amended to improve the licensing process by clarifying and making more consistent the policies and procedures of the act. In principle its provisions were intended to ease rather than restrict the ability of U.S. ‹rms to export to the communists. Yet none of this legislation seemed to have much effect on U.S. trade with eastern Europe. “In reality, the overall effect of the law has not been export promotion” (221). Why did the seemingly similar policies of West Germany and the United States have such different outcomes? What explains German “success” and U.S. “failure”? In this chapter I analyze domestic institutional structures as a means of answering this puzzle. I suggest that the answer lies in the con‹guration of governmental policy-making institutions as well as in the relationship of these institutions with the private sector, 25

26

The Art of Economic Persuasion

speci‹cally, the business community. What I see are two ideal types at opposite ends of the spectrum. One, the quintessential “trading state,” is Germany with its “managed foreign economic policy” apparatus and its institutionalized links to business. The other, the least successful trading state, is the United States with its balkanized foreign policy apparatus and its adversarial relations with business. In 1991 a high-ranking of‹cial in the German Ministry of Economics, elaborating on the role of the German government in East-West economic relations in 1989, justi‹ed German policies by referring to the NATO Harmel Report of 1967 (Jahnke 1991). This historic document, agreed to by all sixteen NATO members, de‹ned the contours of East-West relations by establishing the compatibility of East-West détente with military security. In other words, it gave the green light for building constructive East-West relationships especially in areas of economic cooperation. This so-called second pillar of the Report served for over twenty years as a basis for explaining German governmental support for commercial economic cooperation with Eastern Europe. In the words of the minister, “The political framework is important here as trade based on long-term projects needs calculable conditions. . . . economic policy considerations are not opposed to foreign policy considerations but are interlinked” (249). In other words, both state of‹cials and private business rede‹ned their conception of Germany’s national interest to be that of a Handelsstaat (trading state), a state that has primarily economic interests and pursues them in a noncoercive manner. What, then, characterizes a trading state? What is so different about the organizational and institutional structures of the Federal Republic? Two important organizational characteristics are central to explaining Germany’s success (and the failure of the United States): the degree of functional autonomy, coordination, and continuity within the bureaucratic process; and the degree of coordination between this bureaucracy and the para-public institutions of organized capital. It is particularly important to look at the context of government-business relations. How these relations are patterned is critical to understanding the success or failure of economic persuasion since they can shape and mediate how “national” interests are de‹ned and how foreign economic policy is designed and implemented. It is the presence of a large degree of both of these characteristics that helps predict a successful trading state. In other words, a successful trading state conducts “managed” foreign economic policy-making and has institutionalized relations with its private economic sector. How, then, do these two key attributes—managed policymaking and institutionalized state-business cooperation—affect foreign economic policy outcome?

Institutional Structures and Linkages

27

Managed Foreign Economic Policy In his seminal study of U.S. foreign economic policy-making Cohen (1988) argues that organizational structure matters in that it affects policy substance. His characterization of the East-West trade policy organization within the U.S. bureaucracy speaks volumes about the dif‹culties of the United States in conducting economic linkage. The potential for widespread, overlapping, and transitory organization is so richly displayed here that it could conceivably have been treated as a separate model of decision making, one perhaps facetiously dubbed the ‘multifaceted-duplicative model.’ The maze of bureaucratic entities and apparent managerial inef‹ciency re›ects this country’s inability to categorize trade relations with the Soviet Union, China, and other Communist countries as being primarily political, strategic, or commercial in nature. (174) On the other hand, Haftendorn et al. (1978), in their de‹nitive study of German foreign policy, disapprovingly claim that the German bureaucratic structure leads to “managed foreign policy.” Its extreme functional segmentation and vertical, hierarchical nature can only produce small, incremental changes in policy substance, presumably incapable of major policy innovation. In other words, that which the U.S. structure lacks— coherence—is precisely what German scholars claim is Germany’s greatest weakness—rigidity. However, in terms of German of‹cials’ ability to tap into the resources of the private sector in order to implement a policy of economic persuasion, I argue that this structure of functional segmentation is a necessary condition for success—without clear lines of authority and functional expertise how else to provide the necessary inducements for business to perform? Studies of the Germany foreign economic policy making process conclude that parties and parliament ‹nd themselves on the periphery of the policy network. Their role is to ratify decisions rather than to formulate policy. . . . under the German cabinet system, the commanding heights of foreign economic policy are occupied by the Ministry of Economics. (Kreile 1978, 195) In other words, the legislative branch of government in Germany (the Bundestag) plays a relatively insigni‹cant role in foreign policy. Studies on the foreign policy making capacities and capabilities of the Bundestag come to the overwhelming consensus that

28

The Art of Economic Persuasion

due to legal restrictions—lack of the right to introduce initiatives and a ban on [treaty] amendments—it is parliamentary tradition that the assembly express its foreign political will in the form of resolutions or preambles. They do not actually change the treaty text, but they may interpret it.[1] . . . The effectiveness of parliamentary co-governing through bills, petitions, resolution motions, information requests, etc., is less developed in the area of foreign policy overall than it is in the other areas of Bundestag activities. (Karl and Krause 1978, 64–65) A bureaucratic explanation of German policy-making, then, serves as the most suitable theory of the state. This approach, supported by many scholars of Germany’s foreign policy,2 suggests that in Bonn the political leadership (chancellor, cabinet, and ministers) merely chooses between policy options designed to manage international and domestic crisis management while it is the ministerial bureaucracies who actually formulate foreign policy. This, then, provides for an important institutional component of a trading state: functional autonomy. The bureaucratic pattern of decision making in Bonn is a unique system that combines decentralization with a vertical hierarchical structure. German bureaucracy concentrates authority at successive levels (Katzenstein 1987). The various bureaucracies generally have a four-tiered organizational structure. At the top of the pyramid is the executive level, with the minister and one or two state (deputy) secretaries. The second and third levels are organized by division and subdivision. Finally, specialized sections, with three to four members each, make up the fourth level. This small size of the bureaucratic sections thereby creates a predisposition to work intensively on areas of limited substance (Katzenstein 1987). Yet this not only encourages contact between superiors and subordinates, but also facilitates communication between the public and private sector since the divisions of competence are clearly delineated. This, then, supplies the institutional component, bureaucratic coordination, necessary for a trading state. As one exhaustive study demonstrates, two distinct institutional practices of the German civil service constitute a powerful force for policy continuity.3 In the ‹rst place, political appointees are generally restricted to only the very top tier, that is, parliamentary state (or under-) secretaries. The highly in›uential divisional directors usually remain in service. Indeed, the appointment of of‹cials outside the career civil service to such positions is the rare exception, so that authoritative positions, as a rule, are occupied by persons who have worked their way up through the hierarchy. Thus, the top policy advisers and makers in the German bureaucracy have acquired considerable knowledge and expertise.

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Second, the federal ministries, in particular the lower level civil servants, may actually set and structure foreign economic policies. The attention and energies of of‹cials at the ministerial level tend to be allocated to politically controversial issues, or areas of personal interest, resulting in a de facto delegation of responsibility to the area desks (Referate). Many times it is they who shape the agenda or devise proposals that matter in the decision-making process. Indeed, as one study of German foreign policy making (Krause and Wilker 1980) concludes: Given the structural restrictions at the two [upper] levels mentioned, the basic [area] units take on an especially crucial role in the foreignpolicy decision-making process. It is here, at the working level that the ‘information and background knowledge, the knowledge of the issues and their solutions and those differentiated environmental contacts can be found which enable the ministerial organization as such to ful‹ll its functions in the problem-solving process in their present proportions.’ As ‘supporting units in the organizational setup of the ministry’ . . . the specialist sections prepare the political decisions. Within the con‹nes of the areas assigned to them, they enjoy a relatively great autonomy of action.4 This autonomy of action also permits German civil servants to follow a foreign policy as well as foreign economic policy that is relatively shielded from “political” interference, that is, German policy is highly “depoliticized.” Degree of politicization is not understood as simply a matter of weak or strong states (i.e., degree of autonomy from penetration by private interest groups), but rather of how (national) interests are articulated and de‹ned: in a more narrow manner, for example, promoting the national economy, or in the name of more “global interests,” for example, anticommunism. Illustrative of German depoliticization of economic relations while capitalizing on the support of the private sector was West German behavior toward East Germany after the Soviet invasion of Afghanistan in late 1979. While political relations between the two countries were temporarily interrupted (primarily due to pressure from their respective allies), economic relations continued. Indeed, under the guise of attending an East German trade fair, high-level “unof‹cial” exchanges between East and West German of‹cials were able to take place. Shortly thereafter at a trade fair in West Germany a new traf‹c treaty was signed and negotiations commenced on a number of large-scale economic projects.5 As ‹gure 1 illustrates, the organizational structure of those divisions that manage German foreign economic policy toward Poland (and East-

Fig. 1. Federal Republic of Germany Federal Ministry of Economics

Institutional Structures and Linkages

31

ern Europe in general) is sharply delineated along functional and geographical lines. Competence is distinctly delegated to the desks of a few, not scattered among various civil servants, enabling better coordination across issues. Above all, business has a clearly de‹ned set of actors with whom it can interact. Who has authority for what areas and what issues is transparent for all. On the opposite end of an institutional spectrum lies the United States. It is indeed a poor representation of the typology of a trading state. First, the fact that the U.S. executive does not have the equivalent of Germany’s Ministry of Economics, or even Japan’s powerful MITI, makes a substantial difference in terms of including business’s voice in policy-making. In many cases the departmental sector in the United States does not have one centralized body that has jurisdiction over the particular matter at issue. For example, agriculture and organized labor have speci‹c spokespersons for their interests. The banking sector has speci‹ed forums within delineated branches, yet for industry there is no clear-cut governmental counterpart. In most issues (e.g., trade and investment) industry representatives must prevail upon a number of key power centers. Indeed, competencies are split among differing departments. In terms of the style of U.S. policy-making, as Cohen (1988, 33) points out, rather than a methodical process of determining what is in the overall national interest under such circumstances, inexact shortcuts are more likely to be used. The policy search looks for the acceptable, not necessarily the excellent. Even if one examines the bureaucracies that most closely emulate the Ministry of Economics, namely, the Departments of Treasury and Commerce, vast differences appear, differences that can be attributed to the somewhat ad hoc nature of their growth. For example, the international authority and responsibilities of Treasury grew not by conscious design, but by circumstance, and also not at the expense of other bureaucratic actors, as Cohen points out. Figures 2 and 3 illustrate the less than congruous organization of these U.S. bureaucracies. This explains the incoherent pattern of decision-making as well as the relative inef‹ciency at promoting political goals with economic means. In other words, we see little evidence of bureaucratic coordination or continuity. Whereas [the Department of] State has been active in the foreign arena since the founding of the Republic, Treasury’s continuing involvement has been both relatively recent and sudden. It has relatively little tradition or experience, therefore, in dealing with and accommodating the policies of other sovereign countries. Whereas State’s values are rooted in international political cooperation, Treasury’s values are rooted in the pursuit of a healthy U.S. economy and

Fig. 2. U.S. Department of Commerce

Fig. 3. U.S. Department of Treasury (1988)

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The Art of Economic Persuasion

preservation of such basic capitalistic principles as the market mechanism. This fosters an insular approach based on economic orthodoxy. (Cohen 1988, 46) This historical State-Treasury rivalry, then, leaves little room for functional autonomy. Indeed, there is no statutory base for establishing interagency, or even interdepartmental, coordination, much less authority. Yet in terms of implementing a policy of trade and investment promotion it is clear that such bureaucratic coordination is essential for success. Not only are different bureaucracies involved (in the case of Germany, the Ministries of Finance, Economics, and Foreign Affairs among others), but such decision making also presumes an understanding of the needs of the domestic business sector. This pervasive need for coordination is answered in the Interministerial Committee (Interministrielle Ausschuß, or IMA). This Committee, which includes representatives from these ministries, meets on a biweekly basis to discuss fundamental issues of export credit guarantees (so-called A-sessions). Likewise, at the so-called B-sessions, also held biweekly, this same Committee meets with other governmental of‹cials (i.e., Bundesbank, AKA, and KfW) as well as selected representatives from private industry, including the banking and export sectors. It is at the B-session where actual decisions are made regarding which projects to support. According to the IMA’s own assessment, the participation by members from the business sector is of primary importance since it “contributes understanding for the concerns of business and thereby ensures that the decision-making includes . . . a high level of reallife experience.”6 Institutionalized State-Market Cooperation A second important institutional feature of foreign economic policy-making in Germany is the fact that business elites are centrally organized within certain functional institutions that are in turn endowed with semipublic authority to aid in framing foreign economic policy. I suggest that it is these institutionalized links between government and business in the Federal Republic that enable public of‹cials to overcome the manifest constraints associated with economic linkage. The interventionist state in Germany operates in conjunction with the “coexistence of high levels of national interest aggregation and articulation, mainly through well organized parties and well organized interest groups” (Schmidt 1987, 138). Thus, the implementation of economic linkage is part of a complex bargaining process between the government and the private economic sector.7 This institutional feature is not coincidental but rather mandated.

Institutional Structures and Linkages

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According to Paragraph 23 of the Gemeinsamen Geschäftsordnung der Bundesministerium (Joint Rules of Procedure of the Federal Ministries), federal ministries are instructed to consult interest group associations when needed in the preparation of drafting laws and regulations. This close, mandatory association between the government and the private sector has been characterized (Streeck 1983) as a “devolution of public authority to business associations” (266)8 This process works in both directions in that it primarily entails the tendency of interest associations to include the state among the environments from which they win their organizational subsistence, and the tendency of the state to institutionalize and incorporate interest associations and to confer on them public status and responsibilities. (266)9 Indeed, this relationship has been exploited “pragmatically, or opportunistically, by both associations and the state as an expedient solution to individual problems” (266). Thus, Streeck appropriately points out that it may be impossible to treat organized group interests as neatly separate from the state. It is these organizations that link German business to the government in an elaborate and centralized fashion (Zysman 1984). In comparison, the means by which the views of the private sector in the United States are transmitted to the of‹cial sector are much more dispersed. In terms of in›uencing leading policymakers, U.S. business’s standard operating procedure involves using a “proli‹c number of personal visits and letters to of‹cials’ of‹ces, congressional testimony, publications, expense account lunches, and so-called Georgetown dinner parties” (Cohen 1988, 61). Oddly enough, Cohen concludes that these diffuse methods serve to “transmit directly” the private sector’s problems and demands. Yet, to someone familiar with the German structure of directly mandated consultation, the U.S. process would appear to be less ef‹cient in that it functions by only serving those with the resources to attract the attention of policymakers. Moreover, it then assumes that these policymakers are in the position to actually translate these solicitations into actual policy. Most problematic of all, this process can result in what Aho and Levinson (1988) call “loser-driven” trade policy. That is, because U.S. trade policy has been designed to be responsive to initiatives from injured private interests, the least successful ‹rms are effectively calling the shots.10 The Trade Act of 1974 highlights the fact that bureaucratic decision makers traditionally have not been completely responsive to the needs or interests of the private sector. As a part of this act Congress mandated a

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complex series of private sector advisory committees. Yet as Cohen concludes: The transmission of ideas and data is one thing. The degree of their actual impact is another. The U.S. government may or may not be relatively less sympathetic and responsive to business demands . . . (62) Mastanduno even speaks of a tradition of business deference to national security and foreign policy goals that was established in the early 1950s (1992, 28). Moreover, he suggests that the combination of a powerful Executive with an ambitious foreign policy agenda, and the lack of a countervailing in›uence from the private sector, has facilitated the “sanctions habit,” or the routine reliance of U.S. of‹cials on export controls to in›uence the political behavior of other governments. (28) In contrast, the German decree to consult interest group associations has had a critical effect on business organization: by insisting that only national associations be given such a role, the government forces the centralization of interest representation. German capitalism therefore has, according to Zysman (1984), a quality of “organization, concentration, and centralization” that has been otherwise referred to as “organized capitalism” (Schon‹eld 1965). The distinctive character of this system is its combination of four elements: (1) concentration; (2) tolerated cartel-like arrangements; (3) centralized semiof‹cial trade associations; and (4) a tutelary banking system. These organizational characteristics are signi‹cant in understanding successful extraction of private resources in that, as Krasner (1978) argues, the concentration of resources determines to a large degree the in›uence of private actors on state policy-making. Since the government cannot command performance, understanding these elements is crucial to appreciating how the German state can induce or in›uence the behavior of the private economic sector. In contrast the U.S. system of interest group association appears much less organized or centralized.11 For example, in terms of organizing those with an interest in international trade one organization does exist: the Trade Action Coordinating Committee. The Committee is an informal group of more than 100 “liberal” trade-oriented consumer, agricultural, and business representatives that meets weekly to exchange information and organize lobbying efforts. Yet, as is apparent, this group includes very diverse interests, both consumers and producers, and is very informal in

Institutional Structures and Linkages

37

nature, that is, it has no institutionalized structure or even formal headquarters. The comparable association cited most often, the National Association of Manufacturers, is also a poor substitute since it is not as inclusive as German organizations nor does it have the centralized power of German national associations. Above all else, it is the guiding philosophy of the NAM that distinguishes it from its German counterpart. The current membership information made available to interested members proudly claims, “The NAM has been keeping government at bay since 1895!”12 Federation of German Industry It can be safely said that no other interest group is as politically active or as visible on as broad a front as the Federation of German Industry (Bundesverband der Deutschen Industrie, or BDI). The largest such group, it is a peak association that organizes and encompasses almost the entire German service and production industry. Composed of thirty-nine individual industrial associations (including banking, wholesale, and export sectors), it has a membership of over 90,000 ‹rms. By focusing its activities on the government’s national and international economic policies it is clearly the most in›uential and effective voice of business in national politics. Apart from its general advocacy of German industry, the BDI evaluates proposed legislation that is in any way related to business and follows it during all stages of policy-making, from ministerial drafting through parliamentary debate and even administrative implementation. Not surprisingly, during the two decades of Conservative-Liberal rule after World War II the BDI enjoyed very close ties to the government. Moreover, in those cases where the BDI competed with the trade unions for political advantage, the BDI inevitably tended to be on the winning side. Yet, given the commitment of all major parties to a market economy (albeit a social one), the BDI, even under the Social Democratic–led coalition (1969–82), had little dif‹culty in ‹nding a receptive audience for its proposals to the government. In addition to sympathetic parliamentary deputies, and general cultural support by virtue of its economic accomplishments, business interests command considerable ‹nancial resources. Their political support (or sometimes even conspicuous lack of support), especially of the middleclass parties, the CDU and FDP, gives them added weight in electoral politics. Yet most BDI activity takes place in direct, small-group consultations with ministerial of‹cials, parliamentary deputies, and governmental leaders. It has an extensive “research” department that supplies information to its member associations, the media, schools, and universities. Only

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rarely has it felt compelled to engage in advertising campaigns to in›uence large groups of voters (Conradt 1986). Thus, it is the privileged channels of access that give the BDI an exclusive role in shaping key issues in German foreign economic policy. The tutelage of the German banks also plays an important role in coordinating Germany’s foreign economic policy (Zysman 1984). Banks are perhaps the most powerful force in facilitating the centralization of economic decisions. Indeed, it has been argued (Spindler 1984) that the in›uence of Germany’s large universal banks is dif‹cult to overestimate.13 For example, it is known that Deutsche Bank, as a single institution, has ‹nanced or handled payment for as much as 25 percent of German trade in the 1980s. Moreover, the large banks also exert a critical leverage over the industrial sector by means of directorships and board memberships.14 The in›uence of the German banks on economic affairs rests essentially on two pillars: “Their market power over the sources of ‹nance for industry, and their legal right to own substantial stock in corporations and to exercise proxy votes for other stockholders” (Zysman 1984, 261). Leading banking and industry executives were always included as members of of‹cial state German delegations traveling to Poland. Moreover, top German bankers are regularly consulted on decisions by the Interministerial Committee, which has the power to grant or deny credit guarantees for commercial loans to Poland.15 Anecdotal evidence of the solid links between the private banking sector and the German government is the fact that Chancellor Schmidt’s minister of ‹nance later became the head of Dresdner Bank, one of the three leading banks in Germany. More tragic evidence of the political power of German bankers was the slaying of Alfred Herrhausen, chairman of Deutsche Bank, in December 1989 by the German terrorist group, the Red Army Faction.16 Eastern Committee of the German Industry As previously discussed, the concentration of private resources has facilitated close collaboration between public and private of‹cials in terms of foreign economic policy-making. A constitutive and normative feature of government-business relations, this centralization and collaboration in terms of trade with Eastern Europe was explicitly constructed by the German government after World War II. The Eastern Committee of the German Industry (Ost-Ausschuß der Deutschen Wirtschaft, hereafter referred to as the OA) was established by federal cabinet decree in 1952. This singular interest group is the of‹cial representative for private business interests in Eastern Europe. As its ‹rst and still presiding chairman put it, the OA was a “child born of necessity.”17

Institutional Structures and Linkages

39

In the early 1950s, Chancellor Adenauer was searching for a way to carry out quasi-diplomatic relations with Eastern Europe without undermining his own policy of diplomatically isolating Eastern Europe. Of‹cially known as the Hallstein Doctrine, this policy was designed to bolster Bonn’s claim to sole representation of all Germans. The doctrine stipulated that Germany would withhold or withdraw diplomatic recognition from any government that recognized the East German regime (except for the Soviet Union, which as one of the Four Allied Powers was too important to Bonn; therefore, it could not afford to block channels to Moscow). Such a strategy, of course, automatically precluded diplomatic relations with any of the nations of Eastern Europe since they all recognized East Germany in the spirit of socialist brotherhood. Up until the establishment of the West German trade mission in Warsaw in 1963, the OA, at Bonn’s request, provided the only quasi-of‹cial link between the governments in Bonn and Warsaw. As a result, it was the private ‹gure of the OA president who carried out public duties for the government in Bonn.18 Although the of‹cial functions of the OA have evolved over the years, the basic purposes remained the same. It has ‹ve major objectives:19 (1) to coordinate the views of the commercial sector in all issues concerning economic relations with socialist countries; (2) to inform and advise the commercial sector on current economic issues in Eastern Europe; (3) to advise the appropriate federal ministries as well as assist in the preparation and implementation of of‹cial economic policies and negotiations; (4) to carry out negotiations in the name of the government in cases where it has no of‹cial formal relations; and (5) to cultivate direct contact with the appropriate organizations in Eastern Europe. The institutions it established consist of an executive committee, the main committee, and nine working groups (one of which is especially relevant for this study, the Poland Committee discussed later). The eight executive committee members are drawn from: Bundesverband der Deutschen Industrie (BDI): 2 Deutscher Industrie- und Handelstag (DIHT) (the German equivalent of the National Chamber of Commerce): 2 Bundesverband des Deutschen Groß- und Außenhandels (BGA) (German Wholesalers Association): 1 Außenhandelsvereinigung des Deutschen Einzelhandels (AVE) (German Retail Trade Exporters Association): 1 Bundesverband deutscher Banken (BDB) (Federation of German Banks): 1 A chair, elected at large (which as previously noted has been the same ‹gure since its founding in 1952, Otto Wolff von Amerongen): 1

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Collectively, about 1,000 leading members from the German business community belong to the OA, and they represent ‹rms of all sizes and branches in the Federal Republic. Convergence on a Trading State Strategy Ideas matter. As demonstrated by the scholars in Goldstein and Keohane 1993, ideas “count.” They can shape policy, even when actors are motivated by self-interest. Here ideas are de‹ned as worldviews (as embedded in the symbolism of a culture and people’s identities); principled beliefs (normative criteria, e.g., “slavery is wrong”); and as causal beliefs (i.e., beliefs about cause-effect relationships). Each type of idea can, in turn, interact with the other. For example, principled beliefs can mediate between world views and particular policy conclusions. Causal beliefs can imply strategies for the attainment of goals. Thus, ideas become guides, focal points, or glue to be incorporated into political debates. Together, these ideas then operate as road maps or as appropriate strategies for maximizing interests. These interests need not be material ones, but can be value-based or normative interests. What is crucial about the role of ideas is that they help policymakers (and other actors) to resolve uncertainty and to coordinate behavior. And, as all the authors in the volume point out, once these ideas are institutionalized, they continue to guide action. For example, in her chapter Kathryn Sikkink illustrates how the principled belief of support for human rights became embedded in U.S. institutions. She then suggests, Human rights policies survived the opposition of key ‹gures in the Reagan administration because human rights ideas had become institutionalized in the foreign policy apparatus. (140) Goldstein (1988), in her explanation of postwar U.S. trade policy, also claims that ideas count. According to her evidence, neither international structural approaches nor domestic interest group arguments are suf‹cient to explain levels of protectionism in U.S. policies. Instead, she suggests that institutional arrangements in themselves became a source of trade policy. Instead of perceiving the government as merely a conduit translating pressures from outside, she suggests the institutions of the state acted as a ‹lter for these pressures. This “state structure” “evaluates the legitimacy of claims brought forth by social actors.” These structures, or these institutional settings, are historically determined in that they re›ect the biases (or worldviews) of the decision makers present at their creation. Thus, for Goldstein, ideas play a twofold role: ‹rst in the initial beliefs of

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41

key decision makers; and later, once they are embedded in institutional design and laws. As we see, then, once policy ideas become embedded in particular institutions, they continue to in›uence the way actors assess problems and formulate strategies. This means that the concept of institutions themselves must be broadened to re›ect this more amorphous role. Here I rely again on the Goldstein and Keohane de‹nition of institutions as encompassing administrative agencies, laws, norms, and operating procedures. These political institutions can mediate between the ideas and the policy outcomes. Weaver and Rockman (1993) support these claims when they argue, Institutions re›ect not just legal forms but also normative understandings and expectations. The legal forms, moreover, may not always be their most crucial aspects. . . . such factors as the histories of programs, successful responses in the past, dominant beliefs among leaders, and the political culture of the society may be especially vital in determining how institutions actually function. (10–11) The successful use of economic incentives necessarily implies a convergence of state and business interests in maintaining sustained cooperation with another nation. Here I suggest that the institutional structures previously discussed were important in shaping and mediating foreign policy interests. In the case of Germany, this entailed a reconceptualization of foreign policy interests to encompass the ideals of a “trading state.” German of‹cials (public and private) came to believe that positive and sustained economic cooperation with Poland was in their interest. This convergence did not occur in the case of U.S. of‹cials. Abilities may differ (i.e., there may be economic disparities), but these asymmetries affect international power only to the extent that there is the will, expressed in government action, to transform basic capabilities into forms (e.g., military forces and foreign aid funds) that make them directly usable for the exercise of power, and eventually to use the transformed resources in actual power plays. (Knorr 1975, 18) A comparison of German and U.S. policy toward trade with the Soviet Union (Seppain 1992) singles out contrasting attitudes as the foremost difference. Whereas U.S. policy since the Bolshevik revolution had been dominated by the idea that communism could be changed by the manifest economic superiority of the United States (i.e., economic power in a negative sense), (West) German trade policy toward the Soviet bloc

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continually (except for the aberrant interlude of the 1950s and early 1960s) pursued the strategy of “buying peace.” The implication of these divergent policies, then, was that the United States pursued its security interests independent of economic cooperation, and hence independent of any cooperation with the U.S. business community. In Germany, the opposite prevailed: German business remained rather supportive of Bonn’s pursuit of economic persuasion for the sake of the nation. One could argue that this policy network of close cooperative relationships linking ministerial bureaucracy to interest groups in industry, trade, and banking has contributed to Germany’s overall postwar success: export expansion meant remarkable export-oriented growth. Indeed, in the late 1970s, at a time when other West European nations were facing various economic crises, the Federal Republic looked like an island of stability. And this island of stability, facilitated by the structural economic importance of the export sector, has been effectively translated into political power. Indeed, the axis of power has formed an “‘export mystique’ which no relevant social group has called . . . into question” (Kreile 1978, 193). Furthermore, it has not been the case of an explicit political victory by one group that excluded the losers from power in politics and the markets (Zysman 1984). Instead, a consensus on the necessary interventionist policies of the state characterizes the political economy of postwar Germany. Yet, despite this consensual nature and mandate to consult with all societal groups, one group is privileged over the others—business, due to the mandatory nature of membership in associations. These publicly organized interest groups (Hartwick 1992) fare far better than voluntary interest groups (e.g., consumer and environmental groups) not only in setting the agenda, but also in terms of direct involvement in legislation. The parameters of German dependence on exports for continued economic growth are easily discernible. While German exports accounted for a mere 4.6 percent of world exports in the period from 1950 to 1953, twenty years later, in the period from 1970 to 1973, the share had increased to 11.2 percent (second position, behind the United States). The ratio of exports to GNP made a similar jump: in 1950 it was 8.5 percent, in 1960, 15.9 percent, and in 1974 it reached 23.1 percent. By 1975, one out of every five jobs depended on exports.20 This economic success based on exportled growth in turn promoted a consensus within Germany that preferred expanded economic interaction with Eastern Europe. There is a basic consensus in the Federal Republic on the desirability of non-strategic trade with the East. This consensus includes the business and banking communities, the labor unions, and all of the major

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political parties. There is virtually no opposition to improving economic ties with the East. Indeed, there has been no domestic public debate about the necessity or desirability of export control vis-à-vis the East for decades. (Jacobsen 1988, 159) Two leading German economists (Schüller and Wagner 1980), reporting the results from their study of German foreign economic policy in the East and its effect on the stabilization of both economic systems, found overwhelming evidence of such a preference for increased exchange with Eastern Europe. They found indications of the following four preferences of elites: (1) Despite the existence of opposing economic systems, mutually bene‹cial economic cooperation with Eastern Europe is possible; (2) Bringing the COMECON economies into the international economic order would contribute to the stabilization of both economic systems (for them a desirable goal); (3) This economic cooperation could be done in such a way that it would promote the current political détente and peace efforts; and (4) For these reasons, system cooperation and not system competition is necessary, along with the political will to ‹nd pragmatic political solutions to the remaining problems. This overwhelming consensus among German policy elites proved crucial in the continuity of Germany’s economic statecraft toward Eastern Europe even after the change in governments in 1982. One might argue that the lack of such a consensus at least partially explains the United States’ failure at economic détente in the 1970s. Indeed, the prevailing ideology among U.S. policymakers seems to proscribe the sustained use of economic inducements to improve relations without direct and immediate reciprocation.21 In particular, the struggles between Congress and the Oval Of‹ce for control over U.S. trade and foreign aid policy led to ambiguity in U.S. policies. For example, there was the policy of “bridge-building” by means of “peaceful engagement” in the 1960s, a professed strategy of seeking increased independence for the East European countries by means of increased ›ows of trade, visitors, and humanitarian aid. However, doubts remained whether it was embraced by all U.S. decision makers (Wandycz 1980, 376 ff.; Kovrig 1991, 247ff.). In terms of the U.S. government providing export credit guarantees for communist countries in the period under consideration, one interesting incident points out the divergence in approaches toward Eastern Europe. Included in the Comptroller General’s annual report on the ‹nancial conditions of the Export-Import Bank was the remark, “We [the comptroller’s of‹ce] disagree with Eximbank on interpretations of its enabling legislation involving . . . Presidential determinations for loans to Communist countries.”22 Here the comptroller of the United States was disagreeing

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with the practice recently inaugurated by the Bank of securing determinations of “national interest” by the president on a country-by-country basis and then notifying the Congress of these determinations and their application to particular transactions. In March 1974 the GAO had rendered its opinion that such credits involving communist countries require a separate determination of national interest for each transaction. The Bank continued to rely on the supporting opinion of the attorney general, and the comptroller’s of‹ce was objecting to this broad interpretation. An in-depth study of U.S. foreign policy toward Eastern Europe during and immediately after World War II con‹rms U.S. reluctance to employ positive economic incentives. While some attempts were made to in›uence with economic instruments, they were only used in the negative sense (e.g., withholding credits) and then only in conjunction with demands for immediate political concessions, as when the U.S. ambassador at the 1946 Paris Peace conference demanded “substantial evidence of Czechoslovak independence and friendship toward the United States before resuming any form of economic assistance.”23 This same study concludes that neither support for American business interests, nor even a general business climate conducive to capitalism, was a primary determinant of U.S. resumption of relations with Eastern Europe after World War II. Instead U.S. foreign policy in Eastern Europe seems to have been driven primarily by ideological factors, that is, whether or not the country in question was friendly or supportive of the USSR. To the extent that the foreign trade policies of East European nations mattered at all, they were more often used as a “convenient yardstick by which to measure the foreign policy orientation of the various governments” (323). Anecdotal evidence from the Soviet-German bargaining over the content of German uni‹cation illuminates the stark contrast. During the spring and summer of 1990 Soviet opposition to German uni‹cation remained strong because of objections to united Germany’s continued membership in NATO. In an effort to soften this opposition, Bonn held out the promise of substantial ‹nancial rewards should approval be forthcoming. Essentially the Soviets were asked their price.24 When Soviet of‹cials hinted that they were facing a severe shortfall of hard currency and that an untied ‹nancial credit would ease their situation, Chancellor Kohl was most obliging. According to the chancellor’s national security adviser, Horst Teltschik, the USSR wanted ‹nancial concessions to paper over their differing opinions as to the desirability of Germany’s postuni‹cation membership in NATO. In Teltscik’s account Soviet of‹cials were asked to name a ‹gure for a guaranteed loan from Germany. In the end, Kohl indicated his willingness by personally phoning of‹cials from Deutsche Bank and Dresdner Bank. Within two days those top of‹cials

Institutional Structures and Linkages

45

were in Moscow working out details of a state-guaranteed private credit. At last, the Soviets gave their blessing to German uni‹cation, and the forty-‹ve-year quest for uni‹cation was over. At this point it would be interesting to ask: Would the U.S. government have been in such a position to ful‹ll a similar request? Yes, the U.S. president could call up the head of Citicorp to ask for such collaboration, but the more compelling question is: Would it? The only comparable situation could be the socalled Mexico weekend when President Reagan directly intervened in the bailout of Mexico to forestall their bankruptcy. The historical institutional approach tells us that one way of determining how speci‹c policies are formulated is to look at the process of how political ideas are ‹ltered through institutional structures.25 In this chapter I analyze the institutional dynamism of Germany’s economic statecraft by examining the interaction of institutions and political processes. My evidence demonstrates how speci‹c institutions in Germany in›uenced policy outcomes. In the case of German economic statecraft institutions were instrumental in shaping the political strategies that governmental elites utilized. Institutions, broadly understood, enabled public and private actors to converge in their preference formation. One means of facilitating this is through institutional linkages between the relevant actors. In the case of Germany, institutional links between government and business assured that each actor understood the objectives and needs of the other, thereby facilitating cooperative behavior in their actions.

CHAPTER 3

Extracting Domestic Resources: Reward Power As in the case of trade restrictions, the use of the trade carrot is more easily employed by state-trading than by capitalist states. It is institutionally dif‹cult for the latter to channel trade expansion in a politically desired direction. (Knorr 1975, 164)

This chapter analyzes the capacity of the German government to extract resources from the German private sector as a means of amplifying its efforts at increasing economic exchange with Poland. It examines the instruments and levers that were at the disposal of German of‹cials in carrying out its strategy of economic persuasion. To this extent, a crucial component of implementing foreign economic policy involves the nexus of public and private actors in the Federal Republic. I suggest that speci‹c institutional features of the German political economy enabled state of‹cials to effectively conduct economic statecraft after 1969. These features are embedded in the organizational structures of policy implementation. The crucial quality is the institutionalized nature of state collaboration with the private sector. This policy interaction ensures that business gets what it needs to perform while enabling state of‹cials to calibrate national interests with key constituents. Such linkage involves formal institutions in some cases and in others merely institutionalized procedures, for example, regular dialogue with business associations. Thus, this chapter looks at how economic persuasion can be implemented by examining the nature of the available economic instruments. The challenge, then, is: How does a state translate its economic and monetary capacity into political leverage for the purposes of national interest? In other words, what nonmarket forces must be employed by the government to in›uence commercial outcomes? In the case of German-Polish relations, I ask: How were German decision makers able to extract the necessary resources from its domestic political economy? If, in the words of one social scientist, “for Bonn, eco46

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nomics became the continuation of politics by other means” (Hanrieder 1989, 24), how was this possible? How was Bonn able to wield this strategy? This involves examination of the bureaucratic policy process in addition to analysis of governmental interaction with what Katzenstein (1987) calls the “para-public institutions” of the private sector.1 Examining this aspect of economic statecraft (i.e., how economic instruments are implemented as a means of fostering cooperative economic exchange within the private sector) is important to understand the conditions that led to Bonn’s success at economic persuasion toward Eastern Europe and Washington’s failure at it in the 1970s and 1980s. A signi‹cant weakness of many studies of economic statecraft is that they assume states possess the levers (or at least unlimited control over the levers) of economic persuasion. Those studies that are cognizant of this dilemma remain overly pessimistic when questioning whether public of‹cials can overcome the constraints inherent in a liberal democracy. As noted in chapter 1, Mastanduno (1992, 54) argues that economic linkage (in particular, rewarding good behavior and punishing bad behavior with economic instruments) is quite dif‹cult to implement since “the strategy requires both the mobilization of private economic interests and their long-term subordination to political considerations.” Likewise Knorr (1975) argues that securing domestic support for using economic leverage in foreign policy is a necessary condition for such a strategy to succeed. Thus, it is not at all obvious how a state in a liberal market economy can, of its own volition, extend signi‹cant foreign economic incentives in an attempt to in›uence another nation. Beyond the traditional means of conducting foreign economic policy—manipulating trade barriers and granting economic assistance—state of‹cials in capitalist societies have limited resources with which to initiate and sustain economic cooperation with a foreign partner. Instead it is the far more substantial resources of the private sector that can make a signi‹cant economic impact on the target nation. Yet government of‹cials cannot command performance from the private business sector. They cannot legislate that domestic ‹rms and banks conduct economic exchange with foreign markets. Failure to suf‹ciently understand these limitations on a state’s coercive power over its own domestic political economy, then, can convey false optimism when judging the feasibility of economic statecraft. This is not to say, however, that a state has no ability to control the volume of private economic exchange. What it can do is induce the private sector to perform in an effort to magnify its own offer of economic carrots. Thus, the skill with which state of‹cials can manipulate the resources of the private sector is an important factor in determining the successful outcome of a policy of sustained cooperation. A government’s capacity to

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extract the resources of its domestic economy is directly related to its “power” to employ economic statecraft effectively. Institutionalized Linkage Chapter 2 illustrated how interaction between state of‹cials and business elites in Germany was instrumental in shaping German foreign policy preferences in the direction of economic persuasion. Once this strategy was introduced in 1969 what enabled German of‹cials to then implement it? What new institutions were created that were important factors for the successful implementation of this strategy vis-à-vis Poland? I suggest that two particular organizations were primarily responsible for the success of this strategy: the Poland Committee, a private association, and the Mixed Economic Commission, a para-public organization. Poland Committee The formation of the Polen-Kreis (Poland Committee, hereafter PK) is an engaging demonstration of the complex nexus between state and business in Germany in terms of its two-way direction. Similar to the OA, the Poland Committee is composed of approximately 130 representatives from German industry (including the banking and trade sectors).2 Yet while it is “private” in nature, it also has a quasi-public function, indeed even its origins were quasi-public. The seeds for the creation of the Poland Committee were planted during talks between OA chair Otto Wolff von Amerongen and Polish deputy foreign trade minister Karski. The idea was initially broached in consultations between them and the president of the Polish Foreign Chamber of Commerce held at the fringes of the June 1970 Industrial Fair in Posen, Poland. This was followed by Karski’s of‹cial visit to Germany in February 1971. Before meeting with representatives from the German Foreign Ministry and the Ministry of Economics, the deputy foreign trade minister again consulted with Otto Wolff. As a result, Karski announced Poland’s intention to create a West German desk at the Chamber. Wolff responded with the counterproposal of establishing an appropriate partner organization in Germany, and from this the Poland Committee was born.3 As originally envisioned,4 the responsibilities of the Committee were to promote contacts between leading economic ‹gures in both countries and facilitate the exchange of central information. Accordingly, the Committee was to have approximately 120 members, drawn from all economic sectors (including commerce, banking, and industry) that were interested in business with Poland. The members were to be solicited partly from

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industrial associations and partly from regional chambers of commerce. The concrete efforts of the Committee were directed at (1) sponsoring events in Germany in addition to sending delegations to attend Polish events; (2) receiving representatives from the Polish economic community as well as representing the German business community in Poland; (3) acting as mediator for contacts and consultations within the framework of German-Polish bilateral economic relations; and (4) providing mutual information on all events of interest to the business community. Members are nominated by the OA, and they are chosen to represent their respective branches and not speci‹c ‹rms. The PK meets on a regular basis and hosts joint meetings with its Polish counterpart to carry out its of‹cial purpose: to develop and intensify economic liaisons between the two countries and to bring interested economic parties together.5 Because of the dif‹culties associated with trade with command economies, the German business elite argued that it was necessary to glean as much information as possible from each other and from authorities in Poland, thus leveling the playing ‹eld as much as possible. In other words, the Committee was to function as a forum to promote exchange between leading economic leaders in Germany and public of‹cials charged with foreign economic affairs in Poland. An illustration of the Committee’s of‹cial support from the German government is the go-ahead, indeed encouragement, contained in a memo from a Foreign Affairs of‹cial addressed to members of the Ministry of Economics as well as the Ost-Ausschuß. Relating the details of a recent missive from Poland, the foreign policy of‹cial claimed that the Poles were getting impatient. In his opinion he felt that Polish of‹cials wanted to move beyond declarations of goodwill. Thus, he believed “it is time to ‹ll current [diplomatic and trade] treaties between Poland and Germany with life.” He suggested that the key to overcoming the current impasse in economic relations was better communication channels, especially since it was not always clear to German business representatives who had authority for what in Polish bureaucracies. To this extent, then, the of‹cial argued that the most signi‹cant issue was the creation of the Poland Committee within the Ost-Ausschuß, and since the Poles felt there were great possibilities for economic cooperation “we should support these efforts as much as possible and through our own initiative help them come to success.”6 The origins of the PK also reveal an interesting twist in relations with its traditional allies, the CDU/CSU coalition as well as in the interplay between public and private sector in terms of “foreign policy.” At that time in the opposition, the Christian coalition was challenging the bene‹ts of the SPD’s newly inaugurated Ostpolitik. As part of that opposition a leading member of the CDU was publicly denouncing the recently signed

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Warsaw Treaty for not including the establishment of a joint German-Polish Chamber of Commerce as one of its decrees. An exchange of letters between the chair of one of the BDI industrial associations and a staff member of the OA revealed that the businessman felt the OA should intervene in the affair by informing the CDU representative that his activities were “counter-productive,” that the German business community felt such a chamber would not be desirable. The association chair went on to warn the OA of‹cial that the affair must be dealt with quickly, lest it become a larger issue. In response the OA of‹cial informed the association chair that he had indeed spoken with the respective CDU member, who had agreed to drop his opposition in this matter. The OA chair then told his constituent that the Ministry of Foreign Affairs concurred with this assessment against pursuing the creation of a chamber. Even more important in the opinion of the OA of‹cial was the fact that the OA chair had already cleared the issue with Polish of‹cials, even before the Ministry could convey its opinion to Warsaw. Here, then, is an example of business telling its political allies to sti›e its policies all the while this same business organization is “negotiating” with Polish governmental of‹cials, with the blessing of the Foreign Ministry! The bene‹ts for the German business community seemed broadly to consist of lowering transaction costs in completing business deals with Polish ‹rms. For example, as initially conceived, Polish economic and industrial of‹cials were to provide ‹rsthand information regarding new procedures for Polish ‹rms engaging in trade with Western ‹rms. They were also to inform the German business community about reform efforts enabling Polish ‹rms to obtain easier access to foreign currency, which would then expedite purchases from Western ‹rms. Beyond that, Polish of‹cials were to keep the Poland Committee abreast of any new information regarding the latest ‹veyear plan in Poland. Indeed, they suggested completing information brochures entitled “How to Approach the Polish Market.” Mixed Economic Commission Organized capital was formally fused with the managed foreign economic policy process as a direct result of negotiated cooperation between Poland and Germany. As part of the 1970 Agreement on Economic Cooperation signed between Poland and Germany (Article IX), the German government agreed to establish what is called the Gemischte Kommission (Mixed Economic Commission, hereafter designated as GK). The Commission itself has subgroups, organized according to sectors of speci‹c trade and commerce. Members not only include representatives of private trade and industry, but also German government of‹cials from the Ministries of

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Finance, Economics, and Foreign Of‹ce as permanent members. Its function, in the words of an Economics of‹cial, is to “supply fora to discuss better conditions for cooperation” (Jahnke 1991, 251). The ‹rst meeting of the GK was held in March 1974 in Bonn, and subsequently thereafter the GK met on a yearly basis. The German Ministry of Economics usually initiated and organized the meetings. Before each scheduled meeting the Finance Ministry conferred with the OA in order to gather suggestions for points of discussion, which were used to set the meeting’s agenda.7 Essentially these commissions served to coordinate economic policy not only between Poland and Germany, but within West Germany itself. Of‹cials in Bonn and members of the private business community mutually deliberated what Germany’s economic policy vis-àvis Poland should be. Moreover, the exchange of information between private and public of‹cials was extraordinary. In particular, the Foreign Of‹ce as well as the Ministries of Finance and Economics regularly sent “backgrounders” to the appropriate GK and OA of‹cials (especially before every pending visit by high-level Polish delegations or scheduled GK meetings). These backgrounders included information on the latest governmental policies and suggested strategies. In addition, the Foreign Of‹ce in Bonn routinely forwarded brie‹ng telexes they received from the German embassy in Warsaw. These cables generally included the latest information on the prevailing political or economic situation in Poland. They also reported on the progress of any talks or discussions held with Polish of‹cials.8 The information exchange ›owed in the other direction, too. The German business community, through the “lobby” efforts by of‹cials of the OA and GK, were able to constantly inform policymakers in Bonn of their perspectives on the Polish economic situation. The term lobby is used loosely here and denotes less a solicitous relationship and more one of mutual respect. OA staff in Cologne regularly communicate with the appropriate bureaucrats in Bonn over the latest stand on issues of common interest.9 In turn, policymakers routinely solicit information from OA staff when trying to develop speci‹c policies toward Poland. One such example took place in 1977 when Warsaw was criticizing Bonn for not doing enough to facilitate imports from Poland. An official from the Economics Ministry asked OA staff to submit a report documenting German industrial support for such import promotion.10 Tools of Economic Persuasion If the preferred foreign policy strategy was to offer Warsaw carrots (economic rewards) in place of brandishing sticks (embargoes and boycotts),

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then the economic rewards Bonn promised to provide can be understood in terms of the following three types of desired economic performance: trade, credit, and technology transfer via foreign investment. The following section discusses the tools of persuasion available to the German state to facilitate such commercial performance. It demonstrates the capacity of the German state to enhance its efforts at extending economic incentives by extracting resources from the private economic sector. Trade State of‹cials generally have two options if they want to induce the private sector to export goods and services to another nation: to provide the necessary legal framework, for example, by signing a long-term trade treaty with its trading partners; or to provide the ‹nancial means to trade, for example, by granting or guaranteeing export credits. Germany has done both. As the cases in chapters 4, 5, and 6 illustrate, Bonn understood very early the imperatives of formalizing commercial relations if it was to increase economic exchange. In the case of export credits, it must be stressed that Germany, contrary to other EC member countries, did not subsidize the interest rates for loans to Eastern European nations. This may appear to contradict my later assertion that Germany consciously promoted commercial relations with Eastern Europe for political purposes. I suggest that Germany’s approach of institutionalized state-market relations more than compensated for the absence of subsidized interest rates. German of‹cials instead awarded generous export credit guarantees through the quasi-governmental organization Hermes Versicherung AG. Although Hermes is a private ‹rm, it has the status of “Mandatars des Bundes” (mandatary of the federal government). According to economic experts Hermes export credit guarantees represent a type of indirect subsidization, since they make such export credits cheaper than they would be on the private money market without such a guarantee. Almost the entire scope of trade with Eastern Europe is guaranteed through the Hermes organization. Thus, it is one of the most important instruments for promoting trade that the government has at its disposal. Here I stress government because indeed government of‹cials sit on the executive board that makes decisions about extending such guarantees. These of‹cials can, for either economic or political reasons, reverse or even lift the ceilings on any such guarantees. The history of Hermes prior to 1969 shows this was not always the case. For the ‹rst ten years of the FRG, such supplier credits to COMECON nations were prohibited. After 1959, due to pressure by the Ost-

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Ausschuß, these rigid regulations were modi‹ed to allow middle and long-term supplier credits on investment goods in exceptional cases and with special authorization by the state. In principle, exports to the East were excluded from the Hermes system of export ‹nancing until the spring of 1964. Why the Ost-Ausschuß and ‹rms trading with the East only started in 1963 to put pressure on the government to change this rule is explained by the increasing trade competition once the Bern Union regulations were undermined by the export ‹nancing practices of other West European nations. Ostensibly, up until this time, Bonn had been reluctant to modify its stance in the hopes of putting pressure on the Warsaw Pact nations in order to improve the legal status of West Berlin. This issue was satisfactorily solved in the March 1964 trade treaties with Poland, Hungary, Romania, and Bulgaria (by speaking of the “D-Mark area” this implied the inclusion of West Berlin). However, it was not until one year later (March 1965) that Bonn relented to the continuing pressure from German industry and allowed such supplier credits to be granted to the Soviet Union, which still had not budged on the West Berlin issue (Wörmann 1982). In terms of import promotion, the Federal Republic followed a fairly consistent policy toward the nations of COMECON for the ‹rst twenty years after World War II. In principle, imports from these states were only allowed within the framework of quotas that were agreed upon in bilateral negotiations. These quotas were then anchored in the “goods lists” that were attached to the respective trade agreements. Policymakers in Bonn as well as members of the private business sector perceived early on that in order to increase German exports to Eastern Europe they would have to liberalize these discriminatory import restrictions. However, for particular commercial sectors in Germany there were (and are) con›icting interests: The interests of the export industry were pitted against the protective interests of certain domestic industries (mainly textiles, clothing, glass, ceramics, steel, and wood). According to Wörmann 1982, the exporters’ interests generally prevailed over the interests of domestic industry. The trade liberalization policy followed by Germany in the 1970s re›ected an interest in expanded trade and can be said to be consistent with German national economic interests. This assessment is based on the fact that in May 1966 the government did introduce new import regulations for those East European nations with which Bonn had signed trade treaties. The text of these new rules literally followed the memorandum that the Ost-Ausschuß had drafted on the subject. Accordingly, the quotas covering nearly 69 percent of the import volume with the East were lifted. The compromise was, of course, that the quotas remained in place for those commodities “in need of protection.” Unfortunately for the

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Poles, the remaining quotas happened to be those where Poland was most competitive, namely, lumber and energy products. On January 1, 1973, authority for the conclusion of commercial trade treaties with COMECON countries was formally transferred over to the jurisdiction of the European Community. De facto, however, the “trade policy of the EC ultimately contained a continuation of a largely national liberalization and quota-setting policy in the guise of EC policy. Because of this policy, the undermining of EC sovereignty vis-à-vis Eastern Europe became quite obvious” (Bolz et al. 1976, 158). The concrete result of this disregard for EC competence was that each EC member-country was allowed to automatically extend goods and quota lists from the bilateral trade treaties established before the 1973 deadline. In 1975 a resolution passed by the EC Ministerial Council authorized its member countries to maintain the same quota lists as in 1974. At the end of 1975 no common liberalization list could be agreed upon; therefore the previously negotiated bilateral import quota lists remained in effect throughout the 1970s.11 The institutional features governing the process of awarding export credit guarantees differ widely in Germany and the United States, both in terms of structure and ideology. Hermes as a private organization has been accorded signi‹cant autonomy in granting guarantees. The governmental Interministerial Committee (Interministerieller Ausschuß, or IMA) is the central decision-making body for underwriting questions and cover techniques while Hermes staff members serve as the primary decision-making body for deciding applications for cover up to DM 2 million. Applications for a cover of more than DM 2 million are discussed within this committee before a ‹nal decision is made by the Ministry of Economics. Membership in this committee includes representatives from the Ministries of Economics (which has functional responsibility); Finance; Foreign Affairs; and Economic Cooperation. However, in turn these state of‹cials are dependent upon expertise and advice from representatives outside the federal government: namely, the Bundesbank, Credit Agency for Economic Reconstruction (KfW), Ausfuhrkredit-Gesellschaft (AKA), and a number of experts from the export trade and banking business. When one compares the export promotion policies of Germany with those of the United States, four stark differences emerge regarding economic convictions, decision-making procedures, coverage terms, and actual scope. In the ‹rst case, the political and economic convictions behind U.S. export policies fundamentally differ from those of the Federal Republic. U.S. policy was, and still is, highly politicized in that it states that no trade assistance is available for “Marxist-Leninist countries.” German guidelines have no such stipulation. For the United States, export credit guarantees are managed and

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granted by the Export-Import Bank, an independent government agency. As such its policy guidelines are highly politicized in that not only are guarantees to be granted exclusively to “friendly” countries, but also no such assistance is permitted for “Marxist-Leninist” countries (unless the president deems it a matter of national interest). In general, considerably less emphasis is given to the priority of promoting U.S. exports for the sake of the U.S. economy (notably, except for agricultural exports).12 The perennial dif‹culties of the export-promoting bank have been its insuf‹cient funding; noncompetitive interest rates; and most importantly, its overemphasis on so-called big ticket items, such as aircraft. That narrow focus tends to crowd out small exporters seeking U.S. assistance. In terms of calculating premiums (and other conditions), FRG makes a distinction between private buyers and public buyers (i.e., transactions with foreign governments and bodies constituted under public law) (Bürgschaft), whereas the United States does not. According to German regulations, public buyers are accorded slightly more favorable terms. Moreover, in April 1984 the statutes regarding coverage were amended to include so-called private buyer defaults. That is, in the case of defaults by nonstate debtors, creditors would be guaranteed compensation from Hermes. The volume of export credit guarantees granted by the German government rose substantially in the postwar period, but particularly after 1973 as ‹gure 4 illustrates. For the case of the United States the same ‹gure depicts a much less systematic authorization pattern, the volume showing two dramatic decreases, once after 1976 and again after 1980. Moreover, the volume of U.S. authorizations remained substantially below that of Germany, never reaching beyond $2.5 billion, while the German volume climbed as high as $68 billion in 1978. Indeed, according to its own self-assessment, the U.S. Eximbank is only designed to protect exporters against political and commercial risks. However, to ful‹ll this goal it merely “‹lls gaps left by private-sector sources of export credit ‹nancing.”13 Beyond the overall volume of export guarantees, ‹gure 5 indicates a substantial shift in geographic priorities of the German government. Guarantees for the European developing nations fell as the volume increased for the East European command economies. The Third World (without OPEC) share fell substantially after 1950 (at a steeper decline than the temporary decrease for Eastern Europe). By 1991 (postuni‹cation Germany), the share of Eastern Europe was poised to overtake that of the Third World. The United States, by contrast, never allocated more than 3 percent of its guarantees to Eastern Europe as ‹gure 6 demonstrates. Indeed, if not for Yugoslavia, in most years there were no guarantees for any East European nation.

Fig. 4. Of‹cial export credit guarantees: Yearly authorizations, 1960–89. Figures are for credit guarantees only and do not include loans or credits. German amounts based on an exchange rate of $1 = DM 1.60. (Data from Bundesministerium für Wirtschaft, 40 Jahre Ausfuhrgewährleistungen des Bundes [Bonn: BMWi, 1989], and Rita Rodriguez, The Export-Import Bank at Fifty [Lexington, Mass.: Lexington Books, 1987].)

Fig. 5. German export credit guarantees: Select regional distribution (as percentage of total guarantees). (Data from Bundesministerium für Wirtschaft, 40 Jahre Ausfuhrgewährleistungen des Bundes [Bonn: BMWi, 1989].)

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Fig. 6. U.S. export credit guarantees: Select regional distribution (as percentage of total guarantees). (Data from Rita Rodriguez, The Export-Import Bank at Fifty [Lexington, Mass.: Lexington Books, 1987].)

Credit There can be no doubt that credits from the West served a locomotive function for East-West trade in the past twenty years (e.g., Schröder 1988). In addition to indirect ‹nancial aid granted via means of the Hermes export-credit guarantees (as discussed in the preceding section), the federal government also has at its disposal two direct types of sovereign lending: (1) ‹xed or speci‹ed credits tied to speci‹c purchases or transactions and (2) untied ‹nancial credits (UFKs, or Ungebundene Finanzkredite).14 Paragraph Eight of the yearly Federal Budget Act establishes the parameters for these credits in terms of ceiling amount and purposes. Generally, such credits can be granted for two reasons: 1. to promote the extraction or import of raw materials (this practice has been in effect since the 1970s); and 2. other special “state interests.”15 In the case of Eastern Europe this type of credit was utilized quite frequently by German government of‹cials in order to provide otherwise unavailable public assistance. As is evident in chapters 5 and 6, granting UFKs (untied ‹nancial credits) was the most widely used practice of economic statecraft in the late 1970s and early 1980s. This credit-granting option was also exercised in the late 1980s as a means of supporting the reform process in Hungary. By receiving German UFKs yearly from 1987 through 1990, Hungarian of‹cials were able to avoid defaulting on its Western loans.16

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Poland serves as an ideal example of the development of East-West credit relations in the 1970s. After years of self-imposed isolation from the West, it hoped to pro‹t from the economic normalization resulting from the political normalization in relations. It anticipated using credits to catch up with the West by facilitating industrial modernization and stabilizing growth. Western credits enabled Warsaw to do this without having to introduce systemic economic reforms. Nonetheless, the Polish desire for credits meshed with the desires of the German government to support stronger economic “entanglement” with the East as a means of economically shoring up its political détente. In order to do so, Bonn had to resort to its ties with the private banking sector because it could not go through its normal channels to grant foreign aid. German foreign aid, ‹nanced within the framework of its development policies, could only be granted to of‹cially declared developing countries, a title that did not normally apply to Poland.17 Using a combination of legal and informal persuasion tactics, German commercial banks obliged German political goals. Among other methods, German of‹cials worked out deals with private German creditors and ‹rms to extend so-called lieferanten-Kredite (delivery credits) that were guaranteed by the government, thereby relieving business of any economic or political risk. This protection was suf‹cient for banks to make the loans to Poland.18 As one private banker put it, many of the loans of the 1970s are thought of as Kniefall19 loans, that is, loans made as a result of direct political pressure of the Brandt and Schmidt governments, and not necessarily for commercial reasons. The banks followed all too willingly in increasing their credit limits for individual countries, at least in the beginning. Beginning in 1974 the oil price increases also fueled the growth of credits, since they increased the banks’ liquidity. At the same time, the rise of the Euromarket as a means of escaping national regulations led to the expansion impulse of the banks. Eastern Europe seemed, moreover, to be the perfect creditworthy partner since the banks were all avid believers in the umbrella theory.20 This theory prompted banks to ignore their usual individual country risks since they believed that the Soviet Union would jump in as paymaster in the case of any inability to pay back loans. They based this assumption on their belief that the Soviet Union would wish to ensure the stability of its satellite regimes and so would be willing to become the lender of the last resort. Indeed ‹nancial relations with Eastern Europe and the Soviet Union ful‹lled important stability functions. For example, in 1982 German banks played the role of “liquidity ‹remen” for the Soviet Union when it ran out of hard currency due to increased grain imports, higher payments to Poland, and failed gold speculation (Jacobsen et al. 1988).

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After the so-called Polish crisis of the early 1980s when it became apparent that Poland’s ‹nancial troubles could no longer be solved in bilateral negotiations, Bonn’s credit policy vis-à-vis Poland assumed a more multilateral character. In particular, Bonn’s role in the Paris Club became another important lever in its Poland policy. By 1988 there was a dearth of ideas among Western creditors as to how to come up with a concept of dealing with the Polish debt on a long-term realistic basis (i.e., how to get beyond the issue of short-term rescheduling). Many were pinning their hopes on Poland’s membership in the IMF as a forum for conceiving and carrying out an economic reorganization plan for Poland’s economy. An active role by the IMF is necessary because of the linkage between the major parts of the last rescheduling agreement negotiated by the banks and Poland and the IMF program itself. Moreover, an active role is also desirable because of the importance of coordinating western interests and activities. (Schröder 1988, 632) The United States, however, had blocked Poland’s membership during the years of martial law, and even after martial law was lifted in July 1983 Poland’s membership was essentially put on hold for another two years. (Poland ‹nally became an active member of the IMF in June 1986.) It is therefore important to look at the efforts on Bonn’s part to support Warsaw’s membership as a way of relieving itself (and German banks) of some of the unilateral burden placed on them. In the case of the United States, the Tied Aid Credit Program was authorized by the Trade and Development Enhancement Act of 1983 (later amended by the Omnibus Trade and Competitiveness Act of 1988). This program allows Eximbank and AID jointly to provide tied aid credits. The AID grants are designed to offer ‹nancing in support of the sale of U.S. exports; however, they are offered substantially as concessional to the ‹nancing available from foreign competitors. In other words, the program was created in direct reaction to the perceived disadvantages the U.S. export community was facing. Indeed, as competition increased in the 1980s Congress reacted by creating an associated ‹nancing program called the “U.S. Eximbank/War Chest.” The Export Enhancement Act of 1992, enacted by Congress in October 1992, reauthorized the War Chest for 3 years at $500 million a year to be used to match tied aid credits extended by other governments in violation of the Arrangement or in those cases in which Eximbank determines that US trade or economic interests justify the matching of tied aid credits extended in compliance with the Arrangement,

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including ‘grandfather’ cases. Furthermore, it provides Eximbank with the authority to use tied aid credits to respond to situations in which other foreign governments attempt to gain competitive advantage in foreign markets without formally violating the agreement.” (OECD 1995, 26) Despite its declared purpose to level an unlevel playing ‹eld for U.S. business, amounts actually authorized have been minimal: in FY 1991 nine transactions totaling $145 million and in FY 1992 one transaction of $5 million. Particularly revealing, however, is the fact that decisions were made on a case-by-case basis with a view to advancing U.S. government efforts to reduce foreign tied aid use by all industrialized nations. Industrial Cooperation and Technology Transfer Bonn also has more indirect means of stimulating economic cooperation with Poland by means of inducing private business through (1) commercial missions and trade fairs; (2) bilateral cooperation agreements; and (3) investment and joint venture incentives. Commercial Missions and Trade Fairs. The German federal government allocates ‹nancial resources to organized business in support their presence at international trade fairs in foreign countries. In order to ef‹ciently employ these resources the BDI has a special task force whose sole duty is to ensure that this federal support complements the needs and goals of the commercial sector (Brodach and Wolff-Metternich 1987, 91). The task force seeks pragmatic solutions to promoting German industry at these exhibitions. The very large German presence at the annual Posen Trade Fair in Poland testi‹es to the serious attention given German-Polish trade relations.21 However, it is not just that trade fairs give German ‹rms the opportunity to acquaint potential Polish buyers with their products (after all, every nation at these trade fairs have the same opportunity), but also the fact that they provide yet another forum for communication. It was at the 1970 Posen Fair that OA chair Otto Wolff von Amerongen spoke with Polish deputy foreign trade minister Karski and decided to form the Polen-Kreis as a joint forum with the Polish Chamber of Commerce.22 Moreover, German government of‹cials take advantage of the contact opportunities provided by the trade fairs to feel out Polish positions on matters of political negotiation. According to an of‹cial from the Polish Foreign Trade Research Institute, “Germans are pros at arranging trade deals with the Soviet

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Union and Poland.”23 In addition, the close personal relations that developed between the German and Polish business communities helped facilitate cooperation. It made ‹nding cooperation partners much easier, especially since many German business members had pre–World War II connections with Poland. The chair of the Polen-Kreis (the subcommittee of the OA) also claims that the various committees and forums the German business community had established with their Polish counterparts have been extremely instrumental in establishing and maintaining such personal and business contacts.24 Bilateral Cooperation Agreements. According to German political economists, the government in Bonn has never had a clear conception of what concrete form “cooperative policies” with Eastern Europe should take (e.g., Wörmann 1982; Schröder 1979). The building block of most industrial cooperation between Germany and Poland has centered mainly around “cooperation agreements” that have the express purpose of “improving Poland’s export structure” with less explicit means. Here we see evidence that Bonn was astute enough to realize that by promising to facilitate East-West cooperation, it could economically safeguard its political détente policies. It cannot be ruled out that the government had no exact de‹nition of cooperation because it was mainly concerned about a general improvement in foreign trade, and not some speci‹c element of that trade. Every trade expansion would thus ful‹ll its political function. (Schröder 1979, 61) To this end, Bonn and Warsaw signed numerous cooperation agreements in the 1970s. The early ones merely established desirable economic parameters, while the later ones included ‹nancing packages for speci‹c projects (all are discussed in chapters 5 and 6). Nonetheless, the German government did ascribe political importance to such cooperative agreements, according to a deputy assistant secretary in the Ministry of Economics. The economic component is only one aspect of the matter for the FRG’s government. It attaches not only economic importance but an even greater political importance to East-West economic relations. Foreign policy considerations are interlinked with considerations of economic policy. (Jahnke 1991, 253) Direct Foreign Investment and Joint Ventures. Joint ventures must be understood as the most pronounced but also the most dif‹cult form of

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international economic cooperation: success in joint ventures presupposes years of successful cooperation and an intensive knowledge of one’s partner (Jacobsen et al. 1988). For this reason, I argue, ‹rms in Germany have been relatively successful in establishing joint ventures with Poland (successful compared to other Western nations in terms of number of participating ‹rms, not absolute amounts) in the postcommunist era. Foreign direct investment in the form of joint ventures has been possible in Poland since 1976. However, for the ‹rst ten years foreign investment was limited to small production branches only. As of July 1, 1986, investment in large, state-run enterprises was also allowed. However, because of continuing restrictions (property ownership, pro‹t transfer, limited decision-making authority, etc.), as of 1985 the bulk of such foreign investment (80 percent) came from Polish citizens living abroad (socalled Polonia ‹rms) (Malecki 1987). However, at least one Polish of‹cial admitted that German companies actually dominated such Polonia ‹rms in the late 1970s and early 1980s; in other words, German investment was hidden behind the names of Polish investors.25 At that time investments by German ‹rms were not automatically guaranteed against political risks by the German government since no investment treaty had been signed. However, if the project could prove to be of special “state interest” (as discussed in the section on export credit guarantees), then the ‹rms did receive generous guarantees from Bonn (one such case is discussed in chapter 5). The in›ux of foreign capital into Poland in the 1980s was minimal, comprising a mere 0.4 percent share of total Polish production output. However, it is interesting to note Germany’s dominant role as the primary buyer’s market for the products from such joint ventures (or, as they were called, mixed enterprises): in 1984, 44 percent of their exports went to the FRG and 30.7 percent of their imports were from the FRG (these ‹gures include trade to and from West Berlin). In comparison, Poland’s second largest trading partner in the West was Holland, which accounted for 13.2 percent of total Polish imports and 15 percent of total Polish exports (Malecki 1987). By the time of the 1989 Polish “revolution,” conditions for investment had changed, of course. One of the ‹rst moves Bonn made after the reform process began in Poland (indeed well before the ‹nal outcome in Eastern Europe, i.e., the fall of the Soviet Union, became evident) was to sign a bilateral investment treaty (BIT) with Warsaw. Negotiations for a BIT with Poland began in summer 1989, and one was subsequently signed in November 1989. In comparison, the United States did not begin such negotiations until much later. Moreover, the terms of the German-Polish investment treaty are far more favorable to German business than is the case with American business in the Polish-American BIT.

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All German bilateral investment treaties in Eastern Europe serve purposes comparable to those in developing countries: they are designed to promote foreign investment by providing certain protections as well as to foster a predictable, stable foreign investment climate. In essence, they establish the terms for entry of foreign direct investment, standards of treatment for foreign capital, dispute settlement mechanisms, and acceptable conditions for potential nationalization, as well as rules for transfer of pro‹ts and capital repatriation. With the end of the Cold War, government policy changed, making it easier for private ‹rms to obtain credit for investment in Eastern Europe. Credit may now be issued directly from the KfW to the ‹rm, and only 50 percent of the risk liability must be provided by a commercial bank. During the Cold War period credit could only be obtained by ‹rms indirectly—the money was channeled through a commercial bank, only after that bank assumed 100 percent risk liability. By 1992, DM 40 million had already been appropriated for such investments with funding to increase substantially over time.26 The Overseas Private Investment Corporation (OPIC), the U.S. government agency to support American companies investing abroad, operates on a fundamentally different basis. Only established by Congress in 1969, OPIC did not begin operating until 1971. Its purpose is to promote investment in developing countries, and during the Cold War there was no support for activities in communist countries. It also has a clearly stated political orientation: it will not provide assistance for “any project that adversely affects the U.S. economy or domestic employment, is ‹nancially unsound, or does not promise signi‹cant bene‹ts to the social and economic development of the host country.”27 While OPIC began supporting U.S. business in Central and East Europe in 1990, its activities there have been minimal compared with the volume of German investment projects. Within the ‹rst six years OPIC had provided more than $1.3 billion in project finance and political risk insurance to seventeen projects in Poland. During 1996, however, the volume of of‹cial support for private investment in all of Central and Eastern Europe offered by the German and U.S. governments differed vastly: 774 million ECU (German support) versus 39 million ECU (U.S.).28 In conclusion, in this chapter I argue that the institutionalized nature of German state-business relations played an important role in Germany’s success with economic persuasion. The post-1969 institutions that linked the government elite with the private business elite facilitated a highly orchestrated coordination in implementing this strategy. These institutions enabled tightly organized communication between the two sectors to proceed without the encumbrances of partisan politics. The nondogmatic

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nature of German implementation structures enabled the German government to overcome traditional ideological constraints associated with implementation of foreign economic policy in most countries. Comparing these features to those of comparable institutions in the United States suggests that in the case of the U.S. policy, of‹cials were not able or were unwilling to get the business support needed to extract the necessary resources. In contrast with these limitations, the instruments of the German government were more sophisticated, better funded, and more attuned to the needs of business. As a consequence, the “reward power” of the U.S. government was vastly inferior to that of the German government.

PART 2

German-Polish Reconciliation: A Case Study of Applied Economic Persuasion

CHAPTER 4

Change through Rapprochement: From Isolation to Resolution The moment the [Berlin] wall was erected, German politicians were posed the following question: how can one make this wall insigni‹cant? Should one simply attack it, saying the construction of a wall in the centre of the city contravenes the hitherto existing order? Such was the stance proposed by the Americans. It would have been a sign of resoluteness against the gesture of Ulbricht and the Soviet Union, but at that time, in 1961, it could not have solved the problem—it could not have led to the dismantling of the wall. So then the question arose: how does one respond to a situation where the wall exists? And it was then that SPD circles came up with the following idea: if we cannot demolish this wall, let us do everything to make this wall penetrable, so that it becomes ‘transparent,’ so that it won’t eternally divide one part of Germany from another, one part of Europe from another . . . (Michnik 1989, 118)

The Berlin Wall—symbol of the confrontation between East and West— could not be demolished by either the United States or Germany. Both constrained in their policy options (albeit for different reasons), they ultimately chose vastly different strategies for “defending the national interest.”1 The Germans chose encouraging peaceful change by means of economic persuasion as their foreign policy strategy: what it could not force, it would transform. In other words, Germany chose to emphasize carrots over sticks. And in adopting such a strategy, Bonn was able to achieve its most desired outcome, the uni‹cation of the nation.2 What German chancellor Konrad Adenauer would not do ideologically in the 1950s and what foreign minister Gerhard Schroeder could not successfully complete in the 1960s is what Chancellor Willy Brandt was determined to achieve in the 1970s: the reconciliation and normalization of relations with Eastern Europe. This meant establishing diplomatic relations and that in turn required ‹nding acceptable solutions for the realities of what it meant to lose World War II: loss of terrain and division of 67

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nation, accepting the legitimacy of the 1945 Potsdam agreement transferring German territory and the creation of East Germany in 1949 as a sovereign state. In this chapter I argue that economic incentives in the form of promised increased trade and technology transfer to Poland smoothed for the way for the dif‹cult political negotiations that ensued between the two countries. The dynamic process introduced by the German government in 1969 was intended to peacefully affect the structure of East-West relations as implied in the doctrine’s title: Wandel durch Annäherung (peaceful change through rapprochement). West German foreign policy toward Poland (and Eastern Europe in general) was to shift from diplomatic isolation to diplomatic resolution. Well-known as the concept of Ostpolitik, the ‹nal goal of this policy remained reuni‹cation, but the intermediate-term goal, and thus the pragmatic day-to-day objective, became modus vivendi with the East. The structural context of West German foreign policy in 1969 could be de‹ned as a double dependency. Germany was dependent on the United States as its major protector, in terms of its nuclear umbrella and the extended nuclear deterrence it provided. In a different sense Bonn was also dependent on the Soviet Union. As the hegemonic power in Eastern Europe, no movement in resolving Germany’s division or reducing tensions could take place without Moscow’s consent. These dual constraints limited Bonn’s autonomy in resolving its outstanding problems. Regarding West Berlin, for example, Bonn was still subject to the provisions of the Four Powers statutes. It was therefore compelled to rely on the three Western powers to represent West German interests in the face of the Soviets.3 As a consequence, West Berlin was in a precarious situation, acutely vulnerable to political pressure from the East. Bonn had no legal rights to carry out negotiations to improve the living situation of those West Germans living in West Berlin. Furthermore, Bonn had no diplomatic ties with any of the nations of Eastern Europe (except the Soviet Union). It had no means of carrying out diplomatic initiatives with those very nations that were allegedly threatening its existence or with whom Bonn had (at the least) unresolved issues. Only through extremely delicate legal maneuvering was Bonn been able to negotiate trade agreements with Eastern Europe in the 1960s. Even then, German of‹cials could not insist that West Berlin be formally included in such arrangements. Finally, in the broader global arena, neither German state was a member of the United Nations, so even Bonn’s legal capacity to act independently as a sovereign nation in world affairs was severely restrained. West Germany was in this sense dually dependent because it was

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imperative for Bonn to have good relations with both superpowers in order to avoid pressure or threats or even certain vetoes from either side should the FRG pursue a policy unfavorable to either dominant power.4 Consequently, successive West German governments were conscious of the fact that Bonn could not afford any confrontational solo efforts. This phenomenon has been characterized as a type of internalized constraint or self-containment (e.g., Schweigler 1984; Haftendorn 1978). In the ‹rst twenty years of the Federal Republic, German of‹cials tried two different strategies to pursue the same goal—uni‹cation of the divided nation. In the ‹rst phase of Deutschlandpolitik, from 1949 until the early 1960s, Bonn followed a policy of isolating the East German regime. As part of the ‹ve principles of unity,5 consensus among all the political parties in Bonn dictated that no of‹cial communication should take place with East Berlin. Chancellor Adenauer of‹cially declared that since the regime in East Germany was not a product of the free will of the people, the Federal Republic of Germany was therefore the sole legitimate state organization of the German people. Consequently, the political institutions of the GDR could not be recognized as legitimate. To force international acceptance of this legal interpretation, the West German government declared that it would treat the establishment of diplomatic relations with East Germany by any third-party country to be an “unfriendly act” against West Germany. Since the GDR did not “exist” in the eyes of Bonn, third-party nations could not maintain relations with both states. Known as the Hallstein Doctrine, this policy under chancellors Adenauer and Erhard meant the nonrecognition of Poland (and, indeed, the entire Eastern Bloc, except the Soviet Union).6 The second phase of Deutschlandpolitik commenced in the mid- to late 1960s when the strategy changed to a cautious policy of constructive engagement in Eastern Europe. However, while the strategy changed, the end goal did not. That is, Bonn did not engage Eastern Europe for its own sake, but instead hoped to “isolate the GDR in its own camp” (Joffe 1987, 134). Under this policy, which became known as the “policy of small steps,” the ‹rst initial overtures to Eastern Europe were made in an effort to gain their trust. Even so, this was not to be a reconciliation for reconciliation’s sake, but instead was an attempt to drive a wedge between the capitals of Eastern Europe and East Berlin. It was hoped that East European support for East Berlin would diminish once their leaders perceived the bene‹ts to be gained in the West. For example, it was during the early 1960s that trade missions were established in some of the major capitals of Eastern Europe. A trade mission with Warsaw was established in 1963. Even though its duties were limited to economic issues, this mission constituted a middle ground

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between formal diplomatic recognition and total diplomatic isolation. By doing this, Bonn managed to circumvent the dictates of the Hallstein Doctrine without of‹cially and legally repudiating the policy. Historically, instituting this trade mission was a ‹rst, de facto attempt to face up to the realities of a divided Europe.7 By the time of Brandt’s accession to power in 1969 this combination of external and internalized constraints on Germany’s foreign policy translated into two speci‹c objectives for decision makers in Bonn: (1) ensure that its “national interests”8 were taken into account not only by the United States but also by the Soviet Union and (2) decrease Bonn’s dependency by increasing its autonomy (Handlungsspielraum) as much as possible. Taken together, this meant eliminating as many of the remaining constraints as possible (e.g., resolving outstanding problems with Poland). To this end, after 1969 West German of‹cials pursued these objectives by means of a dual strategy of alliance politics and con›ict reduction. Its alliance policy, of course, consisted of NATO membership and concomitant military preparedness to prove its loyalty to the alliance. At the same time, West German of‹cials took up the banner of political détente, the second component of NATO’s security strategy as propagated in the 1967 Harmel Report.9 Germany’s own policy of détente consisted roughly of improving relations with the Soviet Union and the nations of Eastern Europe by reducing con›ict contractually through diplomatic agreements and treaties. Indeed, by the late 1960s alliance loyalty demanded that Bonn demonstrate its willingness to relax tensions with the East. Ever since the Kennedy administration, the United States had been putting pressure on Bonn to show some ›exibility in its isolationist policy toward Eastern Europe.10 The role of Poland in this process was crucial. Much hinged on Bonn resolving its bilateral differences with Warsaw. Three outstanding issues in particular had to be handled if Bonn was to carry out its goal of reconciliation with Poland (and East Europe in general): (1) the status of the German territory acceded to Poland as a result of the 1945 Potsdam agreement; (2) the situation of the ethnic German minority in Poland; and (3) restitution and compensation for the suffering and damage in›icted upon Poland during the Nazi occupation. The Oder-Neiße as the delimitation line had been established as Poland’s western border as part of the 1945 Potsdam agreements.11 At the maximum, Bonn’s of‹cial policy was to press for a revision of this border. Its more minimalist, yet realistic, policy was to emphasize the border’s provisional character until a peace treaty (and thus an ultimate border solution) could be signed. Therefore, the legal position of the Federal Republic was to claim the areas east of the Oder and Neiße rivers as Ger-

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man territory. Warsaw, of course, wanted to end the specter of being a “nation on wheels.”12 To this extent, it wanted formal recognition of the current territorial status quo as well as the Oder-Neiße border for now and in the future by the government in Bonn. The shift in the border of Poland and Germany after World War II created the awkward issue of an ethnic German minority trapped within Polish territory. According to German Red Cross estimates, the number of ethnic Germans wishing to emigrate in the early 1970s was at least 300,000 (Brandt 1976). Bonn’s legal standpoint on this issue was that these Germans should be allowed to emigrate to the FRG (or even the GDR, if they so desired). At the very least, Bonn expected these ethnic Germans to be granted certain minority rights (special schools, language training, cultural autonomy, etc.). The Polish position was that these were Polish citizens and therefore Warsaw had the right to deny them permission to emigrate. This was a sensitive issue; as Warsaw pointed out, such a massive evacuation of people would mean a devastating loss of labor reserves for the Polish economy.13 The issue of establishing diplomatic relations between the two nations was even more problematic. Each side had a different conception as to what sequence the normalization process should follow. The Poles considered normalization of relations to be a prerequisite for the establishment of diplomatic relations. Hence, Warsaw expected all outstanding issues to be solved beforehand. Bonn, on the other hand, regarded establishing relations to be the ‹rst step in the normalization process, after which any unresolved issues could be settled. Last was the very complex matter of compensation and restitution for the crimes and devastation of Poland committed by the Third Reich. While Warsaw had formally relinquished reparation demands in its 1953 treaty with East Germany, it was still pressing for restitution for certain crimes against humanity. Ever since the creation of West Germany in 1949, its policy toward Poland had been ‹rmly entrenched within its primary foreign policy goal: German uni‹cation. For many scholars of Germany, preoccupation with the unity of the German nation dictated Bonn’s policy toward Eastern Europe. To put it more starkly, [in West Germany’s relations with Eastern Europe] there was never, nor is there now, such a thing as a neatly compartmentalized policy toward Eastern Europe as a political-geographical entity separate from the GDR and the Soviet Union. . . . The driving force was and remains Deutschlandpolitik as demonstrated by each phase of Osteuropapolitik so far. (Joffe 1987, 133)

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Indeed, the preamble of the FRG’s Grundgesetz (its “temporary” constitution) commanded uni‹cation as the foreign policy priority of the Federal Republic: Das gesamte Deutsche Volk bleibt aufgefordert, in freier Selbstbestimmung die Einheit und Freiheit Deutschlands zu vollenden. [The entire German people are called upon to achieve in free self-determination the unity and freedom of Germany.] Hence, policymakers in Bonn were constitutionally compelled to promote the “unity” of the whole German nation, including the territory awarded to Poland in 1945 by the Allied Powers.14 The pursuit of this goal found its corresponding expression in the Deutschlandpolitik (German-German policy) of the federal government. Poland was therefore signi‹cant not only in terms of bilateral German-Polish issues but also because of its role as a key player in Bonn’s more ambitious Ostpolitik. The remainder of this chapter illustrates the process through which these goals were achieved, focusing on the means that were employed—economic incentives extended to Polish of‹cials by German of‹cials but provided by the private economic sector. 1970 Treaty on Trade and Economic Cooperation “As long as the world exists, the German will never be the brother of the Pole.” This old Polish saying is indicative of the major obstacle the newly elected chancellor Willy Brandt faced in 1969—how to gain the trust of the Poles, how to normalize what had never been normal. In the end, an important tool of economic persuasion was employed to undergird this process—the promise of economic rewards via increased trade and technology transfer. The Treaty on Trade and Economic Cooperation15 concluded in October 1970 became the linchpin for initiating de-escalation between Germany and Poland. The important role that increased economic exchange was to play in improving political relations was indicated by the fact that the ‹rst member of a Polish communist government to visit West Germany was the minister for foreign trade in early January 1970. Six months later, the ‹rst member of a West German government to visit communist Poland was none other than the minister of economics. It was the Poles themselves who indicated they could be “economically persuaded” to make certain political concessions. During the negotiations that led to the December 1970 treaty on political normalization, Polish of‹cials attempted to draw a material link between the unresolved political issues and the “normalization” of ‹nancial-economic relations. In other words, Warsaw expected explicit economic bene‹ts as a conse-

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quence of political cooperation with Bonn. When Polish of‹cials surreptitiously expressed this perspective, the initial German response was that increased economic exchange could only take place on a commercial basis, that is, it was a matter for the private economic sector and not the German government. Furthermore, the German government, of‹cials claimed, was not willing to make any unilateral economic concessions.16 Yet as political negotiations bogged down over the issue of recognizing Poland’s western border, governmental of‹cials in Germany worked hard to successfully negotiate a trade treaty. In other words, while the German government would not directly exchange public economic concessions for political concessions, they were prepared to take action to facilitate commercial exchange. Here the principal idea was to enable German ‹rms to increase their trade and commercial intercourse with Poland. To initiate this process, an of‹cial from the German Foreign Of‹ce and one from the German Ministry of Economics met with Polish experts in the Foreign Trade Ministry. These two of‹cials, in turn, stayed in close contact with of‹cials from the private organization, the Ost-Ausschuß (the Eastern Committee of the Federation of German Industry). The OstAusschuß was regularly briefed by the Foreign Ministry and, more importantly, was asked to ‹nd ways of fostering closer economic relations as a means to support closer political relations.17 Here, then, we see our ‹rst example of managed foreign economic policy working to ‹nd reward power. To achieve this the two countries would need to normalize economic relations. Negotiations began in January 1970, a few scarce months after Willy Brandt’s election as chancellor and the subsequent start of his policy of tension reduction. Even though Bonn had always carefully repeated that bilateral economic issues could be not coupled with the complex political issues at hand, for Warsaw the opposite attitude prevailed: progress on the trade negotiations functioned as a barometer measuring the political goodwill of the government in Bonn.18 There were several issues of contention that delayed the ‹nal settlement of the trade treaty. The Poles wanted low-interest credits and the full liberalization of trade between the two countries, including that all remaining quotas restricting imports from Poland be dropped. What, in fact, Poland was ultimately demanding was that it be granted mostfavored-nation status in accordance with GATT regulations.19 Yet it was clear that these economic demands were also of a political nature; in particular they involved political prestige since over 80 percent of current Polish exports to Germany were already freed from quotas. Since Polish of‹cials had already won promises from Italy and France to fully liberalize trade they could bring political pressure to bear on this issue. For

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example, when German of‹cials tried to skirt the issue by claiming that only the European Community had jurisdiction over questions of trade quotas, the Poles could point to France’s and Italy’s behavior as being more conciliatory.20 Warsaw had numerous reasons for expecting subsidized credits from Bonn. First of all, the Polish government, in need of foreign currencies to purchase the goods and technology it required to modernize its industry, wanted interest rate subsidies since commercial interest rates in Germany were fairly high at that time. In addition, Warsaw’s hopes were fueled by the more important fact that Bonn had just signed a large-scale gas pipeline deal with the Soviet Union that was based on low interest rates for the Soviets. Naturally, Warsaw was hoping for the same conditions. German of‹cials, however, refused to budge on this point. They advised the Poles that the Soviet deal was sui generis as well as very narrowly de‹ned. As such, it could not be characterized as a general economic agreement, which was what the Poles were demanding. Moreover, Bonn was careful to argue, the deal was actually signed by a Soviet agency and a private banking consortium in Germany and thus was not due to direct intervention on the part of the German government. Termed a “very progressive agreement” in scope by of‹cials in Bonn, the treaty in its ‹nal form was not limited in scope to merely covering the exchange of goods. It also laid the blueprint for future economic cooperation between the two nations. As part of the main tenets of the treaty, both sides agreed to facilitate expansion in commercial trade, in particular by lowering wherever possible any remaining barriers to trade. Both sides also agreed to handle commerce and trade between their countries according to the principles of GATT. This step was important, for it created a formal foundation for the growth in trade relations. In addition, both sides promised to support the granting of credits whenever possible in order to enhance economic cooperation. Above all, both sides pledged to increase and intensify economic and technical cooperation between ‹rms, economic organizations, and institutions in all economic sectors. The role of business was crucial in the success of this attempt at economic persuasion. Indeed, the German business community was more than satis‹ed with the treaty, which went beyond the prevailing system of periodic “trade agreements” with Poland that had been limited to setting quotas for permissible imports to Germany. The new treaty pragmatically lifted most of the barriers to exports to Poland. Moreover, it provided the desired stability for German exporters since the treaty was coordinated with Poland’s ‹ve-year economic plan. Above all, it provided protection for domestic producers within Germany since all Polish imports were to be subject to the “price clause,” designed to prevent dumping on the part of

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Fig. 7. German exports to Central Europe. (Data from Deutsches Institut für Wirtschaft, Wochenbericht 14, no. 42 (1976): 133.)

Polish ‹rms. In essence the Treaty opened the way for export expansion to Poland, while restricting import expansion.21 In comparison with Czechoslovakia, for example, what followed was an export boom for German business as shown in ‹gure 7. It would appear, then, that German business did not need any particular inducements from the German government to “perform” other than the lowering of transaction costs. Other anecdotal evidence suggests that the German business community heartily supported the outcome of negotiations between the German and Polish governments. A letter from the chairman of the Zentralverband der elektrotechnischen Industrie (ZVEI) (Central Association of the Electronics Industry), Dr. Böttcher, to the executive director of the OstAusschuß, Kirchner, on January 22, 1971, is indicative of this support and its disapproval of attempts by the opposition to politicize trade. Writing within the context of the treaty, the business executive denounced recent political action by the conservative opposition in the Bundestag (the CDU/CSU parliamentary faction had been openly criticizing the treaty for its failure to establish a German-Polish “Chamber of Commerce”). In the letter Böttcher reiterated his belief (and that of his association) that given the political and economic constellation of Poland (i.e., a centrally planned economy) such a chamber would not be able to function properly and was thus not desired by the German business community. Hence, Böttcher suggested that Ost-Ausschuß of‹cials give the CDU/CSU faction some “helpful tutoring” in order to prevent the issue from becoming too politically damaging and resonating negatively in German-Polish political relations.

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In a telephone conversation Kirchner assured Böttcher that he had indeed spoken with governmental of‹cials from the Foreign Ministry regarding the matter and assured them of the German business position. Böttcher insisted, however, that the CDU/CSU leadership be speci‹cally instructed on the issue. Kirchner later noti‹ed Böttcher that consultations between OA of‹cials and CDU/CSU representatives had taken place and that as the result the opposition politicians agreed to drop the issue.22 Here we have an interesting example of the importance of centralized business interests to the successful conclusion of political negotiations. Because the OA had a high degree of representativeness for German business and spoke with one voice, its of‹cials were able to persuade political of‹cials to drop destabilizing political tactics. In the end, Warsaw did win several, albeit ambiguous, concessions from Bonn. Instead of cheap credit, the treaty referred vaguely to possible future economic cooperation. Instead of a full liberalization of trade quotas, the Germans agreed to “de-bureaucratize” trade while promising full consideration of liberalization sometime in the future. De-bureaucratization, designed to placate the Poles in their demands for the removal of the remaining import quotas, entailed simplifying the bureaucratic procedures necessary for importing restricted goods from Poland. But Bonn was also able to achieve several foreign policy goals with the aid of this economic treaty. The more manifest goal of getting West Berlin included in internationally recognized treaties between the Federal Republic and a nation of the East Bloc was in itself part of of‹cial government policy. That is, Bonn was determined to maintain a linkage between normalization of relations with the East and improvement of West Berlin’s political status. In this instance, Bonn wanted formal recognition of its right to sign treaties that would also be valid for West Berlin (which was still not of‹cially accepted by East European governments as a part of Bonn’s legal jurisdiction).23 More important, this treaty was to serve as a linchpin or icebreaker for the whole normalization process. One sign of the political importance that Bonn attached to this treaty is the fact that Schiller, as economics minister, was the ‹rst cabinet-level West German of‹cial to visit postwar Poland. Furthermore, while in Poland, Schiller met with deputy premier Stanislaw Majweski and foreign minister Jedrychowski for talks that covered not just economics issues, but political questions as well. In the meantime, private consultations continued between representatives of the Ost-Ausschuß and Polish representatives with the support of the German government. On September 14, 1971, German business executives from the Ost-Ausschuß met with members of the newly established “West German Section” of the Polish Foreign Chamber of Commerce in Warsaw. Possibilities for increased collaboration between the two organi-

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zations were discussed intensely. The German side emphasized that it wanted to focus on pragmatic, business-related issues and problems. The Polish of‹cials, on the other hand, persisted in stressing more political issues. German business representatives continued to insist that any newly constituted organization bringing together German ‹rms interested in Poland (the future Poland Committee discussed in chapter 3) would not be able to function well as an intermediary for Polish demands on the German government. “It is not the task of the Poland Committee to handle issues of a political-economic nature” was the statement of the OA executive director.24 Yet it was precisely the insistent and continuing demands of Polish economic of‹cials that compelled German business representatives to appeal to the German government to rectify the situation. Clearly the 1970 Treaty on Long-Term Economic and Scientific Cooperation was not suf‹cient to overcome all the barriers to increased trade and cooperation between the two countries. Indeed, in the end, another long-term treaty would be required to resolve those issues. However, a ‹nal assessment of the linkage between economics and politics reveals that the magnitude of goodwill that the treaty brought cannot be overstated. It was to serve as a symbol of Bonn’s desire to improve relations after twenty-‹ve years of abnormalities in relations. By all accounts, resolving the “mortgage of unsettled economic issues” cleared the way for political negotiations to begin, as they did indeed start in July 1970 to negotiate the Warsaw Treaty, which eventually established formal diplomatic relations between the two countries. A historical compromise was reached in the form of the “Treaty on the Foundations for the Normalization of Relations,” signed December 7, 1970, in Warsaw. Part of a larger diplomatic package, it included an exchange of notes between the FRG and the Western Powers and numerous unilateral declarations by the government in Bonn. The treaty itself contained ‹ve major provisions which affected Polish-German relations.25 First was the preamble itself, indicating how low Polish-German relations had sunk and how much of an uphill climb it would be to normalize relations, by referring to the historical burden the two countries were grappling with. It expressly names Poland as the ‹rst “victim” of World War II. However, to the disappointment of Warsaw, Germany is not mentioned as the aggressor. Moreover, the preamble refers to the sufferings of all the peoples of Europe, thereby de facto implying the Germans were also victims. Paragraph V of the preamble de‹nes the scope of the border issue by declaring that the inviolability of borders as well as respect for territorial integrity and sovereignty of all states in Europe in their present borders are fundamental conditions for peace. Warsaw interpreted this passage as

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recognition of its sovereignty over the territory east of the Oder-Neiße. However, in fact, it was not legally an internationally binding recognition. Zündorf interprets this deliberate ambiguity as indicative of Bonn’s limited political will as well as the long-term direction its policies were to take. Article I treats the border dispute in an ambiguous fashion by proclaiming the following: on the basis of mutual (German-Polish) decision the existing border drawn up at the 1945 Potsdam Conference (the OderNeiße line) constitutes the western state border of Poland. Two legal loopholes are discernible here: First, the language used to establish the border implies merely a con‹rmation of the objective status quo and not a legal recognition of internationally binding decisions. Second, using the term state border, designed to be relative, suggests that future revisions would not be excluded. The next paragraph, containing the clause on future territorial claims, is equally revisionist. In it the two signing parties renounce any current and future territorial claims toward one another. However, the connotation here is that this renunciation is not binding for any possible successor states (such as an all-German state). An all-German government would be free to raise new territorial claims against Poland. Article II contains a mutual renunciation-of-force clause that states that neither party will use force to resolve con›icts. This, of course, was an important reassurance the Poles were seeking, which Bonn was only too happy to oblige (in fact, the Moscow Treaty also contained such a renunciation-of-force clause). However, at the same time, the implicit assumption is that there are outstanding issues and that Bonn therefore reserves the right to resolve them, if peacefully. Future political and economic cooperation between the two states is the content of Article III. Here it is apparent that Bonn had to compromise on its desire to immediately establish diplomatic relations with Warsaw on the sole basis of this treaty. Instead, it was only agreed that this treaty forms the basis of future developments, during which the full normalization will occur. Furthermore, in the next paragraph economic cooperation and cooperation on “other issues” are ambiguously combined. The “other issues” refer to the ethnic German minority con›ict, as well as Bonn’s goal to facilitate the exit rights of these Germans. The implication is that Bonn will yield on the economic issues if Warsaw moves on the other issues. Probably the most overtly revisionist measure the Federal Republic implemented in the course of its East Treaties was the note exchange between Bonn and the Three Western Allies. Bonn used unilateral, declaratory notes (sent to Washington, D.C., Paris, and London) as a means of openly expressing those positions it could not formulate in the Warsaw Treaty (such a note exchange also took place after Bonn signed a

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treaty with Moscow renunciating the use of force). In the case of the Warsaw Treaty, the note was ostensibly to reaf‹rm the Allies’ rights vis-à-vis all-German affairs. However, it ultimately weakened the German recognition of Poland’s western border by relativizing its permanence. The note stressed that the recognition of the Oder-Neiße was not necessarily binding for a united Germany. One could see that the signing of the Warsaw Treaty was only the tip of the iceberg in the normalization process. In particular, it only managed to expose what the future issues and potential con›icts were to be. The next, crucial step in the reconciliation procedure was the two-year period leading to the treaty’s rati‹cation by the Bundestag in 1972, not at all a sure thing.26 Since it was the Germans who had to ratify the treaty, the Polish government was thereby relieved of having to take any active steps. During the long, drawn-out, and heated rati‹cation process by the Bundestag, Poland exercised great constraint, but the ‹nal rati‹cation was a disappointing and sobering ordeal for Warsaw (Bingen 1981). Formal parliamentary approval came May 17, 1972 (the Bundesrat, or upper house, approved it two days later, on May 19), but the treaty was devalued in Warsaw’s eyes on two accounts. First, there was the simultaneous approval of a speci‹c Bundestag resolution that declared that the treaty was not binding should a future German state be created. Since the treaty was not the equivalent of a peace treaty its provisions were not considered permanent. Second, the lack of an absolute majority was discouraging. The vote in the Bundestag was 248 ayes, 17 nays, and 231 abstentions. Clearly there was still a substantial amount of unwillingness to truly reconcile with the Poles. Probably the most eloquent assessment of this public opinion disaster was Golo Mann’s. The loftiness, the moral ef‹caciousness which must be particular to the Treaties was brought down to earth. They have no color anymore and almost no substance. . . . So easily are the gains talked aside until remained but a descriptive piece of paper, but quarrels and ashes.27 Despite the domestic parliamentary opposition to the Warsaw Treaty, ostensibly because it “gave away” German territory, its immediate effect was positive for German foreign policy. By overcoming its diplomatic impasse with Eastern Europe, Bonn was ultimately able to expand its room to maneuver on the international front. Bonn’s diplomatic and political emancipation took another giant step forward when the FRG became a full-›edged member of the United Nations in 1973. Yet, ironically, in the period from 1972 through 1976 after the rati‹cation of the Warsaw Treaty in 1972, which was intended to provide

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the Grundlage (foundation) for normalization, just such a normalization foundered. The Warsaw Treaty and Brandt’s dramatic gesture of falling to his knees before the memorial to the victims of the Ghetto Uprising in Warsaw during his visit in December 1970 had done much to persuade the Poles of Bonn’s sincerity in wanting to reconcile the two nations, yet they were not yet fully convinced. Thus began the next phase of German-Polish reconciliation—constructing a foundation of normalization—which persisted from 1972 to 1976 (culminating in PUWP party chief Gierek’s visit to Germany in 1976). Indeed, that four-year period has been characterized by one leading scholar as a “boxing match” for mutual recognition of moral, legal, and ‹nancial demands (Bingen 1981). Topical con›icts, in particular over the issues of ethnic Germans living in Poland and Polish demands for reparations for damages suffered during the occupation by the Nazi regime, remained major stumbling blocks. Economic cooperation beyond the form of normal trade relations was only moving forward slowly. However, more important, both nations still had differing goals—the FRG wanted to keep the German question open and Poland wanted the post–World War II status quo maintained (Bingen 1988). The major obstacles here were the differing conceptions of the form of future relations. Normalization was not the goal itself, but rather it was merely a means to reach differing goals. Adding to the credibility problem was a 1973 Bundesverfassungsgericht (Federal Constitutional Court) decision that interpreted the Warsaw Treaty within the meaning of “continuation of the German Reich within the borders of 1937.” As a result, the new task before Bonn was to reinvigorate the normalization process after this legalistic setback seemingly harmed relations anew. 1974 Long Term Agreement on Economic, Industrial and Technical Cooperation Once again it could be argued that commercial economic relations would serve the German government as a prop for strained political relations. The Long Term Agreement on Economic, Industrial and Technical Cooperation concluded in 1974 was designed to address the growing trade imbalance between Poland and Germany since by then Poland was undeniably suffering from a crippling trade de‹cit, as ‹gure 8 illustrates. Inside of two years, the Polish trade de‹cit with Germany grew to DM 1.9 billion, larger than the cumulative de‹cits of East Germany (DM 1.8 billion) or Romania (DM 1.6 billion), de‹cits that had slowly built up over the years.28 At the same time the treaty served a political purpose in that it sought

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Fig. 8. Polish trade with West Germany. (Data from Ministry of Economics, Bonn, May 24, 1976 [Cologne, OA Archives, photocopy].)

commercial answers to Poland’s political demands for of‹cial state credits. The treaty as such had one primary economic objective: to boost Polish imports to Germany in order to bolster Polish access to foreign reserves instead of relying on German governmental support. The means were twofold: (1) liberalize more of the restrictive import quotas; (2) improve the quality of Polish exports through cooperative industrial projects between German commercial businesses and Polish ‹rms. One of the most basic instruments of economic incentives that a state has at its disposal is the liberalization of imports. A Cabinet resolution passed in 1973 had already expanded the liberalization of imports from the East so that fully 91.5 percent of the listed goods were no longer subject to quotas. The upper limits for the remaining quotas were also increased. Beyond serving as a concession to the demands from the BGA (Bundesverband der Groß- und Außenhandel, the Federal Association of Wholesalers and Exporters, one of the umbrella trade associations represented by the OA) for import liberalization, the move also signaled German sincerity with respect to improving economic ties with Poland. Yet that action was not enough to rectify the worsening situation. Although import liberalization was opposed by the more economically vulnerable consumer goods industry, by 1974 German of‹cials calculated the gains for German exporters to be greater than the losses for domestic industry.29 At the same time import liberalization enabled Bonn to pursue its domestic stabilization policy of checking in›ation. It was hoped that cheap imports from the East would have the effect of dampening prices. As a result in 1974 new import regulations were introduced, freeing fully 94 percent of listed goods from quota restrictions.

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Nonetheless, German of‹cials felt that since a large percentage of West German imports from Poland were already fully liberalized, that is, they were not subject to import quotas, they reasoned that the limited amount of Polish exports to Germany must be due not to restrictions, but rather to the lack of Polish goods competitive on the German market. Thus, Bonn saw “industrial cooperation” on the level of individual commercial ‹rms as the most ef‹cient option to drastically increase Polish exports to Germany since the products would then be guaranteed purchase by German ‹rms or would be more competitive on German markets since they would be of a better quality. The Economics Ministry therefore commissioned a study of the problem of cooperative ventures. In 1974 the Hamburg Weltwirtschaftsarchiv-Institut (Hamburg World Economics Archive-Institute, known as the HWWA) carried out a study on the experience of German ‹rms in cooperative ventures with Eastern Europe.30 The purpose of this inquiry was not only to determine the extent of East-West cooperation, but more important, the task was to point out problem areas so that their published ‹ndings could become a kind of checklist for German ‹rms hoping to conclude cooperative deals with East European countries. By this time German exporters, too, were hoping that such industrial cooperation would lead to increased Polish exports to Germany. It was of concern to the business community that Poland would not be in a position to increase its imports of German goods unless it earned the foreign reserves to pay for them. Indeed, although German exports to Poland had increased at an accelerating pace, up 89 percent from the previous year, by 1974 exports were only up by 37.2 percent.31 The Poles were equally interested in such large-scale projects. By setting up “cooperative projects” the Poles were hoping to eliminate several problems at once. Such projects would essentially guarantee a buyer in Germany. Warsaw preferred such cooperative projects because they involved the principle of self-‹nancing. Imported German know-how and plants could be paid for by exporting the resulting products to the partner ‹rm in Germany. Thus, the need for marketing in competitive Western markets would not be a problem because the products were assured a buyer in Germany. Such guaranteed production and sales would then take some pressure off the Polish economy, with its relatively in›exible, planned structures. By working with German ‹rms, the Poles also expected fewer dif‹culties for its skilled workers as was the case in cooperative projects with France32 or the United States. It was assumed that the traditional structures and former ties of Poland’s western areas with Germany in the pre–World War II era would facilitate cooperation. It was in this area of industrial cooperation that the 1974 treaty was

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hailed as a pacesetter in improving economic relations. The contents of the treaty were designed to lower transaction costs of cooperative ventures between Polish ‹rms and the German commercial sector. Ideally, the cooperation would take the shape of German ‹rms trading German technology and know-how for Polish goods. On the basis of the treaty the standing institution known as Gemischte Kommission (Mixed Economic Commission) or GK was created.33 Designed to foster cooperation and trade by providing a forum for communication, the GK was to play a leading role in facilitating trade contracts. More importantly, it provided a means of “institutional memory” in light of the ever-changing negotiation partners in Poland. According to the former chairman of the PolenKreis, Helmut Wiehn, one of the more important roles of the GK was to act as an intermediate organization between Polish of‹cials and German business representatives. Not only did the GK establish contacts on the economic level, but it also was effective on a more personal level, which in turn facilitated trust on both sides. This was particularly signi‹cant in light of Germany’s need to overcome the Poles’ historical distrust of Germans.34 Article Eleven of the treaty outlines the conditions for such cooperation.35 (1) In order to achieve the goals designated in this Treaty, the Treaty partners will appoint a permanent Mixed Economic Commission, to be composed of representatives from both governments. Representatives from the economic sectors may participate in the tasks of the Mixed Economic Commission. (2) The tasks of the Mixed Economic Commission are the deliberation of all problems connected to the implementation of this Treaty, the investigation of all opportunities for expanding and facilitating trade exchange as well as economic and scienti‹ctechnical cooperation; it shall provide both governments with assessments and recommendations. The duties of the Mixed Economic Commission include in particular: a. the yearly analysis of trends in trade exchange and the conclusion of trade protocols for each following year for the duration of the Treaty; b. the review of development of cooperation and collaboration in third markets as well as the elaboration of recommendations for initiatives and agreements in this area. (3) The Mixed Economic Commission may create sub-committees as well as working groups with representatives from the individ-

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ual economic sectors, especially in order to coordinate concrete cooperative projects. (4) Procedures for the Mixed Economic Commission and its suborganizations are fully elaborated in the Charter attached as an appendix to this Treaty. (5) The Mixed Economic Commission reserves the right to make amendments to the Charter. The creation of the Mixed Economic Commission also expanded the international maneuverability of the German government in matters of international trade. Sovereignty for negotiating external trade agreements with individual COMECON nations was to pass from the national capitals of the EC member countries to EC of‹cials in Brussels on January 1, 1975, but Germany did retain national autonomy to conclude bilateral “cooperation agreements” via the newly created Mixed Economic Commission. This treaty served as a clear sign that Polish goodwill could not be bought so cheaply—much less complex political concessions. Negotiations took over two years (whereas the 1970 trade treaty required a scant ten months) and were hampered by controversies over Warsaw’s demand for the Entschädigung (compensation) and Wiedergutmachung (restitution) for former Polish concentration camp prisoners in the Third Reich. In return German of‹cials countered with calls for a solution of the ethnic German problem in Poland. Bonn demanded a policy of Familienzusammenführung (uniting ethnic German families who had been separated as a result of the border shifts after World War II). In one scholar’s opinion (Cziomer 1988), it was these political controversies that were essentially responsible for the two-year delay in concluding the economic treaty. Although the trade treaty was successfully concluded in the end, fundamental political controversies remained regarding Polish demands for compensation and West German expectations vis-à-vis resettlement of ethnic Germans from Silesia and East Prussia. The positions had hardened on this linkage issue, and it appeared there was little chance for a softening any time soon.36 The fundamental question remained whether or not the German government itself would be forthcoming enough toward Warsaw’s economic wishes, thereby easing strains in their political relations. In this area there had been total stagnation. Warsaw did indeed have a wide palette of “economic wishes.” At the ‹rst annual meeting of the GK on March 16–18, 1975, the Poles communicated their disappointment to economics minister Fridrichs that the “in›uence” of the German government had had so little effect in promoting mutual German-Polish economic and industrial projects. In particular

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the Poles were pushing for Bonn to subsidize interest rates on the market loans the Poles were taking out. Moreover, they were upset that nothing had come of the idea of delivering electricity to West Berlin and West Germany from the large power plant located in Stettin, Poland.37 As a result of these Polish dissatisfactions with economic developments, the Polish prime minister himself was especially critical in political remarks he made the day before Fridrichs’s visit. While Warsaw was interested in détente and the full normalization of relations with Germany, the Polish prime minister claimed, “We are of the opinion that the present position of the Federal Republic does not create the proper foundation and atmosphere for such a normalization.”38 This type of complaint had been a frequent refrain by Polish of‹cials, one that the German government was growing weary of. Government of‹cials turned to the German business community to ‹nd a means of rebutting this claim. For example, of‹cials at the Ost-Ausschuß were asked to supply of‹cials in Bonn with the names of actual concrete commercial projects which had failed due to Polish uncooperative behavior.39 At the same time, it became standard practice for executives in the Ost-Ausschuß to regularly brief of‹cials in the Ministry of Economics and the Foreign Of‹ce of the latest developments in German-Polish commercial relations. For example, before each meeting of the Poland Committee’s executive board with its Polish counterpart, a memo would be sent, outlining the Poland Committee’s suggestions for the coming year’s agenda, including concrete recommendations for improving commercial relations.40 It was hoped that these recommendations could also become part of the agenda of the Mixed Economic Commission, an agenda that had to be set by governmental of‹cials. This type of mutual support and collaboration between private and public of‹cials (both in the Foreign Of‹ce and the Ministry of Economics) would become an important part of German-Polish economic relations. In this chapter I argue that the German government was able to complete the ‹rst important step in the reconciliation process by holding out the promise of economic gains for political cooperation. The economic gains were to be in the form of increased exchange, in particular imports from Germany of the capital goods needed for economic modernization of the Polish economy. These economic incentives were not dif‹cult to supply, nor did they require many material resources of the German government since this type of economic exchange took place on a commercial basis. The German business community responded enthusiastically and did not expect much governmental assistance beyond lowering the transaction costs to “normalize” trade. This was facilitated by the close coordination between German business and government as well as the coordi-

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nated response of German interests toward Polish of‹cials—the Poland Committee and the Mixed Economic Commission. The real dif‹culties arose when the German government still expected political concessions from the Polish government (e.g., family uni‹cations) and commercial solutions were no longer feasible, that is, Poland’s trade de‹cit could not be corrected with market adjustments. Thus, the second stage of reconciliation, that is the stabilization of political relations, would require greater ‹nancial effort on the part of the German government. These efforts are discussed in chapter 5.

CHAPTER 5

From Stabilization to Damage Limitation

In a 1990 interview former German chancellor Helmut Schmidt indicated that in the 1970s and early 1980s a primary aspiration of his government was to maintain détente and, in particular, to maintain good relations between Bonn and Warsaw. This the Germans succeeded in doing, he claimed, despite the fact that in the early 1980s after the invasion of Afghanistan by the Soviets the general atmosphere between the West in general (and Washington in particular) and the East deteriorated to a great degree. Bonn tried with some success, he declared, to keep the German-Polish relations apart from this general deterioration.1 In this chapter I suggest that more tangible economic incentives in the form of state credits and guarantees were successfully used as a means of ‹rst consolidating, then stabilizing, improved German-Polish relations. At the very height of the Polish crisis in the early 1980s the Schmidt government continued to offer economic incentives in an attempt to limit political damage to the German-Polish détente process, even as the economic dynamic between the two nations stagnated. In October 1974 Helmut Schmidt assumed the chancellorship in Bonn, bringing with him not only changes in the style of governing, but also in the emphasis of Bonn’s policies. Schmidt was a man who connected Germany’s territorial security with the extension of Germany’s economic potential. The political and economic signi‹cance of the turbulence associated with oil shocks and the Arab-Israeli con›ict was not lost on Schmidt. As one keen observer of politics in Bonn shrewdly states, it is a case of good luck that ever since the beginning of the downward economic decline a politician like Helmut Schmidt took over the leadership, one who not only had made a name for himself as a foreign policy expert as well as an international economics specialist, but above all one who had already carried political responsibility in both areas in his capacity as Economics and Finance Minister as well as Defense Minister. (Haftendorn 1985, 166) The combination of West Germany’s good luck in having a perceptive statesman like Schmidt and its newly increased autonomy opened new 87

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avenues for independent foreign policy making. Bonn was able to press its own interests much more ‹rmly than it had been able to before it had shed the burdens of nonrecognition of the postwar division of Europe. In particular, it had ceased to be totally dependent on the United States in matters of the divided city of Berlin. It was ‹nally in a position to assume membership in the United Nations. And Bonn’s improved international standing made it more con‹dent in its European policies. From now on, West Germany’s relations with its partners will . . . be marked by a ‹rmer assertion of its own interests. . . It is however, clear, from the general attitude of the Schmidt government towards its European partners that they will have to count on a more selfreliant and independent attitude from West Germany than they were used to in the past. It has been seen that one of the most important reasons for this development was Brandt’s successful pursuit of Ostpolitik. (Morgan 1975, 106–7) Under the leadership of Helmut Schmidt the immediate objective of German détente policy focused on maintaining the “unity of the nation”— that is, a “reassociation” of the German people in Poland and East Germany. The goals of Deutschlandpolitik became not reuni‹cation-quaAnschluß, but “dynamic status quo” or “status quo plus,” with its operative policy being increased human contact (Joffe 1987; Asmus 1986). This policy was pursued toward Poland as well as East Germany. For example, during informal meetings with Schmidt at the culmination of the Conference on Security and Cooperation in Europe (CSCE) in Helsinki in July 1975, East German SED party chief Erich Honecker indicated that he was willing to open up his regime.2 According to German assessments of the Helsinki conference, CSCE was a signi‹cant, multilateral continuation of the German bilateral processes in Eastern Europe that began in the late 1960s, a development that was of mutual bene‹t to East and West.3 The conference was, therefore, central to Schmidt’s desire to institutionalize the détente process. He saw the conference itself as a means of con‹rming the postwar security status quo: the Soviets acknowledged the legitimacy of American involvement in European security affairs, thus refuting the continual Soviet propaganda that the United States was merely an imperial power and had no rightful reason to continue its engagement in Europe. More important, the ‹nal documents of the CSCE also con‹rmed the possibility of change in the status quo in Europe by acknowledging in its ‹nal document the possibility that the current borders could be redrawn in the future, albeit such changes could not be the result of use of force. The signi‹cance of this

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clause for German-Polish relations should not be overlooked for two reasons: (1) Bonn was able to claim diplomatic victory in the sense that the German question had not been swept under the table; the border issue was only tabled for an inde‹nite period; (2) Warsaw, on the other hand, could say that the West Germans had ‹nally acknowledged the reality of the Potsdam border divisions for all to see. It need not fear for its future sovereignty. This feeling of security on Warsaw’s part was a key piece of the détente process: “A prerequisite for the success of this process is stability in Europe which requires respect for the integrity of all European states within their current borders” (Phillips 1989, 411). On this basis, Schmidt was able to arrange a “diplomatic compromise” with Polish Communist Party Chief Gierek on the fringes of the Helsinki Conference. Labeled a “minimal solution,” during a long session on the evening of August 1, 1975, Gierek and Schmidt were able to hammer out the contours of an agreement on the issues of exit visas for ethnic Germans and compensation for social security wages lost by Polish forced laborers during World War II. The ‹nal details were to be worked out, and the respective treaties became part of a treaty package signed in October 1975. Schmidt also felt obliged to offer Gierek something as compensation for a July 7, 1975, Constitutional Court ruling. The decision handed down once again had the effect of annulling the provisions of the Warsaw Treaty by saying that nothing affecting the status of Germany was permanently binding until a peace treaty was signed (not even the 1945 Potsdam agreements).4 As a consequence, according to one expert, the Polish government learned to become a “demander” (Bingen 1988). Indeed, the Poles would in the end receive ample ‹nancial compensation as part of the ensuing treaty package. The 1975 Treaty Package (including Jumbo Credit) The ‹nal hurdle to tangible political concessions from the Polish government did ultimately require tangible economic incentives from the German government. Despite the establishment of diplomatic relations in 1970, the federal government in Bonn initially refused to extend Poland state credit on the grounds that lending credit is solely a matter for private banks and not a matter for a government operating in a liberal market economy. Bonn’s refusal, however, ended in 1975 when it changed its policy, if only temporarily. Until then, the one credit instrument at the disposal of the government took the form of export credit guarantees for certain types of trade. These export credit guarantees were awarded by the Hermes-Insurance agency (as discussed in chapter 2) and initially served

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mainly as a means of promoting trade with Poland (later their function would shift, however). It was thus a great exception to the rule for Bonn’s normal credit policy when it awarded the so-called jumbo credit to Poland in 1975. This credit of DM 1 billion was granted by Chancellor Schmidt who two years earlier as ‹nance minister had opposed such a credit. This credit was an exception to the rule for two reasons. First, it was awarded by the Kreditanstalt für Wiederaufbau (Credit Agency for Reconstruction). Normally the assets of this agency are used either for the bene‹t of the German domestic economy or for promoting development in Third World countries, but not for East European nations. Second, this credit was awarded under very favorable terms for Poland: the loan carried an interest rate of 2.5 percent, and repayment was to begin in ‹ve years (1980). The loan was of‹cially granted under the rationale that it would provide a signal for Germany’s desire to improve and foster economic relations with Poland. This credit was later to play another key role in Germany’s strategy of economic persuasion toward Poland, when Chancellor Kohl was negotiating the details of his November 1989 visit and wanted to bring some economic assistance with him as part of a “reward package” for Warsaw. The background story of this credit presents a crucial example of how Bonn’s goals shifted over time. The idea of giving Poland a state credit was originally proposed by economics minister Hans Fridrichs in 1973 as part of what was known as the Poland Model, initially conceived to serve for other East European nations. Fridrichs’s plan was to offer Poland cheap credit as a means of “priming the pump” or inducing Poland to revitalize its original verbal agreement to allow ethnic Germans to emigrate as part of Germany’s Familienzusammenführung policy. (This family uni‹cation policy was designed to unite ethnic German families separated by the Potsdam agreements that shifted Poland’s borders, which left many ethnic Germans residing within Polish borders.) The plan was opposed by then acting ‹nance minister Helmut Schmidt on the grounds that such a cheap credit would cost the federal government DM 70–80 million a year in interest subsidies alone.5 Furthermore, at the time of its original proposal, the credit was to be “nicht liefer-gebunden” (i.e., “untied” or not restricted to the speci‹c purchase of German goods). Regarding the domestic consequences, foreign minister Walter Scheel felt compelled to reassure representatives of the German banking and industrial community that such a credit would not be allowed to endanger the government’s economic stability policy. As a result, under the originally envisioned terms the ‹rst of the total three credit remittances was not to be used by Poland to purchase German goods, lest the prevailing stabil-

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ity in Germany be upset by such a sudden in›ux of buying power.6 Here, then, we see an excellent example of how prudent coordination between the competing bureaucracies in Bonn led to an acceptable compromise, one that was conducive for German-Polish political relations. Regarding foreign policy consequences, the Germans found themselves facing stubborn Polish demands for a DM 3 billion credit (versus the 1 billion Bonn was willing to give) (Bingen 1981). Polish of‹cials insisted that a large credit was an indispensable element of any agreement with Germany. In fact, government of‹cials in Bonn were surmising that Poland evidently hoped that it would be easier to get German concessions at higher of‹cial level. German of‹cials did not preclude the idea that the Poles were hoping to solve the issue of the credit limit in direct talks between Chancellor Schmidt and Party Chief Gierek in the spring of 1975, during Gierek’s planned visit to Germany.7 The motives behind these bargaining positions served politics at both levels of the game, domestic and international. On the domestic policy side, the German government was under increasing pressure from the opposition to show some success in the issue of Familienzusammenführung. Furthermore, the government was worried that the showpiece of its reconciliation policy—normalization of relations with Poland—was already deteriorating. A relapse back to the more hostile pre-1970 state of affairs would have hurt Chancellor Schmidt’s domestic popularity. A more subtle goal was apparently to alleviate the current labor shortage. Of‹cials hoped to expand the available labor force by “importing” ethnic German manpower from Poland. This would thereby eliminate the need for increased immigration of foreign workers of non-German descent (socalled guest-workers). Another point of consideration was the stability of the Gierek regime. For his own domestic purposes, he could not afford to come back from his visit to Germany with a mere DM 1 billion credit. Thus, informed sources were already speaking of a “Geld gegen Menschen” (people for money) deal.8 At this point it was becoming increasingly apparent that reconciliation was becoming an economic issue.9 The compromise that was reached after the long negotiation process was, as mentioned previously, quite favorable to the Poles, especially in terms of interest rate (2.5 percent) and period of validity (25 years). Estimates at that time were that Germany would end up spending a minimum of DM 1 billion in order to subsidize the interest rate alone. Ultimately, however, in the almost two years of negotiations, German of‹cials changed their minds about the credit’s instrumentality for domestic economic purposes. Whereas the original idea was to forbid the purchase of German wares with the cheap money, the actual credit terms

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now made it “de facto liefergebunden” (quasi-tied to the purchase of German goods).10 In fact, the conservative newspaper Die Welt, after criticizing the high economic costs of political concessions from Warsaw, did concede that the German economy should pro‹t from the cheap credit since export proceeds will increase as a result of Polish purchases.11 After this so-called jumbo credit, the federal government’s credit policy became much more covert, with subtle attempts to placate Polish wishes for credit via means of inducing private bank lending, thereby supposedly reducing the risk to the government. Despite the international diplomatic success associated with the October 1975 treaty package, Schmidt still faced severe resistance at home. In the following months, what can only be called a “rati‹cation marathon” took place, until the treaties were ‹nally rati‹ed by the Bundestag in mid-February 1976. The opposition CDU/CSU vehemently criticized the agreements as “boundless communist monetary demands.” Some spoke of “‹nancial blackmail” (Bingen 1981).12 Foreign minister Genscher in an impassioned speech before the parliament implored for the treaties’ rati‹cation (Genscher 1981). One of the overriding justi‹cations he gave for the treaties’ acceptance was the necessity to prove to the rest of the world (especially Bonn’s allies) that Bonn was sincere in its desire to reconcile with Poland. Otherwise, the danger was that Germany’s international image could be tarnished. Largely on this basis, the government was able to obtain the necessary rati‹cation with a large majority on February 19, 1976 (the Bundesrat vote on March 12 was unanimous). Hence, the path was cleared for the ‹rst visit ever by a Polish Communist Party leader to the postwar Federal Republic chie›y through the use of economic instruments—outright “purchase.” While little was needed from the German business community, this type of economic persuasion was costly to the German government because it was an incentive directly from government of‹cials. The 1976 Package Deal on Industrial Cooperation and Hermes If the act of Willy Brandt in 1970 kneeling before the memorial to the Jewish ghetto uprising in Warsaw provided the right emotional framework for developing political and economic links, then Helmut Schmidt’s economic and political ‹nesse provided the necessary “momentum” to keep those ties alive in the latter half of the 1970s when Poland’s economic troubles began.13 That momentum was needed was con‹rmed by one expert (Cziomer 1988) on German-Polish relations. According to Cziomer, until that point the various agreements concluded between Poland and Germany

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could be characterized as being “pure declarations of good will” in supporting business deals, but there was little concrete activity behind their public relations (121). Bonn, of course, had to comply with the rules of a market economy, requiring it to take the market interests of business ‹rms and banks into consideration, while at the same time carrying on political negotiations with a government used to command economies. For this reason, the terms agreed upon between Poland and Germany often, and sometimes quickly, changed. This, in turn, called for additional governmental measures and agreements in order to facilitate greater economic cooperation. One sign of the German government’s efforts to ‹nd new ways to foster economic interaction was the series of studies it commissioned the Hamburg Weltwirtschaftsarchiv to carry out in the second half of the 1970s on ways and means of improving industrial cooperation.14 One such measure included a concentrated effort by the German government to support industrial cooperation by means of capital investment. After years of benign neglect, Bonn wanted to stimulate private investment in Poland in the form of coproduction projects. The decision to do so arose out of the March 1975 GK meeting held in Warsaw, where government and private of‹cials debated what course of action to undertake to correct the growing trade imbalance between the two countries. At that time, Poland was running a trade de‹cit of DM 2.2 billion (even though German-Polish trade increased in total volume to DM 5 billion in 1974, Polish exports to Germany were not climbing as rapidly as were German exports to Poland). The Polish side continued to complain about remaining import restrictions (meaning they wished to export more to the FRG), the shortage of moderate credit possibilities (meaning they wished to import more from the FRG), as well as the lack of exemplary, large-scale coproduction projects. On the German side, after prompting by the German business community, German Economics Ministry experts protested that Polish of‹cials were apparently awarding contracts to German ‹rms only when otherwise unavoidable. In particular, France, Austria, and Great Britain were being given top priority. The assessment of the Economics Ministry was that the Polish pattern of behavior was a tactic to apply pressure on Bonn for more restitution and for credits under more favorable conditions. Moreover, the perception was that Warsaw was most likely disappointed by Bonn’s willingness to be more generous toward Israel and Yugoslavia in matters of restitution.15 In their reports to government of‹cials, representatives of German industry were, on the one hand, optimistic about the chances for recuperating economic interaction (and thereby revitalizing imports from Poland). Yet, on the other hand, they realized they still faced critical prob-

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lems because self-‹nancing was the standard condition under which German ‹rms had to cooperate with Polish producers.16 Poland apparently had been asking for an increase in export credit guarantees from Bonn. The sovereign Polish liability with the German government at that time was DM 1.5 billion, and the Polish demand was for another DM 7 billion, to be spread out over several years. The reply by the Economics Ministry was that such a move was impossible, because the credit limits for Hermes export credit guarantees had to be renegotiated each ‹scal year. However, in conjunction with this limitation, it was noted that so far the German government had not granted Poland any UFKs (ungebundene Finanzkredite, or untied credits, as discussed in chapter 2), meaning that the use of UFKs might be a pragmatic possibility.17 The German government, for its part, consequently agreed to support however it could the facilitation of large-scale cooperative projects with Polish and German ‹rms. In essence, it promised to “favorably review” any applications for the allocation of untied credits.18 The ‹rst such case was a 1976 Hermes credit guarantee in the amount of DM 2 billion. In June 1976 the German government agreed to guarantee almost the full amount of a commercial credit extended to Poland by a consortium of German banks (the loan was DM 2.65 billion). It was at that time the largest such credit agreement ever made with Poland. The money was to be used to ‹nance the construction of a coal gasi‹cation plant. The necessary licenses, technology, installations, and equipment were to be delivered by German ‹rms. During the negotiations it was calculated that the sale of the plant’s output (to be further processed into chemical products) would be used to pay back the loans, so it would seem that economic justi‹cations were the overriding criteria. However, there are indications that other motivations were also important. The major German partner in the deal was Krupp AG. In an interview with the author a Krupp of‹cial noted that the Krupp CEO, Berthold Beitz, had always been very active in facilitating Polish-German economic exchange. Beitz apparently felt morally obliged to do so because of Krupp’s “immoral” economic activities during the Nazi occupation of Poland (Bach, interview). This could also be considered a case of political instrumentalization, especially since it was very unusual for the government to guarantee the entire amount of German deliveries in such a commercial venture. Chancellor Schmidt had been pressuring the OstAusschuß to use its in›uence to facilitate the timely conclusion of the commercial contracts involved in the deal. He was particularly anxious to be able to present PUWP party leader Gierek with a lucrative economic package during his scheduled visit in June 1976.19

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Negotiations between Polish of‹cials and Krupp had been going on for months. The Polish foreign trade minister, Jerzy Olszewski, claimed that what was holding up the deal was Poland’s need for a long-term credit in the amount of DM 2.6 billion.20 Final details of the project were not worked out until the meeting of the Mixed Economic Commission, one week before Gierek’s scheduled visit. Economics minister Fridrichs attended the meetings, at which time he characterized the promised credit guarantee as “one-of-kind.” Not only did it cover the entire value of expected German deliveries, but the scope of it was so large that it equaled 60 percent of the value of average German exports to Poland. Even though it was a private German banking consortium negotiating the details of the loan’s terms, Fridrichs as a government of‹cial assured the Poles that the project would not fail for lack of credit, that is, the government would “guarantee” its consummation.21 Indeed, in an overt display of governmental support for private transactions, economics minister Fridrichs, in an unusual gesture, accepted the Polish invitation to attend the loan-signing ceremonies. Thus, he made no secret of the fact that he considered this commercial project vitally important for the development of Polish-German political cooperation. Polish foreign trade minister Olszewski seemed to con‹rm this belief when he spoke of a “new stage in relations between the two countries.”22 One possible explanation for the government’s economic motivation is that Bonn wanted to enhance the chances of signing an agreement with Poland guaranteeing copper deliveries to the FRG. As part of its resourcesupply diversi‹cation program, the copper deal would have enhanced German copper supplies by securing delivery of 10 percent of total German copper imports. Bonn was prepared to provide a DM 300 million untied credit to seal the deal’s ‹nancing. Although no ‹nal agreement was reached, according to the Economics Ministry it was not due to credit issues, but rather pricing questions.23 Furthermore, the Germans were beginning to fear competition from other Western nations. The United States, France, Great Britain, and Italy had already initiated large-scale cooperative projects with Poland, and now Germany wanted to curry favor with Poland. In any case, whatever economic calculations originally led to the Hermes credit guarantee in 1976, they were no longer the prevailing motivations when, two years later, the German government tacitly allowed Poland to re-allocate the money for uses other than the original stated purposes. Desperate for hard currency in order to ‹nance badly needed imports, Warsaw received Bonn’s permission to use the money instead for such imports.24 A Bonn of‹cial later characterized this as a “declaration of

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political will” to help Poland.25 This political will to help Poland became increasingly more important as overall East-West relations deteriorated as a result of the Soviet invasion of Afghanistan in 1979. The so-called crisis of détente began to manifest itself to all at the end of 1979 with the Soviet invasion of Afghanistan and NATO’s dual-track decision on intermediate-range missiles.26 One initiative Schmidt took to counter this growing crisis was to ‹rst privately pressure the Soviets and the Americans to negotiate over the issue of intermediate range weapons (INF). But after both moves failed to bear fruit, the chancellor raised the issue publicly in his 1977 London speech that eventually precipitated the dual-track decision. It is only within the context of this doomed “quiet diplomacy” that the next phase of Germany’s foreign policy can be understood: Bonn attempted to construct a kind of “splendid isolation.” In other words, Schmidt strove to maintain a “mini-European détente” even after Afghanistan and the dual-track decision. “When Schmidt took that initiative, he saw détente as threatened, but by no means as lost” (Lowenthal 1984/85, 310). It was this hope that was to sustain his East European initiatives until domestic issues forced Schmidt out of the chancellorship in late 1982. For example, during a 1980 visit to Moscow, Schmidt succeeded, after great effort, in getting the Soviets to agree in principle to take part in the eventual INF Geneva talks. He subsequently convinced Reagan to follow through on negotiation preparations and appoint of‹cial negotiators. This success was only partial, though, and can only be characterized by saying, “while Schmidt succeeded in bringing those horses to the water, he could not make them drink” (Lowenthal 1984/85, 311). One assessment of this so-called second phase of Ostpolitik (Phillips 1989) sees Schmidt and the SPD wanting to renew the impetus and vitality of Ostpolitik in the face of deteriorating U.S.-Soviet relations. Germany needed a fresh point of departure. As a consequence, new issues arose on the German agenda, issues such as disarmament and environmental problems, which had not been central to Germany’s Ostpolitik before. Schmidt in particular was driven by his frustration with European dependence upon the superpowers for security and survival. Moreover, he was impatient with the inability or unwillingness of the superpowers to move ahead on substantive arms reduction. The role of Poland in Schmidt’s valiant attempts to keep an EastWest dialogue going was a delicate, double-edged sword. Schmidt, rightly or wrongly, perceived Warsaw as playing a moderating role in edging Moscow closer to negotiations with the United States.27 For this reason, Bonn was willing to ‹nancially support the ailing Polish economy in the late 1970s and early 1980s. Schmidt’s chief means of doing so was by

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inducing the private economic sector in Germany to increase its commercial exchange with Poland. Because of the close communication between the two groups, this type of reward power seemed to function. The 1980 Commercial and Hermes Credit Deal While the 1976 Hermes untied credit guarantee by the German government was designed to induce private investment in joint production projects in Poland, the October 11, 1980, Hermes export credit guarantee was deliberately devised to induce commercial bank lending to Poland as a means of alleviating Poland’s ‹scal dif‹culties. In the years between the 1976 DM 2 billion Hermes deal for the coal gasi‹cation project and 1980, Poland’s economic situation (and thus political situation) deteriorated dramatically. That Warsaw was under severe constraints ‹nancially was evident by the fact that it was increasingly pressuring German ‹rms to conduct trade on a “compensation basis” (i.e., barter Polish goods in exchange for imports from Germany). At the same time Polish of‹cials appealed, sometimes even pressured, the West German government for assistance. Yet a report compiled by the OA outlined the dif‹culties German ‹rms faced with such compensation deals. Thus, the OA in turn began to pressure Polish of‹cials to drop such bargaining. Moreover, an of‹cial from the Ministry of Economics requested a copy of the report to use in its defense against Polish accusations of trade discrimination.28 At the May 1978 GK meeting in Warsaw, for example, the Polish delegation accused the German government of discriminating against imports from Poland.29 As a result of this discrimination, the Poles argued, Warsaw had a trade imbalance with Germany. This trade de‹cit was leaving the Polish government with no other recourse but to import goods from other countries instead. Bonn’s reaction was that Poland was exaggerating the importance of the remaining restrictions in determining the volume of Polish exports to Germany. Nonetheless, the German government did show its willingness to help the Poles out. However, it ‹rst attempted to solve the matter in an indirect fashion, that is, by ‹rst asking the private economic sector in Germany to take the initiative. A German government of‹cial argued at the 1978 GK meeting that it wished to make the 1976 coal gasi‹cation deal a “symbolic project” for German-Polish economic relations. On this basis, Bonn appealed to the German private sector to do its part, assuring them that “the Federal government would not shy away from following up by playing its necessary part,” that is, providing the crucial credit guarantees to ‹nance such projects. A year later, however, at the 1979 GK meeting in Bonn, the German

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government, while still playing up the idea of preferring self-‹nancing, large-scale cooperative projects, acknowledged the problems associated with such deals: “We know, however, that there are limits, due to the current investment climate and currency dif‹culties.”30 Not surprisingly, then, Poland’s ‹nancial troubles were the major discussion point at the 1979 GK meeting. Bonn discussed what alternatives were available as possible solutions. The idea of increasing Hermes export credit guarantees was debated, as well as extending UFKs (untied governmental credits). However, no actual promises were made at this time. Poland continued to increase the pressure on Bonn in 1979 when vice minister for foreign trade Dlugosz traveled to Bonn, complaining again about the lack of concrete “cooperation” on the part of German ‹rms. In particular, Dlugosz pointed out that France and Italy had been very forthcoming and that considerable progress had been made in initiating cooperative projects there.31 By spring 1980, German banks began a debate on the merits of granting Poland an untied ‹nancial credit (UFK), knowing that it would not be used for new investments in Poland but rather for debt-servicing.32 Poland’s Western debt at year’s end 1979 was estimated at $18.7 billion; in 1980, $5.8 billion was due in loan repayment and another $1.8 billion in interest. Debt service to the FRG alone was estimated at DM 3 billion. Figures released by the Polish state bank, Handlowy Warszewie, showed that servicing Warsaw’s Western debt would consume almost 70 percent of Poland’s hard currency earnings in 1980. In 1979, the ratio of service payments to hard currency earnings was only 54 percent.33 Nonetheless, the banks agreed they were willing to lend the money “out of the conviction that Poland must be helped in its current economic dif‹culties.” One private assessment at the time claimed that the reason German banks were willing to negotiate new credits for Poland was because Bonn had signaled its willingness to take part by means of credit guarantees, “thereby giving this credit a de‹nite political character.”34 By all accounts, German policymakers were anxious to strengthen trade links with Poland in light of the prevailing East-West crisis and Poland’s role in easing tensions. Schmidt was particularly grateful for Gierek’s efforts to bring Soviet leader Leonid Brezhnev together with France’s president Giscard d’Estaing. Schmidt, himself, was trying to keep the détente momentum rolling by traveling to Moscow in July 1980 and scheduling a visit to East Germany in late August 1980. Moreover, Gierek was in a precarious domestic situation. In early July, labor unrest and worker’s strikes swept across Poland. In particular, Chancellor Schmidt was hoping that by providing the loan to Gierek he could help prevent the Poles from being forced to turn to Moscow for

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help.35 Therefore, Schmidt wanted to present the loan to Gierek during his proposed visit to Germany in mid-August 1980. The key stumbling block in wrapping up the credit deal was determining what level of German governmental guarantees would satisfy the German banks regarding the risks involved. The banks’ original idea was to put together a DM 1 billion commercial credit, with Bonn guaranteeing half the sum.36 Bonn made a counterproposal of a total credit of DM 1.5 billion, of which DM 0.5 billion would be guaranteed by the government and the remainder (DM 1 billion) would be an unsecured general purpose credit (the DM 500 million Hermes guarantee would be granted ostensibly to facilitate the exploitation of Polish coal and would be repaid with the resulting increased coal deliveries). In comparison, at the same time a group of American banks, under the leadership of Bank of America, was proposing a loan of $350 to 500 million to Poland.37 However, by the beginning of August, after the labor unrest in Poland continued, the banking consortium could only muster DM 400 million in unsecured loans for Poland from the twenty-‹ve members of the consortium. Reports from the Chancellor’s Of‹ce were that Schmidt was irritated; said one staff of‹cial, “What do we have commercial banks for, if not to take risks?” to which a banker participating in the negotiations replied, “We recognize our political responsibility. But the Chancellor cannot order us to do anything.”38 In the end, both sides scaled back their contributions. The amount agreed upon was a compromise: the federal government awarded Poland a credit guarantee of DM 400 million, supposedly in return for increased coal deliveries and thereby legally staying within the guidelines of the Hermes Agency. However, economic experts agree that this supposed export credit guarantee was actually just a concealed state loan since it was widely known that Poland was not in a position, technologically or labor-wise, to increase its coal deliveries. Thus, the presumption was that this money, too, would be used to service outstanding loans. More important, this credit guarantee by the government was enough to “encourage” private banks to lend another DM 800 million to Poland, including DM 15 million from a Soviet bank that was a member of the banking consortium. One half of this sum (DM 7.5 million) was secured by the government in Bonn. Originally the Finance Ministry was opposed to the federal guarantee, but after pressure by the Foreign Of‹ce and the Economics Ministry it reluctantly gave its approval.39 Thus, the total amount awarded, DM 1.2 billion, nearly equaled the amount Poland owed to Germany for loan repayment (DM 1.8 billion). Hence, it appeared that the money German banks were so reluctant to lend would, in the end, be used by Poland to pay back old credits to German banks. Yet this reduc-

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tion in the ‹nal amount agreed upon had repercussions elsewhere. Reportedly the U.S. consortium banking group, led by Bank of America, had stipulated that the progress of their dollar loan would depend on the West German credit. Now, after the reduction in Germany’s loan, the word was that they, too, were going to hold consultations and reduce the amount of their loan from $500 million to $300 million.40 In essence, Chancellor Schmidt resorted to notable arm-twisting tactics to “encourage” crucial commercial bank lending.41 In fact, it was no secret that the banks had been extorted by Bonn to extend the credit. What upset the banks most was the fact that in what was obviously a political loan, the commercial banks were being asked to shoulder two-thirds of the risk. However, the banks did not complain too much. In an apparent countergesture the German government announced shortly thereafter that it was planning to revise banking laws, and in a manner more favorable to bankers.42 Bonn and the German banks were ‹nally able to reach a compromise because there was at least a consensus on the political and economic risks involved. First, despite the high ‹nancial risk involved, it was better to keep Poland economically a›oat. Otherwise, no one stood a chance of ever getting their money paid back. Second, in political terms, Gierek as the leader of Poland was considered the lesser of many possible evils. It was prudent to back him ‹nancially in hopes of avoiding a less moderate party chief. In particular, it was feared that the next leader would not be as successful in standing up to the Soviets.43 Nonetheless, by all accounts and in the ‹nal assessment, it was clear that for the ‹rst time in German banking history, bank of‹cials had allowed themselves to be guided not by the laws of the market, but rather by overt political pressure.44 This type of reward power would, in the end, prove costly to the German government, both in terms of its relations with the private sector, as well as in its accumulated liabilities for the Polish debt. The 1981 Export Credit Guarantees In March 1981 foreign minister Genscher paid an of‹cial visit to Warsaw. While there he formally extended to the Polish government an offer of additional export credit guarantees in the amount of DM 150 million. This seemingly economic act can only be interpreted as a political gesture of support. By the beginning of 1981 it had been apparent for some time in the West that Poland was suffering from severe ‹nancial dif‹culties. Lack of hard currency earnings was making it nearly impossible for the Polish government to service its debt with Western institutions. In the interest of

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maintaining stability in Eastern Europe, political will to ease Poland’s ‹nancial crisis was growing daily within German governmental circles. The central problem for German of‹cials was how to do so given legal constraints on granting sovereign credits. The strategy they chose in the end was to induce further commercial lending by lowering the transaction costs for German banks. German banks perceived a large risk for any new nonguaranteed loans to Poland. Consequently, they were no longer willing to offer new credits or loans without some type of direct support from the state. That type of reward power was no longer forthcoming. The German government therefore had to assume the responsibility of shoring up, if not restoring, the creditworthiness of Poland. The question was how. Previously useful means, such as awarding quasi state loans concealed as export credit guarantees in return for coal deliveries, were no longer possible. The drastic decline in Polish coal production made this procedure impossible to justify. At this point the German government began to think in terms of multilateral solutions to Poland’s debt problems. The ‹nancial risk to the federal government was becoming too immense for such bilateral shoring-up measures. Nonetheless, Bonn made one last, if low-key, attempt in 1981. In March 1981 foreign minister Genscher made the aforementioned visit to Warsaw in order to discuss the Polish debt problem. The result of his talks with Polish of‹cials was the promise of an additional DM 150 million credit to Poland. A short time later a consortium of West German banks agreed to a temporary moratorium on all repayments on the Polish debt due them in the next three months. This act gave Warsaw some breathing space since only the interest had to be repaid. In August 1981 the German government publicly debated the merits of extending yet more sovereign credits to help Poland overcome its ‹nancial dif‹culties. At the time Polish obligations toward Germany amounted to $4.5 billion, of which $1.8 billion were guaranteed by the German government. It was therefore understandable that German ‹nance minister Matthöfer was concerned about the increasing and unpredictable risk Bonn was assuming. By this point, calculations were that in 1982 alone Bonn would be burdened by Polish obligations of up to DM 1 billion, based largely on Bonn’s past credit-guarantees. Estimates were that the federal government had already paid out an estimated DM 700 to 800 million to private German banks to compensate for Polish obligations that were not being met by Warsaw. Despite these already known burdens as well as future risks, foreign minister Genscher and economics minister Lambsdorff urged decision makers in Bonn to extend ‹nancial aid to Poland.

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Although Bonn was not willing to lend Warsaw fresh money at this point due to the uncertainties of the Polish economic situation, it did promise to ease Warsaw’s ‹nancial dilemma. Accordingly a bilateral rescheduling agreement (Poland I) between Bonn and Warsaw was signed in October 1981 that gave Poland four years breathing space before it had to repay loans. This was the bilateral agreement that formally implemented the measures agreed upon during the Paris Club negotiations concluded on April 27. As a result of Poland I, Bonn agreed to pay approximately DM 650 million to German banks to cover their exposures in Poland which were not being serviced by Warsaw. On the other hand, Warsaw was under severe domestic pressure to give the Polish workers some political concessions as compensation for their prevailing economic misery. This led to the dramatic developments in the summer of 1980 and the rise of Solidarity as an independent trade union. While Bonn supported these reforms for moral, humanitarian reasons, it was setting itself up for the inevitable Polish accusation that came in October 1980 denouncing Bonn for interfering in internal domestic affairs in Poland (Hönsch 1990). It was a precarious situation for the German government. Of course, the situation was even more precarious for the Polish government. Ostensibly as a preemptive measure designed to prevent a Soviet invasion, Warsaw declared martial law December 13, 1981, thereby outlawing the newly created trade union Solidarity. German of‹cial response was to reaf‹rm its willingness to support Poland in overcoming its economic and ‹nancial dif‹culties. Economics minister Lambsdorff stated: “We have helped Poland up to now and we will do so again in 1982.”45 What made the situation particularly dif‹cult for Bonn was the fact that Schmidt was actually visiting SED party leader Honecker in East Germany when Poland declared martial law. Schmidt was so determined not to ruin the historic occasion that he refrained from denouncing the action and merely joined Honecker in calling upon the Poles to “solve their problems without outside interference” (McAdams 1986, 144). Indeed, after allegedly consulting the Vatican, German of‹cials reached the conclusion that this brutal move by Jaruzelski was the lesser of two evils (i.e., martial law or Soviet intervention). The U.S. response, on the other hand, was one of immediate condemnation, including implementing various economic sanctions intended to pressure the Warsaw government to retract its policy. This singular assessment led to ill will between Bonn and Washington, as Bonn was prepared to wait out the crisis and see if Warsaw made conciliatory tones. Above all, Bonn was prepared to shield economic relations as much as possible from the ensuing political fallout.46 Schmidt visited with Presi-

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dent Reagan in Washington shortly after martial law was declared, giving this argument: I pointed out with no small satisfaction our continuity and regretted the misleading media reports in the American press. Continuity in our foreign policy toward the Soviet Union was one of the prerequisites of trustworthiness in this foreign policy; it was necessary in order to be understood in Moscow. (Schmidt 1987, 308) The peak of American accusations of Schmidt pursuing an “isolationalist” policy was probably made by Zbigniew Brzezinski on January 11, 1982: “Schmidt was already acting like a neutralist, even though he proclaimed loyalty to the unity of the Alliance.”47 Schmidt himself countered this accusation by quoting the New York Times in their report on Schmidt’s visit to the United States and his subsequent talks with President Reagan: “the result lies in the tacit agreement to continue negotiations with the Soviet Union despite the Polish situation” (312). Schmidt, forever the realist, had concluded, “Every attempt to use the Polish, Hungarian, Czech, or German will to freedom as a lever for forcibly rolling back the Soviet sphere of in›uence runs the risk of a violent intervention by Moscow; at the end is the threat of civil war” (314). Although Poland had been condemned internationally, Polish deputy prime minister Rakowski still felt comfortable enough to travel to Bonn less than three weeks after martial law’s imposition and ask for an audience with the head of Germany’s most powerful industrial organization (the aforementioned Ost-Ausschuß). Signi‹cantly, Rakowski chose to visit Bonn over any other Western capital. I would argue that this was indicative of Warsaw’s perception of the increasingly in›uential power of Bonn. Interestingly, almost nine years later to the day, Tadeusz Mazowiecki, as Rakowski’s successor as Polish prime minister, became the ‹rst foreign head of government to visit Bonn after Germany’s uni‹cation. This, too, could be interpreted as a sign of the importance Warsaw attaches to its relations with Bonn. Granted an appointment, Rakowski’s efforts were directed toward winning German sympathy for Poland’s troubles. Reactions by West German industrialists had indeed shown little sympathy for the Solidarity movement and some understanding for Warsaw’s harsh measures: “I already said a year ago that they would hang Lech Walesa some day. . . . it could not have continued on like that in Poland, instead the people must start working again.”48 The Polish prime minister particularly wished to convince the German government, via the efforts of the Ost-Ausschuß chairman, not to

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participate in the embargo sanctions proposed by the Reagan administration. Although the chairman showed complete understanding for the Polish situation, he claimed his hands were tied.49 The Western NATO allies plus Japan (Poland’s main creditors) decided, under direct pressure from Reagan, not to resume negotiations for a new rescheduling agreement as long as martial law ruled in Poland. However, Schmidt did manage to exempt private bank negotiations from the Western embargo. Thus, instead of unmitigated support for Solidarity and its cause, the emphasis in Germany was on maintaining economic and political stability in Poland by whatever measures were possible.50 As a result, the 1981 London Club rescheduling agreement negotiated between Poland and private banks for interest payments on nonguaranteed commercial loans was signed in April 1982. Later, in the fall of 1982, West German banks did sign a new bilateral debt rescheduling plan with Poland, but no new fresh bank credits were forthcoming for Poland. The economic risks were too great, and the German government was prevented by the terms of the economic embargo from extending credit guarantees. Despite the declaration of martial law and the international isolation of Poland in the West, Bonn tried to keep the lines of communication open. Above all, Schmidt used informal channels to carry on a dialogue with Warsaw in the hopes of easing the situation of Solidarity (Hönsch 1990). For example, February 19–22, 1982, Herbert Wehner, Bundestag Social Democratic whip, made an informal visit to Warsaw. However, despite Schmidt’s best intentions, no signi‹cant progress was made, and by October 1982, he no longer was chancellor. In this chapter I suggest that as the goals of the German government changed over time and it began to expect more tangible concessions from the Polish government, so too did its strategy of economic persuasion change. Its reward power seemed to decline as it became necessary for German public of‹cials to use more tangible economic incentives, such as state credits. Moreover, once the transaction costs became too high for the German business community to conduct normal commerce (i.e., lend money), here too the German government had to increase its inducements for the private sector (i.e., provide credit guarantees). Despite its institutionalized links to the business world, and the excellent communication enabling the German government to apprise commercial of‹cials of its dif‹culties, the old ways of collaborating were no longer possible. The cost of economic persuasion for the German government rose substantially. Yet, while it seemed that the German government had failed at its objective of peaceful change, chapter 6 discusses how it did, in the end, succeed.

CHAPTER 6

From Ambivalent Adaptation to Normalization The weaker side is always more interested in normalization. Jozef Czyrek, former Polish deputy foreign minister1

This Polish assessment of the state of German-Polish affairs in 1982 at the outset of the new Conservative-Liberal coalition in Bonn reveals the psychological barriers the new government faced. On October 1, 1982, the helm of the Bonn government changed hands after thirteen years of a Social-Liberal coalition, and Helmut Kohl assumed the chancellorship. The assumption at the time was that, in matters of foreign and security policy, Bonn would more likely “astound critical observers with its large degree of continuity than with any tendency toward independence of mind [Eigenwilligkeit] or even appetite for adventure” (Wagner 1983, 164). Predictions were that Kohl’s foreign policy would be characterized by “caution and a ‘low pro‹le.’” Yet the Poles, according to Czyrek, feared that the new German policymakers would try to use the circumstances (i.e., Poland’s politically precarious situation) to invalidate the 1970 Warsaw Treaty. There was some validity to these fears in that some CDU/CSU politicians were calling for a reinterpretation of the treaty. They wanted to deny the legitimacy of the treaty’s border agreement and only recognize the agreement to renounce use of force. In the end, though, the Christian Democrats acquiesced to the results of the Ostpolitik treaties in general, and the Basic Treaty with the GDR (1972) in particular. For the ‹rst time, the CDU/CSU saw them not only as legally binding, but as serving as a meaningful step forward in improving inter-German relations. This chapter examines the process and the means whereby the German government pursued its understanding of peaceful change, namely, closer German-German relations as well as settlement of outstanding issues connected with the ethnic German minority in Poland. What I demonstrate is that as long as the German government only offered minimal economic concessions (e.g., new export credit guarantees), it made little progress in resolving political con›icts. However, that troubled state of 105

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diplomatic affairs did not preclude the use of private contacts to continue negotiations. Indeed, the German government on many occasions conferred with German business representatives in ‹nding creative solutions to diplomatic impasses. Once certain German political goals became imperative, they were able to reach a consensus with Polish of‹cials by increasing the amount of reward power used. In the 1980s the “German question” was transformed. Instead of the traditional focus on unity of state, new emphasis was placed on the reemergence of a revived consciousness of a common German nationhood and heritage, which boosted the self-con‹dence of both the leaders and the peoples of both Germanies. Political observers of the German scene were driven to claim that there was an almost “desperate desire” for peace by the German people in both West and East. As Lowenthal (1984/85, 309) suggests, “National consciousness and national history, neglected by two generations of postwar youth, both revived in the new climate.” Foreign minister Hans-Dietrich Genscher also provided a critical element of continuity in Germany’s foreign policy. Serving continuously as the foreign minister since Schmidt’s ascension to chancellor in 1974, Genscher was a key supporter of Ostpolitik in both Schmidt’s and Kohl’s governments. Maintaining dialogue with East Europe, including Poland, was to receive equal, if not more, attention. By 1983 even the conservative CDU had taken the 1967 NATO Harmel Report to heart. Bonn had determined that striving for a maximum of dialogue and cooperation with East Europe would promote military security since it would help in limiting con›ict. Furthermore, dialogue and cooperation were necessary in order not to “dim the perspective of a European peace order, which the Europeans, and especially the Germans, did not want to lose sight of.”2 The causes of this overwhelming change in priorities are rooted in the reemergence of the “German issue” in the early 1980s.3 This, in turn, must be linked to the deterioration of East-West relations at the end of the 1970s. Both German states had reassessed their positions and come to the conclusion that “the investments [made in the 1970s] were worth preserving, even at the cost of some friction with their respective superpowers” (Larrabee 1989, 4). Indeed, a new de‹nition of the issue meant a transformation of the goals. “The real issue today . . . relates not to reuni‹cation but to the evolving modalities of inter-German détente and their implications for European security” (3). That there was a strong consensus on this issue over time and across party lines was con‹rmed by a pivotal act by Franz Josef Strauß. Strauß was one of the most arch-conservative politicians on the West German political scene and had always been a outspoken critic of Social Democratic détente policies. In 1983, less than a year after the new Conservative-

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Liberal coalition came to power, Strauß spearheaded a drive to give the GDR a very generous state credit in the amount of DM 1 billion. Again, in 1984 Bonn granted a DM 950 million credit guarantee to East Berlin. One of the more crucial bene‹ts of this lavish policy of ‹nancial accommodation was a humanitarian one: in ever greater numbers East Germans were allowed to travel to West Germany for visits—1985: 60,000; 1986: 500,000; 1987: over 3 million. Yet for German of‹cials it also became clear that there was an important and crucial linkage between inter-German détente and cooperative East-West relations overall. Without the one, it became very dif‹cult to have the other. So once again, Bonn had to acknowledge the limitations the omnipresent East-West con›ict imposed on its relations with the GDR. Despite this recognition, Kohl, like Schmidt, initially tried to insulate the German-German relationship as much as possible from outside events. What ensued was a policy of damage limitation, whereby Bonn tried to improve relations with Warsaw so that damage to German-German relations would be as limited as possible. A spate of anti-German propaganda in the Soviet Union and Poland led policymakers in Bonn to recognize that a crucial link existed between improvements in German-German relations and attitudes toward Germany in Moscow and Warsaw. This was especially evident in Moscow’s attempt in the summer of 1984 to revive the ghost of German revanchism as a means to get at least the Polish and Czech governments to toe the line by loyally following Soviet bloc policies. Indeed, consensus grew between Moscow and Warsaw that the two Germanies were involved in a “dangerous ›irtation.” It was considered particularly disturbing because it came in the middle of a confrontation between the two alliance leaders, a time when junior alliance partners were expected to be especially loyal (Korte 1990). The result of this Soviet and Polish foot-dragging was that SED party chief Erich Honecker twice had to cancel scheduled visits to the FRG (in 1983 and again in 1984) before ‹nally making his historic trip in 1987. During this period, relations between East and West deteriorated dramatically to the extent that U.S.-Soviet INF negotiations broke off in 1983 and deployment of the new Pershing II and cruise missiles commenced in November 1983. Despite the so-called missile-crisis of 1983–84, Honecker himself began calling for “new thinking” in foreign policy, obviously hinting at possible alternatives to the new deployments. This line of thinking obviously corresponded with West German thinking; that is, Bonn, too, was searching for a way out of the dilemma it was in. It did not want to upset its American ally by refusing to accept the new missiles, yet the government was under great domestic pressure to oppose the deployments.4

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This internal dynamic of “damage limitation” led the decision makers in Bonn to “play a more active role in promoting East-West détente and pushing both superpowers to improve their relations” (Larrabee 1989, 5).5 Improving German-Polish relations was to play a key role in this thaw as anti-German sentiments were growing in Poland and the Soviet Union. Nevertheless, Bonn took some time to recognize that it had to counter these obstacles to its German-German détente. It was only after reaching an absolute low point in German-Polish relations in 1984, when Warsaw accused Bonn of “pan-Germanism,” that new thinking arose in Bonn that it must strive to achieve a “common European perspective” as an important step in facilitating closer ties to East Germany (Bingen 1988). This change of heart in Bonn corresponded, however coincidentally, with a change in Warsaw. Jaruzelski also came to realize that relations with the West had to be intensi‹ed. In particular, improving economic relations with the West became a key factor in Warsaw’s pursuit of domestic stability. Most importantly, Warsaw considered the FRG to be the gateway to success in this policy. Indeed, easier relations with Warsaw were fast becoming a prerequisite, even if not so explicitly stated, for Honecker ‹nally to visit West Germany (something the government had been keenly pursuing in order to tout a foreign policy success for the upcoming elections in January 1987). Political assessments of the time claim that Poland was second only to the Soviet Union in the orchestrated criticism in the East that forced Honecker to call off a visit planned for September 1984.6 Therefore, the issue was once again how Bonn could use economic levers to overcome political distrust. At this point, a process was launched that can only be described as a “state of permanent bargaining.”7 In early 1984 a letter exchange took place between the chancellor’s of‹ce, the Foreign Of‹ce, and the Economics Ministry, which of‹cially set in motion the start of the new normalization process.8 In his memo Kohl signaled his approval to begin activating economic relations with Poland as a means of improving political relations. However, Kohl cautioned that any progress in relations would depend on Warsaw’s willingness to ‹nd a suitable solution to the ongoing debt rescheduling negotiations. Moreover, Kohl warned Lambsdorff that these “small steps” must be taken cautiously since they would also attract the attention and suspicion of Germany’s allies. Foreign minister Genscher scheduled an of‹cial visit to Warsaw in November 1984 as a ‹rst step in this renewed policy of dialogue. However, he was forced to cancel his visit at the last minute after some political friction arose over details of the visit.9 Genscher never of‹cially rescheduled his canceled trip, but he did make a stopover in Warsaw in March 1985

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while on business elsewhere. Although not an of‹cial state visit, he spoke with representatives from the Polish government. That same month Chancellor Kohl took advantage of the opportunity offered by the funeral of Soviet CP chief Konstantin Chernenko in Moscow to speak with Polish head of state and PUWP chief Jaruzelski.10 Another new impetus for improved relations with Warsaw came in the summer of 1984. After his election as West German president, Richard von Weizsäcker made German-Polish reconciliation in the sense of the Franco-German reconciliation of the 1950s one of his main goals in of‹ce. What primarily troubled him was that no signi‹cant diplomatic agreements or treaties had been concluded with Poland since the Warsaw Treaty of 1970. Weizsäcker hoped to in›uence this deplorable state of affairs by making an of‹cial state visit to Warsaw. Polish of‹cials wanted to take advantage of Weizsäcker’s more conciliatory tones by inviting him for a visit, but Weizsäcker was constrained by party politics. He was not willing, as one of his aides later recalled, to “conspire” against Kohl’s government and schedule a visit behind Kohl’s back. Weizsäcker’s reasoning was that a state visit to Poland only made sense if the Bonn government really supported it.11 By all accounts, Kohl was not yet fully motivated to sacri‹ce certain principles in order to unconditionally pursue GermanPolish reconciliation.12 1985 Visit by Bangemann and the Promise of Hermes Guarantee Admittedly, Polish of‹cials expected continuing cooperation from Bonn in solving its economic troubles. In particular, because Poland’s largest trading partner in the West (and second largest overall, after the Soviet Union) was Germany, it was anticipating special consideration. However, after the events of December 1981, of‹cial German policy was to follow the lead of the United States by upholding the ‹nancial embargo imposed against Warsaw. Since Bonn was Poland’s largest sovereign creditor in the West, these restrictions were especially painful. Even though Poland managed to reschedule its sovereign debt in 1981, some three months before the December 1981 crackdown, it never fully serviced that rescheduling agreement.13 What happened in the ensuing years is that Bonn basically “›oated” Poland from 1981 to 1985 by making indemnity payments to German banks for payments never received from Warsaw. This, of course, cost the German government immense sums of money (DM 3.4 billion).14 In this sense, even though Germany was supposedly the “stronger side,” if it wanted to stop the drain on its ‹nancial resources, it had to undertake some action. Hence, nor-

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malizing ‹nancial relations between Poland and Germany became another overriding concern of the conservative government in Bonn. In 1982 alone Bonn made indemnity payments in the amount of DM 1.95 billion to German banks for losses they suffered on loans to Poland. This, of course, should have legally required Poland to declare bankruptcy ‹rst but Bonn chose to override that legal requirement. Of course, what this amounted to for Warsaw was an interest-free loan.15 By 1989, such indemnity payments were to total DM 5.5 billion. Another indirect subsidization of Poland was a court decision to allow German banks to legally deduct from their taxes 50 percent of any losses accrued in bad loans to Poland. Here the court delivered a very liberal interpretation of prevailing regulations since technically such a tax write-off requires the sovereign creditor to declare bankruptcy. Through these measures the government was able to lessen the pressure not only on Poland, but also on the deeply exposed German banks. However, this also became a source of irritation between government of‹cials because estimates from the Ministry for Finance were that between DM 2 and 3 million in tax revenues were lost as a result of such tax write-offs.16 Yet, foreign political interests prevailed over domestic economic ones, and the practice continued. Beyond this, the German government was also upset because Warsaw was very carefully paying the necessary interest on their commercial loans with private banks, while refusing to do so on of‹cial state credits/guarantees.17 Nonetheless, by early 1984 the Kohl government signaled its desire to rebuild relations. The means Kohl chose were decidedly economic. In a January letter exchange between the chancellor and his minister of economics, Kohl indicated that he welcomed the Economics Ministry’s efforts to renew its dialogue with Warsaw. In particular, Kohl supported the idea of taking small steps. One such step that he advocated was the recommencement of meetings of the Mixed Economic Commission.18 As a result, in March 1985 economics minister Bangemann became the ‹rst high-ranking West German of‹cial to visit Poland since the declaration of martial law in 1981. While there he was ‹nally able to renew the bilateral trade agreement from 1974 (which had of‹cially expired after its ten-year duration in 1984). Bonn also made a signal gesture to Warsaw by promising to restore export credit guarantees (up to a maximum of DM 100 million). This decision was announced during a meeting of the Mixed Economic Commission that Bangemann also attended. Bonn was hoping that its gesture would serve as a signal for other major Western trading partners to follow suit. France and Austria had already indicated their readiness to do so if Germany went ‹rst.19 With this pledge, Germany became

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the ‹rst Western government to offer Poland new trade credit guarantees since 1981. Accompanying the economics minister on his high-level visit were important members of the German business community. They were deliberately invited by the German government as a means of signaling Germany’s sincerity in wanting to add new impetus to German-Polish reconciliation. Business, too, was clearly supportive of the government’s goal of “renormalizing” relations.20 As one political pundit, clearly critical of this approach, put it: “It was a West German contingent hell bent on détente, with the optimist Bangemann at the head along with the forbearers, Berthold Beitz and Wolff von Amerongen.”21 At the same time that Bangemann was offering the Poles new credit guarantees he also promised to use all of Bonn’s in›uence in supporting Warsaw’s application to join the International Monetary Fund (IMF), another form of reward power. (Indeed, Poland was ‹nally able to do so in 1986, despite opposition from Washington.) For this reason, the guarantees offered were far more important as a signal than for its monetary value. For one thing, they were to give commercial creditors the impression that Germany was once again prepared to back the Poles in their ‹nancial negotiations. In addition, it represented the end of Poland’s political isolation from the Western world. As a consequence of these efforts by Germany, new negotiations were ‹nally able to commence in dealing with Poland’s debt rescheduling plan. Accordingly, a new multinational consensus was reached on July 15, 1985. On October 25, 1985, the second bilateral rescheduling agreement between Bonn and Warsaw (Poland II) was signed, putting the Paris Club agreements into effect. This time Warsaw’s accumulated debt from 1982 through 1984 was rescheduled, which meant Bonn promised to cover Polish obligations of DM 3.6 billion, at that point the highest amount ever rescheduled. Bonn viewed this as a sign of the high priority given to the normalization of overall bilateral relations and not just the ‹nancial side.22 The agreement reached gave Poland a ‹ve-year grace period on repayments, after which payments were to begin, which would be spread out over a sixyear period. Interest payments were to begin at the end of 1985. Shortly thereafter, negotiations began on the rescheduling for Poland’s debt from 1985 since Warsaw immediately let it be known that it would not be in a position to make interest payments scheduled for 1985 (as required by Poland I, the ‹rst rescheduling agreement). Thus, the Western creditors came prepared to give Poland a longer grace period. “The fact that Poland needed a longer breather in order to get itself back

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on its feet economically was not disputed by anyone.”23 According to insider information from banking of‹cials in Germany, they were aware already in 1982 that the grace period awarded in Poland I was insuf‹cient, yet the shorter period was agreed to under pressure from U.S. banks. In particular, it was clear that Poland needed more recovery time for its hard currency imbalance. If it was to use all its hard currency earnings for debt servicing, then it could not import the necessary technology and spare parts it badly needed in order to improve its export capacities. Without improvement in its export capacities, Poland could not hope to continue servicing its ever-increasing debt balance. Subsequently, Poland III (the third bilateral rescheduling agreement) was signed on December 12, 1985, and put into effect immediately. It covered Polish obligations for 1985, thereby rescheduling its debt toward Bonn in the amount of another DM 1 billion. This rescheduling plan was designed to pave the way for Bonn to extend new export credit guarantees. Notably, it was not until the new economics minister Martin Bangemann visited Warsaw in March 1985 that serious discussions between the two governments could begin anew. The new focus of these talks centered around Poland’s debt problem, but Bangemann made it clear that without progress in other outstanding political issues, no progress could be made in solving Poland’s ‹nancial dif‹culties. While the outstanding problems between Bonn and Warsaw were manifold, two in particular were crucial, for they impeded progress in strengthening relations: living standards for the ethnic German minority living in Poland and the conditions for repayment of the 1975 jumbo credit (P›üger 1990). During Bangemann’s visit, the Mixed Economic Commission (or GK, as discussed in chapter 3) met for the ‹rst time after a six-year interruption. This was a deliberate effort on the part of the German government to signal to Warsaw its desire for “re-normalized economic” relations as well as support for the German industry to reinvigorate its commercial links to Poland. Moreover, signi‹cant improvements in the overall international climate made Bonn even more eager for new improvements in German-German relations. In other words, Bonn was hoping to exploit the new, soft tones emanating from Moscow under the leadership of Gorbachev in the form of glasnost and perestroika in its dealings with East Berlin. Warsaw, too, was beginning its own policy of “stabilization of power structures” (which essentially amounted to an internal reform policy).24 However, the German objective was not necessarily to mold the actual content of reform, but rather to “contribute to an international climate which is favorable to indigenous forces of reform” (Phillips 1990, 421). In other words, Bonn needed to do everything it could to ensure the success of a

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reform outcome that was by no means certain. One means of doing so was by providing economic incentives. On April 7, 1986, Polish foreign minister Marian Orzechowski was the ‹rst Polish minister to visit Bonn in six years. Genscher made a counter-visit to Warsaw in January 1988. A ›urry of debate was taking place in Bonn as to what should be done to facilitate the renewed attempt at reconciliation. One Polish analysis of Genscher’s trip argues that his visit was the turning point in overcoming the prevailing “normalization de‹cit” between the two countries This same assessment attributes economic cooperation as the essential stabilizing factor in the development of Polish-German relations (Wec 1988). Yet, ironically, despite improvements in German-Polish relations and the thaw in German-German relations, which had its triumphant climax in Honecker’s visit to the West in August 1987, more signs of concern in the German-German dialogue were surfacing. In the aftermath of Honecker’s visit, the GDR leadership faced a dual challenge to its legitimacy from the inside and outside. The GDR was proving stubborn in resisting calls for more far-reaching changes. SED party leaders were opposed to Moscow’s and Bonn’s calls for economic reforms and openness. By April 1987 Kurt Hager, the SED-chief ideologist, was claiming: “Just because your neighbor wallpapers his walls, does this mean you need to do the same thing?”25 In the summer of 1987 the occasion of a rock concert by Michael Jackson in front of the Brandenburg Gate in West Berlin gave rise to massive demonstrations on the other side of the Wall in East Berlin by disgruntled and disaffected East German youth, who enthusiastically chanted Gorbachev’s name. Of more serious political signi‹cance was the fact that the Protestant church in the GDR was becoming more assertive in its role as an organized opposition. In January 1988 some 100 political activists in the GDR were arrested, and many of them were subsequently expelled to the West. Just how resistant at least the party orthodox were is signaled by the fact that Kurt Hager published a scathing article in Neues Deutschland in October 1987 as a counterattack against a joint SED-SPD document signed only two months earlier by his own comrades (Larrabee 1989). One expert on German foreign policy (McAdams 1986) suggests that “Bonn’s strong vested stake in good ties with East Berlin . . . has given the GDR a degree of leverage it lacked a decade ago. [Therefore the question is] who wants inter-German détente most. And who is willing to pay the higher price for it” (17). After the January 1987 elections, at which Genscher’s party, the liberal FDP, made a strong showing, Genscher started moving Ostpolitik even more in the direction of a comprehensive process.

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As conceived by Genscher, this process would include large-scale economic cooperation, especially in support of Gorbachev’s reform program in the Soviet Union. By June 1988, the CDU’s shift to a more sweeping concept of the goals of Ostpolitik was complete. At its Thirty-Sixth Party Congress in 1988, the CDU rede‹ned the Party’s commitment to German reuni‹cation by “predicating it upon the ‘understanding and support of our neighbors and friends.’ The tone and content of government policy have become more compatible with SPD policy. . . . a new consensus within the FRG seems to be developing . . . in support of a revitalized Ostpolitik” (Phillips 1989, 422).26 Easier relations with Warsaw were becoming a prerequisite, albeit a less often stated one, if Erich Honecker, the East German leader, was to make his much-delayed trip to West Germany. Speculations were that Poland was second only to the Soviet Union in its deliberate criticism of West German intentions in East Germany. Supposedly, these Soviet and Polish misgivings had forced Honecker to call off a scheduled visit to Bonn in 1984.27 Apparently, the Polish assessment of the German-German dialogue changed from one of negative feeling to positive reinforcement. This is how the former Polish deputy foreign minister and Politburo member explained it four years later. For rationally thinking people it was impossible for détente to succeed if there was tension in central Europe. Hence, German-German normalization was considered useful for Poland. . . . All reasonable persons identi‹ed Polish raison d’état with détente; otherwise Poland would only be an instrument in international affairs. In the case of Afghanistan, we Poles paid the price, especially as far as embargoes are concerned. The sanctions were ostensibly because of martial law, yet it was really a ‹ght against the ‘evil empire.’28 As discussed earlier, in April 1986 Warsaw sent two prominent politicians to Bonn (deputy prime minister Szalajda and foreign minister Orzechowski) in order to emphasize its goal of “opening a new chapter” in German-Polish relations. During their visit, the German government, for the ‹rst time since 1981, formally extended a Hermes credit guarantee of DM 100 million as promised by economics minister Bangemann one year earlier. Nonetheless, by December 1986, because of concern in Bonn that Warsaw was not paying back on all its ‹nancial obligations, it froze the unused portion of the credit guarantees (only DM 13 million had actually been spent). Poland was in arrears on payments for the ‹rst rescheduling

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agreement, Poland I, in the amount of DM 217 million and for the second, Poland II, another DM 438 million. Thus, once again a total suspension of secured loans for Poland was announced. The Conservative-Liberal government’s ‹rst attempt to normalize ‹nancial relations by extending DM 100 million in secured Hermes loans was not suf‹cient enough to convince either side of the need for continued political and economic normalization, and thus the endeavor failed. As Bonn saw it, Poland was not interested in paying back DM 170 million in old debts just to get DM 87 million in fresh money. Bonn’s argument was that Warsaw should have recognized the signal effect of the new Hermes. Paying back the DM 170 million would have been worth more than merely the DM 87 million since doing so would have improved Poland’s image as a creditworthy nation, making available even more money. The Poles, according to Bonn of‹cials, should have realized that their backsliding would hurt them in the long run. In particular with no new money in sight, the Poles had been trading with the West by means of compensation-in-kind or barter—or so they claimed. In contrast to its state-guaranteed loans, Warsaw was servicing its debts with private commercial banks in Germany. The result, as apparently agreed in a rescheduling agreement made privately with the commercial banks, was that part of the interest paid by Warsaw was ›owing back to Poland in the form of new, short-term loans.29 After reaching a new high level in trade volume in 1985 (a little over DM 6 billion), trade with Poland sank almost 15 percent in 1986 (and continued this negative trend in the ‹rst two months of 1987). Imports from Poland fell 15.7 percent; German exports to Poland fell 13.5 percent.30 The main reason for the decline in Polish exports was considered to be the decline in prices for raw materials (e.g., coal and copper) as well as for fuels. German exports subsequently suffered as a result of Poland’s hard currency shortage. This meant decreased deliveries of mainly chemical goods, textiles, and electrotechnical products.31 One important precursor to the second attempt at normalization of relations between Warsaw and Bonn in the aftermath of martial law in Poland was a letter exchange between Poland’s deputy prime minister, Zbigniew Szalajda, and Bonn’s minister of economics, Martin Bangemann.32 On September 5, 1986, Szalajda sent Bangemann a formal letter, asking for the economics minister’s assistance in re-invigorating the normalization process between the two countries. In particular, the Polish of‹cial appealed to Bangemann in his capacity as cochairman of the Mixed Economic Commission and as a committed proponent of the normalization process. Szalajda pointed out the special role that economic

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cooperation played in this struggle, most notably as a dynamic factor that kept the political process moving forward. For this reason, the minister was concerned that the prevailing “‹nancial blockade” (Bonn’s decision to suspend credit guarantees) would weaken current prospects for an intensi‹cation of economic cooperation and thus jeopardize the political process of normalization. Szalajda did not fail to spell out the economic implications of the guarantee suspension. For example, according to his statements, Poland had contracts ready to sign with German ‹rms covering purchases of German goods in the amount of DM 116 million. The actual purchase of these goods depended on Hermes credit guarantees. Moreover, Polish of‹cials were planning investments of DM 180 million in the Polish export sector. Without loan security from Bonn, these investments could not be carried out. And without these investments, Poland would not be in a position to increase its exports, upon which Warsaw depended as a source of hard currency. Hard currency, in turn, was desperately needed in order for Warsaw to pay back its foreign debt. Bangemann’s reply was that he, too, was especially concerned about creating an “atmosphere of trust and mutual understanding.” However, he pointed out that the suspension of federal guarantees for commercial credits to Poland was not a political decision, but rather one based on economic concerns (Poland’s arrears in debt payments). Nonetheless, Bangemann did not overlook the importance of normalized economic relations, thus stressing the need to continue efforts to achieve greater economic cooperation. Normalizing ‹nancial relations by means of resolving Poland’s outstanding debt was the imperative prerequisite for the further development of bilateral trade/economic relations. In the ensuing panic that arose among Western commercial banks after Poland’s ‹nancial insolvency surfaced in 1981, commercial credits for all of Eastern Europe had dried up. Even though Poland’s ‹nancial situation stabilized somewhat after the 1985 debt rescheduling agreements, German commercial banks still were not prepared to lend credits to Poland. The ‹nancial condition of Poland (and East Europe) remained precarious. The credit relations between East and West stumbled ever since then from one problem phase to another. . . . it is becoming increasingly clearer that it is not going to be possible to cast off the old debts of the 1970s as well as the currently high level of indebtedness, which is necessary to bring in foreign capital in large amounts to serve as a motor for domestic investment. (Schröder 1988, 622)

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Beyond the fact that East Europe’s indebtedness between 1984 and 1987 increased by 57 percent, the technological gap between East and West was larger in 1988 than in 1980. In the case of Poland, its debt with the West increased from $12 billion at the end of 1981 to $38 billion at the end of 1987. Although it showed a trade surplus in exports, usually ranging from $1.5 to 2 billion annually, this hard currency was not even enough to service the yearly interest payments (around $3 billion). Thus, Poland was continually increasing its “forced credits” (Zwangskredite or interest capitalization), necessary to merely pay the interest due. The credit Poland was amassing was not fresh money, but was being used to pay back interest; it therefore did not constitute a real capital transfer. However, some sources say German banks had made a deal with Poland that allowed the money paid back to them to then be recycled in the form of new loans for Poland.33 By 1987, that is, after the Poland I, II, and III rescheduling plans, over 90 percent of Poland’s debts had been rescheduled; some debts were rescheduled more than once. Not only that, but Poland continued to treat its creditors on an unequal basis: whereas the private banks were receiving almost all of the interest due them, the interest payments scheduled for various state creditors in the West were overdue. Beyond this, most banks had written off up to 80 percent of their debt claims on Poland, even though they were receiving interest on the full credit balance. Since the German banks were using these write-offs as tax breaks, the government thereby took over half of the bank’s losses (corporate taxes being 51 percent in Germany). German banks, by this time, were also “swapping debts.” The discount rate for Poland was growing. In the spring of 1988 the rate was at 58 percent (e.g., $42 was paid for every claim in the amount of $100).34 This lack of ‹nancial con‹dence in Poland on the part of commercial banks, and thus their reluctance to lend Poland fresh money, was confounded by the practice of the Bundesaufsichtsamt für Kreditwesen (Federal Agency for Overseeing Credit Affairs). This German governmental regulatory agency assumed for its own regulation purposes the assessments of commercial bank accountants that 50 percent of the outstanding Polish debts must be value-adjusted in terms of required reserve holdings. Moreover, it went beyond that conservative estimate by demanding that for every new credit to Poland, a 50 percent reserve (Rückstellung) automatically be made. This tightening-up of regulations came after accusations that it had been too lax in its oversight responsibilities. Most crucial of the accusations was that it had not been anticipating or even heading off the German

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commercial banks’ overexposure in Poland. The consequence was that German banks could not, even in the case of hand-picked projects that were politically and economically acceptable, participate with new capital, even with co-‹nancing by the World Bank. The result is that it is necessary to pursue appropriate re‹nancing models with even more creativity and engagement.35 The German business community itself was concerned about the lack of regular ‹nancial relations between Warsaw and Bonn (which would have allowed Bonn to secure commercial credits to Warsaw). According to the German Federation of Exporters, Poland’s debt problems with Bonn were paralyzing trade between the two countries. “If it weren’t for a large scope of business transactions, bartering goods for goods, German-Polish trade would practically come to a standstill.”36 By 1987, German exports to Poland had fallen by 13.6 percent. 1987 Bangemann Visit: Support for Paris Club Rescheduling During this period numerous Polish of‹cials appealed for other types of economic concessions from Germany. In March 1987 Mieczyslaw Tomala (a former Gomulka supporter and expert on German-Polish relations) made an appeal for activating more mutually bene‹cial industrial cooperation between Poland and Germany, especially in the area of medium- and small-sized industry. The political logic behind this economic plea was as follows: (1) Decision makers in the past (in particular Helmut Schmidt) had realized the importance of normalizing relations. In fact, Tomala argued, Germany was the only state to maintain political contacts with Poland after the imposition of martial law despite all critical opinions. (2) Trade volume between the two nations was able to make a quick recovery, by 1985 achieving a volume equal to that of 1980. This was interpreted as proof of the “consolidation of the progressing stabilization of economic life in Poland.”37 Nonetheless, Tomala pointed out, some decision makers in Bonn have not quite comprehended the linkage between overcoming bilateral dif‹culties and progress in overcoming the division of Europe. With this perhaps indirect hint about the linkage Warsaw–East Berlin–Bonn, he concluded his remarks with: The Polish-German relations are . . . not just a bilateral problem. They are, in light of the past and the signi‹cance of our nations for

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the entire European dialogue, also an important element in the structuring of European cooperation. We are thus an important component of a common Europe.38 German of‹cials responded in kind. In May 1987 economics minister Bangemann visited Warsaw to take part in the seventh annual meeting of the Mixed Economic Commission.39 Bangemann made the Poles three promises:40 (1) Within the framework of the multilateral Paris Club negotiations, Bonn would push for a new rescheduling plan that would cover Warsaw’s debt from 1981 to 1988. (2) Within the framework of the GK, Bonn would support efforts to ‹nd new ways to cooperate economically, especially forms of joint ventures. In particular, Bonn was interested in concluding an investment promotion and protection treaty. By signing such a treaty, Bonn would legally be in the position to guarantee private German investments in Poland against political risks. (3) If agreement is reached on the preceding issues, Bangemann promised to use his in›uence in the Bundestag to lift the prevailing suspension of government guarantees for commercial and export credits to Poland. Indeed, on October 30, 1987, the Paris Club was able to reach agreement with Warsaw on the terms of a new rescheduling plan for Poland. The multilateral protocol, subsequently signed on December 16, 1987, covered Polish present and future obligations (through year’s-end 1988). The conditions were very generous and gave full recognition to Poland’s precarious ‹nancial situation. Nonetheless, by one account, Bonn used its in›uence as Poland’s largest of‹cial creditor to protect the interests of commercial German banks, also Poland’s largest private creditor. Accordingly, Bonn made sure that commercial debts would be better served than of‹cial debts.41 Under the terms of the agreement, Poland was given payment relief through the end of 1988. That is, instead of paying the full amount of obligations that would come due by then ($9.5 billion), Warsaw would have until March 31, 1989, to make payments totaling only $1 billion (a third of which was to go to Bonn as Poland’s largest creditor). It was also agreed that the remaining $8.5 billion owed would be rescheduled once Warsaw reached an agreement with the International Monetary Fund. Expectations among Paris Club members were that the IMF would most likely give Poland some form of ‹nancial aid, thus alleviating Warsaw’s cash shortage. On the basis of this multilateral agreement, each individual creditor nation was to sign a bilateral rescheduling treaty. Accordingly, Bonn should have rescheduled Polish obligations in the amount of DM 2.7 billion (DM 1.9 billion in arrears and DM 800 million for payments due 1987). However, the bilateral negotiations for rescheduling Poland’s debt

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with Germany covering the years 1987 to 1988 were not able to reach a conclusion until October 1989. One of the major blocking points in reaching a new rescheduling plan was the unresolved issue of the 1975 jumbo credit. That is, despite the rescheduling agreements Poland I, II, and III, no agreement had ever been reached on the rescheduling of the jumbo credit from 1975. From the start, the jumbo credit had been uncoupled from the of‹cial Paris Club negotiations, ostensibly because it was classi‹ed as a “political credit” (and thus not an ordinary state credit).42 Nonetheless, it remained a contentious issue between Bonn and Warsaw, and not just because Warsaw had stopped servicing the debt after two token payments in 1980. More important was the issue of repayment for the interest subsidization, which Bonn had been forced to undertake in the succeeding years. At its inception the credit was extended at an arti‹cially low interest rate (2.5 percent), since Bonn agreed to subsidize the difference between 2.5 percent and the market rate. However, since Poland had not made the scheduled payments, Bonn was being forced into subsidizing the interest subsidies. By 1986, estimates were that between 1976 and 1985 approximately DM 500 million had been spent for such subsidies; another 70 million had been budgeted for subsidies in 1986. For these expenditures, Bonn was demanding something in return, something to show their constituents for their efforts. By one account, Poland was insisting the jumbo credit be forgiven in the name of a political “donation.” At that point in time (i.e., spring 1988, before signi‹cant political and economic reforms), however, the Finance and Economic Ministries were still demanding not only that the debt be repaid, but also that its interest rate be raised to a market rate. The Foreign Of‹ce, on the other hand, opposed its fellow ministries’ demand. Its fear was that overall German-Polish relations could be damaged, a risk it was not willing to take. Instead, the Foreign Ministry urged the other two ministries to be more conciliatory.43 Warsaw, however, initially refused to make any political concessions, so the issue remained unresolved. Hence, the conservative attitude prevailing among German of‹cials remained: No matter how great the political interest is in helping Warsaw at least economically escape Moscow’s sphere of in›uence: after the experiences of Helmut Schmidt’s attempts, one must ask whether this is a suitable instrument or not.44 It was not until political and economic reforms were clearly under way in Poland that a ‹nal rescheduling agreement could be reached on

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October 9, 1989, barely one month before Kohl’s scheduled visit. At that point, a total of DM 2.5 billion in Polish obligations to Bonn were rescheduled, with the understanding that a new rescheduling agreement would have to be worked out in accordance with the latest IMF ‹nancial appropriation agreement. 1989 Visit by Kohl and the Treaty Package German-Polish political relations entered a state of “permanent bargaining” from the time of foreign minister Genscher’s visit to Warsaw in January 1988 until Helmut Kohl’s long-awaited visit to Poland in November 1989. In 1988, during his visit to Warsaw, Genscher gave his solemn declaration that Bonn’s goal was to normalize all relations between Poland and Germany (i.e., including ‹nancial relations, which would require a new debt rescheduling agreement). At the same time he spelled out the political concessions Bonn considered to be necessary conditions for any German economic concessions (i.e., secured credits from Bonn). The emphasis was on Polish political acquiescence in matters of the ethnic German minority living in Poland. For example, Bonn was demanding increased exit permits for ethnic Germans residing in Upper Silesia; intensi‹cation for German language training in Polish schools; and the use of German names in of‹cial transactions when designating former German cities now located in Polish territory. Nonetheless, at the same time Bonn was pressuring Warsaw to undertake economic reforms as well. Indeed, Otto Wolff von Amerongen, chair of the Ost-Ausschuß, Berthold Beitz, chair of Krupp AG, and other prominent members of the German business community accompanied Genscher on his visit to lend credibility to the importance of economic reforms.45 Bonn, however, was itself in the midst of a dilemma. The political goodwill was there on the part of the government, but Genscher and Kohl had to deal with the more conservative elements of their governing coalition, who were demanding speci‹c political concessions in return for any economic concessions that Bonn should make. Evidence of this can be seen in the remarks made by Theo Waigel, at that time chairman of the ultra-conservative coalition partner, the Christian Socialist Union (CSU). Replying to the question of whether future aid to Poland should depend on increasing freedoms for the former independent trade union, Solidarity, he claimed: What is going to take place in every instance must be decided by the Poles themselves. Important for us is the protection of the German

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minority. Beyond that we welcome the increasing enfranchisement for Solidarity that the Poles have longed for.46 The tension between Bonn’s goodwill and Warsaw’s willingness to undertake political and economic reforms was eased somewhat during the so-called private visit of Prime Minister Rakowski to Bonn on January 20–23, 1989.47 Rakowski’s private attendance was used as an excuse to hold unof‹cial consultations with high-ranking members of the government and the private sector. Rakowski spoke with both the chancellor and Otto Wolff von Amerongen (OA chair), making it clear that Poland was prepared to meet the Germans halfway in settling their remaining differences. In particular, Rakowski emphasized the fact that his government was undertaking massive economic reforms, designed to do away with socialist inef‹ciencies and open the way for a market economy. The Polish prime minister’s hope was that this signal of willingness would spur German of‹cials to grant Warsaw a generous economic aid package in the name of normalization of relations. Here Rakowski was successful in piquing the interest of the German government to reward economic reforms without demanding political reforms. Nonetheless, if the governing coalition in Bonn meant to make good on its desire to improve and normalize relations with Warsaw, the calledfor gesture was a trip by the chancellor to Poland. It would be the ‹rst time that a Christian Democrat, as chancellor of the Federal Republic of Germany, would make an of‹cial visit to Poland. However, in the assessment of one Poland expert, “The ‹rst visit by a CDU Chancellor is not conceivable without some type of ‘gift,’ this especially so in the year of the ‹ftieth anniversary of the German invasion of Poland.”48 What made the situation particularly dif‹cult was that Poland’s horizon of expectations toward the German government and the business community seemed to increase with each new promise of goodwill. Nonetheless, there were ‹nancial and economic limits to Germany’s largesse. And thus began the poker sessions between Bonn and Warsaw over the political and economic stakes of reconciliation. Of course the stakes were raised immensely when Warsaw carried out intensive economic and political reforms in the ‹rst six months of 1989. As part of Rakowski’s January program to institute trade union and political pluralism, the so-called round table talks began between government and opposition in Poland. Two agreements reached as a result of these negotiations were to have earth-shaking results for the rest of Eastern Europe. On April 5 it was agreed to hold free and open elections,49 and on April 17 Solidarity was reinstated as an independent and legal trade union.

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On June 4 the elections were held and the Solidarity Citizens Committee won a landslide victory: 99 out of the 100 Senate seats went to their candidates. The communist bloc parties, including PUWP, failed to win a single seat in the Senate. In the ensuing months before a ‹nal, stable government was formed in Warsaw, Kohl took advantage of the opportunity offered by the domestic turmoil to once again delay his visit to Poland. During the summer months, Kohl was torn between, on the one hand, wanting to economically reward the Poles (and Hungary) for their reforms and thereby pressure East Berlin to carry out similar reforms and, on the other hand, wanting to maintain the conservative position that the “German question” was still an open issue. For example, on July 11 Kohl proclaimed the need for reconciliation with Poland; yet he insisted that the German question remained open. In his opinion, self-determination by the German people remained the core of the German question. Bonn’s “Poland policy” was anchored not only in the Warsaw Treaty, but also in the Basic Law (i.e., the FRG’s constitution that called for the unity of the nation).50 With the election of Tadeusz Mazowiecki on August 24, 1989, as the ‹rst noncommunist prime minister of Poland in forty years, however, Kohl could no longer put off earnest negotiations for his trip to Warsaw. Before Kohl could make ‹nal arrangements to visit Poland, Solidarity leader Lech Walesa made a historic visit to Germany in early September. During his trip Walesa solicited loudly for economic aid for Poland. Not only did he expect direct ‹nancial concessions from Bonn, but he was also urging more private economic engagement in Poland. At one news conference, he went so far as to accuse West German industry of behaving like a prudish virgin in its lack of enthusiasm for economic engagement in Poland. Indeed, the German business community was waiting to see what economic reform packages would come from the new government in Warsaw. In particular, the Germans were hoping for the ‹nal conclusion of an investment promotion and protection treaty.51 In the weeks immediately leading up to Chancellor Kohl’s visit to Warsaw in November 1989, Bonn had been tempting Warsaw with the idea of not only canceling one-half of the DM 1 billion owed from the jumbo credit of 1975, but also providing several million marks for a currency fund to be used to shore up the Polish zloty. Above all, Bonn was signaling its willingness to provide up to DM 3 billion of export credit guarantees, imperative if trade between the two countries was to recover. Yet at the same time, German of‹cials had been demanding a linkage between the zlotyization of the 1975 jumbo credit and certain political concessions. In particular, they wanted to create a fund to be used for projects in support of the ethnic Germans living in Poland. The hope was that

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such projects would improve the living standards of ethnic Germans in Poland enough that they would want to stay in Poland and not immigrate to Germany. This, of course, was a total reversal of traditional German policy, which had been to encourage as many of these Germans as possible to immigrate. However, by 1989 the number of Germans resettling from Poland was getting too large to handle, especially in conjunction with the large number of East German refugees the West Germans were also having to cope with.52 That the chancellor was interested in using economic bene‹ts as rewards for political reforms is evidenced by two incidents. However, in each case the OA was able to persuade the Chancellery to do otherwise in the name of economic pragmatism.53 The ‹rst incident concerns the preparations for the chancellor’s visit in November. Originally the Ministry of Economics was charged with assembling the economic delegation that was to accompany Kohl on his Warsaw visit. However, the Chancellery had a ‹rm view of how it wished the Economics Ministry to proceed. Along the lines of the “Moscow model” (i.e., using the same concept from Kohl’s Moscow trip), the chancellor above all wanted ‹rms who were prepared to bring concrete cooperation and/or investment contracts with them, in order to sign them while in Warsaw. The Economics Ministry questioned whether such a feat could be executed. Its assessment was that most likely not enough ‹rms could be found and that therefore various “letters of intent” would have to be signed. The reaction of the OA, requested to assist in selecting the appropriate assortment of German industrialists, was that it considered the idea equally dubious and it did not want to be put under any “public relations” pressures. As one OA staff of‹cial argued: “It is really an issue of revitalizing long-term business relations—and not a matter of photo opportunities in Warsaw.”54 However, within one week of voicing these misgivings, the OA reached a compromise after bypassing the Economics Ministry and holding talks with an of‹cial from the Chancellery. The OA, in choosing representatives from the German business community, would not follow the “Moscow model,” but instead would aim for ‹nding ‹rms that were willing to negotiate on concrete projects. Moreover, the OA was to communicate its suggestions directly to the Chancellor’s Of‹ce and merely keep the Ministry of Economics informed in order to “to keep them happy.”55 A telephone conversation two days later between OA of‹cials and of‹cials from the Economics Ministry con‹rmed that the Chancellor’s Of‹ce was exclusively in charge of setting the economic delegation. A second incident is also indicative of the power of the OA to in›uence decisions made in the Chancellor’s Of‹ce. It, too, was a matter of

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persuading the chancellor to drop an idea originally conceived of as a grand gesture of West German sincerity to improve economic ties to Poland. Of‹cials in the Federal Chancellery were considering creating the post of a “Poland-Adviser for the German Industry” (apparently to be a type of super-adviser). The plan was clearly public relations–oriented (i.e., meant to be a sign of the chancellor’s sincerity in wanting to improve German-Polish economic relations). Helmut Schmidt (the ex-chancellor) was being considered for the position. The initial reaction of the OA was not entirely favorable, and, if not otherwise unavoidable, they were at least hoping to have the Poland subcommittee chair serve in a double capacity as the “Poland-Adviser.” However, the major concern of the OA was that by giving Poland this special privilege, other “reform nations” (e.g., Soviet Union and Hungary) would soon demand the same right, thereby creating coordination problems for the OA. Apparently, on this basis the Chancellor’s Of‹ce dropped the idea of an “adviser-guru.”56 The ‹nal results of the endless bargaining between Bonn and Warsaw were several signi‹cant ‹nancial and economic concessions. Most telling was the fact that Bonn dropped its initial proposal to make future credit guarantees dependent on Poland repaying the 1975 jumbo credit. Also of signi‹cance was the agreement to forgive the current obligations from the 1975 jumbo credit (a sum of DM 760 million). The remaining amount, DM 590 million due by 1999, was to be repaid in nonconvertible zloty.57 Furthermore, Poland IV, the latest bilateral rescheduling agreement, covering Poland’s debts from 1986 through 1988, was signed. With it another DM 2.5 million in Polish obligations were rescheduled. Last, but not least, a treaty covering investment guarantees in Poland was signed, an agreement the German business community had long been pressing, since otherwise they would have been extremely reluctant to invest fresh money in Poland due to the still unforeseeable political risks. Warsaw ended up receiving DM 2.5 billion for project ‹nancing. However, the German government reserved the right to approve the economic projects before extending the credit, an exceptional stipulation. Another DM 500 million was promised for the Polish currency stabilization fund (although only in the form of a verbal promise and not a concrete agreement). In all, the ‹nal declaration issued by Kohl and Mazowiecki on November 14 contained 78 points, covering such issues as future political relations (reconciliation) and economic relations (striving for new forms of cooperation). The German delegation departed from Warsaw knowing the German question had been reopened for the immediate future by virtue of the opening of the Berlin Wall during Kohl’s visit to Poland.58 Ultimately, this meant the old linkage system of supporting reforms in Poland in hopes of

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getting political concessions from the GDR was no longer valid for Bonn. A Polish assessment of the situation after the Berlin Wall fell best sums up the shifting attitude of the Germans: the Polish example as a transmitter of reforms was no longer needed for improving German-German ties.59 1990 Polish Debt Reduction (Poland V) By early 1990 the Polish foreign debt had assumed colossal proportions. Its total debt amounted to $41 billion, of which $29 billion was owed the Western creditors in the Paris Club. (Debt with Western commercial institutes was $10 billion and with the COMECON nations $2 billion.) The amount to be consolidated in the 1990 negotiations was $9.35 billion (approximately the same amount consolidated by Poland IV, initialed in 1987). Yet the 1990 debt rescheduling agreement concluded by Poland and the Paris Club members (Poland V) was qualitatively dissimilar from all previous agreements. Signed on February 16, 1990, the geo-strategic positions of both Poland and Germany had been fundamentally transformed. Poland was no longer ‹rmly entrenched in the Soviet bloc, and its government was headed by leading members of the former dissident movement, Solidarity. For Bonn, too, the conditions had changed. The Berlin Wall had fallen, and negotiations among the Four Powers were under way to arbitrate the formal uni‹cation of Germany. There were also new dynamics at work within the rescheduling negotiations. Of‹cials in Warsaw were eager to facilitate an acceptable arrangement. They saw a new agreement as crucial to their goal of transforming a command economy to a marketdriven one. German of‹cials, on the other hand, were pressed to bargain in good faith since they did not wish to jeopardize feelings of goodwill regarding German uni‹cation, at least among the Allies. At the same time, they (as well as other Western nations) wanted to formally anchor the economic reform process under way in Poland within a binding agreement. As a result, the ‹nal multilateral agreement was concluded under terms that gave the Polish government generous conditions for the servicing of its debt. A fourteen-year repayment plan was established, with a ‹ve-year grace period before resuming principal repayments. At the same time, the Paris Club members were able to secure Warsaw’s written assurance that it would continue the “shock therapy” reform course introduced on January 1. As a result, the Poland V agreement contains stricter conditions than the previous agreements. Among other stipulations, the agreement decrees that the Polish government establish a special account to which it would make regular payments. These funds were then to be drawn upon in order to facilitate equitable repayments to its Paris Club creditors. The assurance that Poland would continue with its economic reforms (and

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austerity measures) came in the form of a linkage with the economic conditions demanded by Poland’s stand-by agreement with the International Monetary Fund. The Paris Club agreement would only be valid so long as Poland was in good standing with the IMF. (This is a standard clause in the minutes of most Paris Club rescheduling agreements. However, under the communist governments Polish of‹cials had rejected any such linkage.) Finally, the creditor nations agreed to convene new negotiations on consolidating the Polish debt after March 1991, provided Poland was not in arrears in its accrued interest payments or the agreed-upon economic targets set by the IMF. According to standard Paris Club practice, at this point Poland was to negotiate a bilateral rescheduling treaty with each of its creditor nations under the terms of the Paris Club minutes. Thus, it appeared the last hurdle for the formal consolidation of the Polish debt with the German government was to conclude a bilateral treaty covering the Polish debt with Germany ($2.5 billion), a matter not considered controversial. However, German of‹cials still had an agenda regarding its policy toward Poland. Above all, Chancellor Kohl was concerned about the sensitive matter of protecting the rights of the German minority in Poland. Although the Polish government had verbally given its promise to improve the rights and living conditions of ethnic Germans during Kohl’s historic visit to Poland in November 1989, the rights had not yet been formally secured in the form of a binding treaty. Beyond this, matters related to the terms of German uni‹cation became a complicating factor. Above all, it appeared the issue of the nonviolability of Poland’s western border was not yet satisfactorily resolved. I suggest that as a result of these unresolved political issues, the conclusion of a bilateral rescheduling agreement between Bonn and Poland, essentially an economic issue, was considerably delayed. At the very least the formal endorsement was delayed for political reasons. A complete draft of the bilateral treaty was ‹nalized on June 22, 1990, and according to inside sources, it was expected that the treaty would be signed within the next week. Yet in the end, it took over one month before the of‹cial signing ostensibly because of unrelated political tensions.60 The 1970 Warsaw Treaty on the normalization of relations between the People’s Republic of Poland and the Federal Republic of Germany ostensibly dispensed with the issue of Poland’s western border. In the treaty both nations declared the nonviolability of borders as well as respect for territorial integrity and sovereignty of all states in Europe in their present borders as fundamental conditions for peace. Yet as chapter 4 discusses, the clause dealing with any possible future territorial claims was somewhat revisionist, that is, only Poland and the Federal Republic

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renounced any current and future territorial claims toward one another. The connotation was that this renunciation would not be binding for any possible successor state, that is, an all-German state. Thus, it would allow for a united, all-German government to raise new territorial claims against Poland. In the aftermath of the breach of the Berlin Wall, and as the possibility of German uni‹cation became more plausible, this ambiguity became a source of mistrust. Above all, it was Chancellor Kohl’s unwillingness (or inability) to unconditionally recognize the ‹nality of the Oder-Neiße border that fueled suspicions in Warsaw. Over time, the situation escalated. For instance, in early February 1990 the Polish foreign minister, Krzysztof Skubiszewski, spoke only of having the nonviolability of the German-Polish border anchored within the context of a CSCE summit meeting.61 By February 22, the Polish foreign minister was requesting participation in the 2 + 4 talks that were to negotiate the external conditions of German uni‹cation. Above all, Skubiszewski suggested that a separate treaty con‹rming the border’s permanence be negotiated as a part of the arrangement.62 Tensions heightened when in early March Chancellor Kohl (apparently without consulting his coalition partners) publicly demanded a promise by Warsaw to formally relinquish any future demands for reparations from World War II as quid pro quo for a formal border guarantee. This latest pronouncement by Kohl, however, also angered his coalition partners so that on March 8, 1990, the West German parliament passed a resolution con‹rming the right of the Poles to live within secure borders. The resolution also suggested that parliaments in both East and West Germany issue a declaration to that effect. Moreover, it was suggested (not mandated) that a new treaty be signed by the newly uni‹ed Germany with Poland, guaranteeing its borders for once and for all. At this point, it would seem that the Polish side had “won” in getting the German government to concede to certain guarantees.Yet, the mistrust continued in that Poland’s president, Wojciech Jaruzelski, traveled to both France and the Soviet Union to procure their formal support in compelling Germany to establish the Oder-Neiße as the nonviolable border in an internationally binding manner before uni‹cation.63 This manifestation of mutual distrust that had permeated German-Polish relations for the ‹rst twenty years following World War II, before Ostpolitik, resurfaced in the form of a miniature test of wills. The chronology of events in July 1990 sheds some insight as to the dynamics of German negotiation and its ability to secure its preferences. By the beginning of July it was still unclear as to whether the Soviet Union would concede to German uni‹cation if it insisted on remaining a member of NATO. Indeed, some Soviet of‹cials were suggesting that while internal

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German uni‹cation could take place rather quickly, externally Germany should remain under the direction of the Four Powers until all external issues could be resolved. In conjunction with these Soviet reservations, Poland had articulated three demands from the uni‹cation process regarding its western border, including that Germany only regain its full sovereignty after rati‹cation of a binding border treaty. In suitable “checkbook diplomacy” fashion Germany resolved these outstanding controversies by ‹nancially appeasing the relevant actors— however, in this case it was the Soviet and not the Polish government. On July 16, 1990, a historic breakthrough was made in German-Soviet relations when Party chairman Mikhail Gorbachev agreed to German uni‹cation without requiring its alliance neutrality. Moreover, once an appropriate treaty was signed by the Four Powers, Germany was to immediately regain its full sovereignty. The “price” for this Soviet acquiescence was DM 15 billion in various forms of grants and loans. A distinctive aspect of the “friendly” bargaining was the series of conversations between foreign ministers Genscher and Schevardnadse, during which Genscher was able to secure Moscow’s support in dealing with the Polish demands.64 The next day, July 17, 1990, agreement was reached in the 2 + 4 + 1 talks on the conditions of German uni‹cation regarding the Polish border. None of the Polish demands were accepted, and on July 30, 1990, the German-Polish bilateral debt consolidation treaty was signed in Bonn. 1991 Friendship Treaty During the entire postwar era German of‹cials sought to facilitate the resettlement of as many ethnic Germans as possible from Poland as the second best alternative to regaining the territories it lost there. In particular, after the thaw in German-Polish relations in 1970, policymakers in Bonn resolutely pursued the policy of Familienzusammenführung (reuniting separated families). Yet, as ‹gure 9 illustrates, Bonn scored only minimal success with this policy during the 1970s and early 1980s. However, in the post–martial law period in Poland the ›oodgates opened as the Polish government, in order to relieve political unrest, allowed large numbers of “Germans” to leave. After the fall of the Iron Curtain the numbers increased dramatically from all over Eastern Europe, compelling the postuni‹cation German government to develop a new policy toward the ethnic Germans scattered throughout Eastern Europe and the former Soviet Union. As a result of these pressures, the thrust of German repatriation policy changed immutably. Instead of promoting repatriation and resettlement, the German government now was striving to stem the ›ow of “Ger-

Fig. 9. Ethnic German repatriates (from selected East European countries). (Data from Federal Ministry of Interior, “Aussiedlerzahlen,” Bonn, July 3, 1990, photocopy.)

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mans” from Poland (as well as Central and Eastern Europe overall).65 The contractual linchpin for this policy of stemming migration lay in anchoring and codifying the rights of the German minority in Poland. Here Bonn can point to signi‹cant success due to major bilateral agreements. As discussed in the preceding section, the ‹rst major breakthrough on minority rights came on November 14, 1989—after the ‹rst noncommunist government was installed in Warsaw—when a package of fourteen agreements was signed by Warsaw and Bonn. One of the accords stipulated, among other things, that both sides enable people and ethnic groups to protect and practice their cultural identity . . . and enable all interested persons to have increased access to the language and culture of the other side.66 The agreements also included a ‹nancial settlement, whereby the German government agreed to forgive half of a DM 1 billion intergovernmental loan made to Warsaw in 1975. The other half was to be paid (in zloty instead of DM) into a special fund to be used to promote German language and culture in Poland. The second, and most signi‹cant, legal instrument guaranteeing German minority rights is contained in the treaty signed by of‹cials from Warsaw and Bonn on June 17, 1991. For the ‹rst time minority rights in Poland were carefully spelled out according to the norms of international law. Indeed, in a decisive departure from the practices of former Communist governments that denied the existence of any remaining ethnic Germans, the treaty speci‹cally speaks of a “German minority in the Republic of Poland,” de‹ned as “persons of Polish citizenship who are of German descent or who identify themselves with the German language, culture or tradition.” Furthermore, Article 20, Paragraph 4 declares that membership in these minorities is a matter of “personal decision for the individual.” The treaty precisely enumerates the rights of the minority groups as well as those of the two governments. The speci‹c guarantees made to the members of the German ethnic minority in Poland (as well as to the Polish ethnic minority in Germany) include the rights to express freely, maintain, and develop their ethnic, cultural, linguistic, and religious identity, as well as to be free from pressure to assimilate against their will. Each minority group also has the right to exercise fully and effectively all human rights and freedoms without any discrimination under conditions of full legal equality. In addition, the treaty declares that both ethnic minorities will be able to use their languages freely; to set up and operate their own educational, cultural, and religious organizations; to spell their names in the

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forms used in their mother tongues; and to maintain free contacts across borders. The rights for the governments include the right of each government to consult with the minority organizations and their representatives located in the other country. This, of course, gives Bonn the prerogative to interfere in the internal affairs of Poland through the German minority organizations, a crucial concession wrested from Poland. This legal right of the German government to support minority organizations in Poland has become a signi‹cant component of its new repatriation policy, effective January 1, 1993. While the policy maintains that the “door for German repatriates wishing to come to Germany remains open,”67 it is clear that the preference of the German government is that the ethnic Germans remain their place of birth. Thus Bonn pledges to provide them [repatriates] and their children with a perspective for a future in their present home country. In this context it remains important to make them feel at home with German culture, to give them social and economic assistance which puts them in a position to help themselves and to implement effective protection measures for minorities.68 As part of this resolve to keep the “German” Silesians in their homeland, Germany has expanded its support agencies there. The German embassy in Warsaw and the newly created consulate in Wrocaw have each established a Desk for Minority Affairs. A branch of the German General Consulate is scheduled to open in Opole with the mandate to manage German minority affairs. In order to promote German language and culture at the community level, meeting halls (Begegnungsstätte) have been established throughout Eastern Europe. The treaty also provides a cornerstone for German policy to promote and anchor the expansion of economic and ‹nancial cooperation in the name of political goodwill. As a means of sweetening the deal for Polish of‹cials, the treaty also contains specific mandates to intensify economic cooperation and to hold regular governmental consultations and meetings on all levels of government, as well as the express desire to continue the work of the Mixed Commissions previously mentioned. Most meaningful to Polish of‹cials was Bonn’s pledge to support their bid to join the European Community as soon as conditions permit. Beyond promoting state-to-state relations the treaties enumerate German pledges for promoting private economic cooperation and support for the reform process. As one result, there have been major increases in funding for advising, consulting, training, and schooling in Central Europe. Of particular interest is the German equivalent of the U.S. enter-

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prise fund. Geared to aiding the establishment of small and medium-sized businesses in Central Europe, the fund is expected to receive substantial increases in ‹nancial support. Estimates in 1992 were that the fund will grow from DM 16 million in 1992 to reach up to DM 40 million in the next ‹ve years.69 In practice this policy aims to intensify contact with the Germans in Poland and to provide material assistance for the emerging German minority “pressure groups.” It also helps to make German minorities feel at home with German culture and to improve their living standards by promoting small German businesses. In this chapter I argue that the strategy of economic persuasion was not easily implemented in that the German government was not willing to offer large enough incentives to Poland in order to gain its cooperation. Yet once the Polish government reconceptualized its preferences and realized its interests lay in cooperating with Germany, the strategy once again functioned to send signals and build trust. And once German uni‹cation became a reality, opening the way for signi‹cant improvements for the German minority in Poland, the German government marshaled substantial amounts of reward power in order to secure the desired peaceful settlement of con›icts.

PART 3

Conclusion

CHAPTER 7

The Utility of Economic Persuasion: A Reappraisal “George Kennan, meet Willy Loman.”1

The utility of economic persuasion, in particular the use of economic incentives, can be a powerful tool for governments seeking peaceful change. Yet it also means retooling for diplomats schooled in old-fashioned ways of bargaining and negotiating: government of‹cials need to also be business-minded. This is understood best within the context of policy objectives as well as strategy options. If the objective is to build trust or elicit political cooperation from the target state, then being able to generate conciliatory signals is paramount for the sender state. In particular, if the goal is to de-escalate con›ict, or simply reduce the barriers of mistrust between nations, concessional gestures such as economic rewards may be the only vehicle to reach that goal. When seeking peaceful change, then, the usefulness of economic persuasion as a viable foreign policy strategy is without parallel among all forms of statecraft. Offering economic incentives can indeed be an extremely effective strategy, if not the only feasible one under certain circumstances. While the costs of economic incentives may be signi‹cant, these costs may pale in comparison with the costs of alternative strategies, in particular military intervention. Nonetheless, if economic persuasion is to be a viable alternative to use of force, certain conditions must prevail; otherwise the basis for economic leverage— suf‹cient reward power—will not ›ourish. In other words, the German model of economic persuasion is dependent on certain domestic factors. This chapter presents a reappraisal of economic persuasion by examining the costs and bene‹ts of such a strategy. It surveys the domestic constraints Bonn encountered while employing economic statecraft as a technique of foreign policy and examines how these constraints affected the outcome of such a policy. In particular, it focuses on the domestic institutional structures that Bonn developed to implement its strategy of economic statecraft. This is especially crucial since I argue that it was precisely these structures that gave Bonn the capacity to extract the critical resources necessary from its domestic society. I then examine the feasibil137

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ity of economic persuasion for other nations by asking whether the German model can be replicated elsewhere. In particular, I examine the U.S. policy toward Poland in the postwar era to elicit comparisons, and I focus on the institutional structure of that policy: How well was the U.S. government able to “manage” foreign economic policy? Was it able to muster the same amount of reward power as the German government? I close with a discussion of the likelihood of the United States developing such institutional structures in the post–Cold War era. The Benefits of Economic Persuasion Concomitant with the transformations in West German political objectives after 1969 (from diplomatic isolation to political rapprochement), even more signi‹cant changes took place in the strategies of the German government. The shift was away from a “policy of strength,” meant to coerce Poland into concessions through a show of military force, and instead toward traditional means of diplomacy (i.e., treaties and political agreements). To enhance these efforts, increasing use was made of economic instruments. In particular, once Bonn began its policy of damage limitation in the mid-1970s and, later, even more so during its policy of stabilization in the early 1980s, it increasingly emphasized a strategy of economic persuasion. The main instruments German of‹cials employed were the “carrots” of credit and technology transfer. This shift in strategy neatly coincided with a shift in Poland’s goals. Once Poland achieved its political goal vis-à-vis Germany, namely, the con‹rmation of its western border, it, too, was interested in intensifying economic relations. Bonn, then, was willing to oblige, even if it meant incurring high economic costs. For example, by the early 1980s it was clear that the Polish economy was suffering from a major economic crisis. Even so, German of‹cials continued to award Poland credit, directly and indirectly. By continuing to grant export credit guarantees under the guise of national interest, the German government primed the pump for commercial loans. I interpret this willingness to oblige Poland as an attempt to keep the Polish regime politically a›oat despite costing the German government several billion deutsche mark. In 1982 German elites even grudgingly accepted the “necessity” of martial law,2 and tried as much as possible to exempt economic relations from the political fallout. Later, during the 1980s, even the conservative government under Chancellor Kohl continued this policy of offering economic carrots for political concessions, if less generously than Schmidt. While only small amounts of export credit guarantees were made available, the conservative government did support of‹cial debt rescheduling as a means of inducing further private lending.

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What did the German government gain from its efforts at economic persuasion? It is when states desire peaceful change in the international system that the bene‹ts of economic persuasion become most apparent. The accrued bene‹ts may be either intangible in nature (e.g., changes in attitude) or of a substantial material kind. One prime advantage of economic persuasion over the use of military force is the fact that economic rewards or acts of economic concession can contribute to the de-escalation of con›ict by reducing the barriers of mistrust (Kriesberg 1992, 404). Even compliance can be peacefully “purchased” by means of economic reward. As discussed in chapter 1, German objectives toward Poland ranged from the concrete (ease the situation of ethnic Germans in Poland) to the more abstract (normalize relations). Likewise, the goals included short-term ones (e.g., recognition of the rights of West Berlin) as well as long-term ones (e.g., reduction of tensions). Above all, Bonn sought the peaceful change of the status quo: overcoming its own historical legacy, which had generated international mistrust, in order to resolve the division of Germany peacefully. From the preceding chapters the following assessments of the ef‹cacy of economic statecraft can be made. First, success with a strategy of economic statecraft is more likely with economic incentives than with negative sanctions (e.g., embargoes or boycotts). The most vivid example of the failure of an economic embargo was Poland’s refusal to lift martial law in 1982. Not only did Warsaw refuse to comply, but by imposing the embargo against the wishes of most European nations, the United States only splintered an already fragile Western consensus. On the other hand, Bonn’s experience in Warsaw reveals that it was by far easier to win political concessions from its Eastern partner by granting economic advantages rather than through the use of negative economic sanctions.3 Second, economic statecraft is particularly useful if the goal is threat reduction within the context of adversarial relations. The economic dimension of political relations was fundamental in achieving long-term transformation of relations; for example, by replacing the “state of non-war by means of deterrence with a state of peace supported by trust and cooperative security structures” (Ruhfus 1987, 5).4 While one must be cautious in concluding that intensi‹ed economic interdependence means the end of political and ideological con›ict, it can be argued that such interdependence decreases the probability of armed hostility. Indeed, during the mid1980s when criticism of Germany by the Polish political elite increased as a result of martial law, economic relations seemed to help maintain an overall positive assessment. For example, Polish economic specialists continued to report positively and approvingly of German economic behavior in the mid-1980s while criticizing that of other Western nations.5

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Evoking attitudinal change was one of the primary successes of the normalization of relations between Germany and Poland. Bonn was able to allay Polish fears of a West German threat to Polish security interests. By diminishing the threat, Bonn thereby undermined the contention of the Polish Communist Party leadership that only complete loyalty to the Soviet Union could safeguard Poland’s national existence.6 Economic interdependence also seemed to undermine the cohesion of the Soviet military bloc. Even at the height of the new Cold War in the early 1980s, authoritative scholars were claiming (Johnson et al. 1982) that the more the “German threat” faded in the eyes of the Polish Communist Party leadership, the more improbable it became that they would support a decision to deploy Polish forces within the Warsaw Pact. The paramount achievement for Bonn was, of course, altering Polish attitudes toward German-German normalization. By the mid-1980s of‹cial Warsaw no longer feared German-German reconciliation and, instead, considered it useful for Poland. The best anecdotal evidence for Warsaw’s growing reliance and trust in German support is provided by the visit of Mieczyslaw Rakowski. As discussed in the introduction to this book, in 1989 the last Polish Communist prime minister appealed to German politicians and business leaders alike for massive ‹nancial aid to support the restructuring of the Polish economy. Apparently, Rakowski felt that Germany (and not the United States) was the only Western country that would be receptive to Polish pleas for economic support. As German uni‹cation rapidly became a reality, Poland saw its role in that process transforming as well. Warsaw would no longer be an obstacle to German uni‹cation, but a transit for its realization.7 The intense Soviet-German consultations in the months preceding German uni‹cation in 1990 are indicative of how far Bonn had progressed in expanding its freedom for maneuver. Indeed, in the early 1970s, during the initial years of Ostpolitik and the negotiations of the East Treaties, almost every aspect had to have prior clearance in Washington.8 When Chancellor Willy Brandt met with Soviet leader Leonid Brezhnev in 1970 without prior consultation with Washington the outcry in U.S. policy circles was furious (and suspicious).9 Yet, almost exactly twenty years later, when foreign minister Genscher met with Soviet foreign minister Schevardnadze in 1990 to discuss certain issues of German reuni‹cation, the details did not need to be cleared, much less discussed, beforehand in Washington. U.S. of‹cials no longer suspected Bonn’s motives. Normalizing relations by means of economic cooperation with Eastern Europe also had material bene‹ts for Germany. For example, German business was able to pro‹t by expanding its export market eastward as well as its access to cheap imports and energy resources. Even though the vol-

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ume of trade with Poland as a share of total German trade never reached the magnitude of Germany’s trade with its Western partners, acquiring new markets in the East helped compensate for those lost in Western countries during the economic slump of the mid-1970s. One leading German economist noted, “As a rule, centrally planned economies are less affected by economic cycles. Consequently, the interest of Western countries in trade with the East grows in periods of Western recession” (Walter 1987, 21). Figure 10 illustrates the substantial growth in German trade with Poland. Probably the ultimate cost-bene‹t analysis of whether West German expenditures succeeded in lowering any lingering barriers of mistrust in Warsaw would be to gauge the attitudes of Polish elite toward German uni‹cation in 1989. Indeed, initially, Warsaw viewed it favorably. If anything, Polish of‹cials feared that Bonn would became so involved in the uni‹cation issue that human and material resources would be diverted from helping Poland in its struggles. In particular, many feared that the Germans would become so self-absorbed that Poland would lose out economically.10 However, most were actively pinning hopes on a successful outcome of German uni‹cation because they foresaw Germany as Poland’s golden gateway to the West. In particular, Germany was seen as the vehicle that would enable economic integration and eventually EC membership. This was a far cry from the days when Polish elites denounced West German claims to the right of self-determination as “revanchist” and threatening to Polish security. Polish of‹cials (especially Prime Minister Mazowiecki) later backed away from this support for uni‹cation. By early 1990 the Polish government began making demands for a peace treaty that would de‹nitively establish Poland’s western border (this mistrust surfaced, however, only after Chancellor Kohl’s initial hesitation in unequivocally guaranteeing the inviolability of the Oder-Neiße border). Apparently, the ‹nancial concessions offered in November 1989 were not enough to compensate for Polish opposition at that point. Chancellor Kohl even contemplated, albeit very brie›y, the use of economic sticks to force Polish of‹cials to back down. Economic threats were also not suf‹cient when Polish territorial sovereignty was thought to be threatened. Yet one could argue that economic statecraft did prevail in the end. The only nation that could be reasonably expected to support Polish demands for a pre-uni‹cation border treaty was the Soviet Union. But even Moscow capitulated to German wishes in the end. Once a DM 5 billion state-guaranteed commercial credit had been bestowed (along with the promise of a long-term economic cooperation treaty and the economic bene‹ts that it entailed), Moscow dropped its initial opposition to a

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Fig. 10. German foreign trade with Poland. (Data from Ministry of Economics, Der Deutsche Osthandel [Bonn, 1988, 1991/92].)

uni‹ed German membership in NATO, clearing the way for uni‹cation.11 (Moscow also agreed to relinquish four-power rights and responsibilities over Germany at the time of uni‹cation.) President Gorbachev made these concessions at the historic bilateral summit in the Soviet Union in July 1990 despite Warsaw’s last-ditch attempt to block uni‹cation. Shortly thereafter, at the next round of 2 + 4 + 1 talks Poland quietly dropped its opposition to uni‹cation without a prior border treaty, apparently in recognition of the futility of its efforts (Ludwig 1991b). The Costs of Economic Persuasion The direct costs of using economic incentives or rewards as a tool of foreign policy cannot always be determined at the outset (i.e., before the concessions are granted), but at the same time the costs of military intervention are also not so easily estimated beforehand. In the case of German economic rewards and concessions for Poland during the period of normalization (1969–91), the overall ‹nancial parameters of its economic statecraft were generally established yearly by the Haushaltsgesetz (federal budget). In particular, the ceiling amounts for Hermes export credit guarantees (the primary source of positive sanctions) and private capital investment guarantees (granted only after 1990) were set by the federal

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budget, which in turn had to be approved by both houses of parliament (Bundestag and Bundesrat). The most pronounced form of economic rewards in German-Polish relations was the export credit guarantee, especially as granted to sovereign buyers (i.e., public buyer transactions). These guarantees were crucial to the Polish regime as they became the financial cornerstone for its forced industrial modernization policy in the 1970s. Essentially they enabled Warsaw to import crucial capital goods obtainable only from the West. Here it is critical to note that the United States, for example, has a very similar structure for guaranteeing export credits. However, Washington’s policy differs in two important practices. First, in terms of buyer credit guarantees, the United States does not grant them to sovereign entities, only private sector buyers. Second, and of special signi‹cance here, the United States does not insure exports “to or for use in a Marxist-Leninist country unless the President of the United States has determined that FICA-insured sales to that country are in the national interest.”12 Thus, economic and political limitations curb any attempts at economic persuasion made by the U.S. government. The German federal government can grant export credit cover only within an exposure limit on total commitments ‹xed annually by the Bundestag. For ‹scal year 1994 the overall ceiling was set at DM 180 billion, an equivalent of approximately $64 billion. In comparison, the ceiling for U.S. commitments in 1988 was only $40 billion. Allocations for new cover depend on the commitments already existing at the beginning of the ‹scal year. For Germany in 1993, for example, prior commitments totaled DM 165.7 billion, thereby making DM 14.3 billion available for new guarantees in 1994.13 How those funds are geographically allocated is, however, not just an economic issue but also a matter of political objectives. The ceiling for individual countries is generally a matter of negotiation among the relevant ministries—the Chancellor’s Of‹ce, Foreign Ministry, Finance Ministry, and Economics Ministry—leaving room for bargaining among competing bureaucratic interests. Yet this bargaining is contained with the parameters of Interministerial Committee (IMA) negotiations. These regular meetings enable all viewpoints to be expressed and a compromise found that supports the larger goals of the federal government. At the same time, because of the informal consultative links to the business community, the views of commercial interests are also represented. Since Germany’s export credit agency (Hermes) is considered a private organization and is thus not subject to public disclosure, no breakdown of the ceilings for individual countries is available. However, some generalizations can be made about the increasing level of support for export coverage to Poland because breakdowns are given for speci‹c

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regions, in this case the East Bloc countries. Export credit guarantees to East European countries have been available since 1965; however, it was not until the 1970s that extensive use of them was made by German exporters. Although total exports to Eastern Europe never amounted to more than 6 percent of total German exports, by the mid-1970s East European buyers were receiving nearly one-quarter of all export credit guarantees (mostly to the detriment of the Third World) as table 2 reveals. This same shift in priorities to favor Eastern Europe to the detriment of the Third World seems to be resuming in the postcommunist era. In 1993 (1992 ‹gures in parentheses), 21.8 (18.5) percent of all export guarantees went to Eastern Europe while only 36.8 (37.4) percent went to the Third World and 27.6 (29.5) percent to OPEC countries (Finanzbericht 1993, 270; Finanzbericht 1994, 292). While generally all industrialized nations pursue this same practice of granting export credit guarantees, in the case of Poland it is clear that the German government’s share of the Polish sovereign debt was disproportionally large as table 3 demonstrates. Moreover, commercial lending to Poland by German banks was also far more signi‹cant than that of banks in any other Western nation. Clearly, the German government had succeeded in priming the pump for private credits to Poland in the 1970s and 1980s. The ability of the German government to secure the support of private banks in its foreign policy goals marks a strong contrast to the inability of the U.S. government to do so. Spindler (1984) suggests that American banks were unwilling to cooperate with any attempt by the U.S. government to in›uence their international lending. According to one high-ranking executive, “If any senior of‹cer of [our bank] got a call from a U.S. government of‹cial [urging us to make a loan], we would almost certainly do exactly the opposite.” Another claimed, “I don’t know of any [U.S. commercial] bank lending that was done [explicitly] in support of U.S. foreign policy, and [if we were asked to do so], we wouldn’t have lent” (Spindler 1984, 201). In comparison, German banks were willing to accommodate the foreign policy goals of German governments on more than one occasion. During both the Social Democratic governments of Helmut Schmidt and the Conservative government of Helmut Kohl, German banks obliged the requests of federal of‹cials (including extending loans to East Germany as well as the Soviet Union in order to facilitate the process of German uni‹cation). Macroeconomic ‹gures illustrate the extent to which Germany “aided” Poland’s economic programs of the 1970s and 1980s. By 1988 Bonn’s share of the Polish hard currency debt (commercial and public) was almost 20 percent (the next largest creditor was France with a share of

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TABLE 2. Geographic Distribution of German Export Credit Guarantees East European Share of Total German Exports (in percent)

East European Share of Export Guarantees (in percent)

Third World Share of Export Guarantees (without OPEC)

3.62 4.17 6.42 5.75

9.7 14.5 23.6 14.5a

65.4 57.7 32.7 31.0

1965 1970 1975 1979

Source: Bundesministerium für Wirtschaft, “30 Jahre Interministerieller Ausschuß für Ausfuhrgarantien und Ausfuhrbürgschaften,” Bonn, 1980, 27. aAlthough exports to Eastern Europe dropped slightly, the primary reason for the decline in East Europe’s share in export guarantees was the substantial increase in guarantees to the OPEC countries, which rose from 34.0% to 47.4%.

TABLE 3. Polish Debt According to Origin of Creditors (as of May 30, 1991) Paris Club Germany France USA Brazil Austria Canada Great Britain Italy Japan Others

$ billion

Percent

London Club

$ billion

Percent

5.253 4.537 3.538 3.403 3.254 2.913 2.563 1.571 1.243 2.646

16.99 14.67 11.44 11.01 10.52 9.42 8.29 5.08 4.02 8.55

Germany France Great Britain USA Japan Austria Canada Italy Others

2.362 1.015 0.996 0.947 0.938 0.544 0.440 0.376 1.668

25.44 10.93 10.73 10.20 10.10 5.86 4.73 4.05 17.96

Source: Rzeczpospolita (Warsaw), no. 162 (July 13/14, 1991).

10.8 percent. That Poland received “special” treatment from German commercial banks (and thus the German government, since most commercial loans received government guarantees) can be seen in the fact that the share of German commercial banks in the 1989 Polish debt was an astonishing 35 percent, as illustrated in ‹gure 11. Although German commercial banks also extended credit to other East European nations, their share was not as pronounced as in the case of Poland. For example, the German share of the Hungarian sovereign debt reached only 21 percent, and in the case of Romania a mere 14 percent.14 Sovereign lending to Poland by the German federal government led,

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Fig. 11. Major creditor nations in commercial bank lending to Poland (as of December 31, 1989). (Data from PlanEcon, Report, November 3, 1989, 61.)

in turn, to another conspicuous form of economic concessions: debt rescheduling. After Poland threatened to default on repayment of its debt to German (as well as other Western) creditors in the early 1980s, six debtrescheduling agreements were negotiated between 1981 and 1992. The 1985 rescheduling agreement represents a substantial concession to the Polish government in that nearly one-half of the Polish debt was bilaterally negotiated by the German government within the parameters of a Paris Club agreement. The principal ‹nancial cost of these agreements to the German government has been governmental compensation to German ‹rms and banks for Polish nonpayment of loans (as well as the cost of tax write-offs due to “bad” debts in Poland granted by German banks or ‹rms).15 This amount of compensation was then added to Poland’s sovereign debt with the German government; as a result, the German share of total Polish debt has remained substantial as table 4 illustrates. A new type of economic incentive has been available since the 1989 economic reforms in Poland: capital investment guarantees. As discussed in chapter 6, Poland and Germany signed a bilateral investment treaty (BIT) in 1989, enabling the German government to insure German investment against commercial and political risk. While the following sums only represent credit guarantees (i.e., there has been no actual expenditure on the part of the government), they do indicate the extent to which Bonn is willing to absorb potential expenditures in the form of compensation. The BIT treaty has been in effect since February 24, 1991, and as of March 31, 1992, Bonn had guaranteed German investments totaling DM 36.6 mil-

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lion. Applications for another DM 251.4 million for investment guarantees in Poland were still pending.16 Meanwhile, during this same time period the United States had not yet negotiated an equivalent investment treaty, meaning that U.S. investors could not receive federal guarantees for their investments. Finally, the German government made use of certain economic rewards that were singular in nature. Indeed, there were certain forms of economic rewards that were not limited by budgetary ceilings; in particular, restitution payments and untied credits or export credit guarantees made in the name of “national interest” were also useful. According to federal guidelines, Bonn can guarantee untied credits (i.e., credits that are not tied to speci‹c German exports) in order to secure necessary raw material or to stabilize the ‹nancial and/or economic conditions of foreign countries. These untied guarantees do not fall under any speci‹c ceiling and are rarely employed due to their especially risky nature. In the case of Poland, however, Bonn did choose to issue such guarantees, as discussed in chapter 6. Beyond this type of concession, the German government has, due to its historical legacy, also found it necessary to grant restitution for crimes and atrocities committed by the Third Reich. Of special signi‹cance were the compensation agreements totaling DM 1.443 billion for restitution (as discussed in chapter 5). Put in a comparative context, however, this sum is not particularly exceptional. As part of the negotiations over German reuni‹cation with the Soviet Union, Bonn agreed to

TABLE 4. Bilateral Debt Rescheduling Agreements between Poland and Germanya

Agreement

Period Covered

Poland I Poland II Poland III Poland IV Poland V Poland VI

1981 1982–84 1985 1986–88 1989–90 1992

Total Amount Amount German Share Consolidated by Consolidated with of Total Debt Multilateral Paris Club German Rescheduled Agreement (U.S. $ billion) Government (percent) 2.11 10.93 1.40 9.03 9.35 16.50b

0.375 2.125 0.625 1.563 1.563 2.840

18 19 45 17 17 17

Source: Bundesministerium für Finanz, internal report, Bonn 1992, photocopy. aExchange rate used for calculations from Deutsch Marks: 1 US$ = DM 1.6. bThe Poland VI agreement was actually a compromise to forgive one-half of the total Polish sovereign debt, which these figures reflect; that is, one-half of Poland’s total $33 billion debt was forgiven, of which the German share was DM 9.1 billion.

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establish a foundation for “Understanding and Reconciliation” and fund it with DM 1 billion. The foundation is to aid victims of Nazi persecution in Belarussia, Russia, and Ukraine (Finanzbericht 1994, 41). Any assessment of the costs of economic statecraft must also include the indirect ‹nancial costs of securing domestic legislative approval. As a rule this was of marginal concern in Germany due to its parliamentary system. However, on occasion (e.g., when economic incentives were included as part of an international treaty), such approval was necessary. The constraint of needing legislative approval before implementing such a strategy can in the long run make the costs substantially higher. One of the more salient examples of such additional costs involves the 1975 Pension Agreement between Bonn and Warsaw. An integral part of the total treaty package arranged by Schmidt (as discussed in chapter 5), it essentially gave the Poles a DM 1.3 billion injection of badly needed hard currency. Because it was part of an international treaty, this economic “reward” was subject to approval by the Bundesrat, Germany’s upper house. While the treaty was approved in the Bundestag, where Schmidt’s ruling coalition controlled a majority of votes, the opposition Christian Democrats voted against it. Yet since the CDU controlled the majority of seats in the Bundesrat, it could have blocked approval in the upper house. As a means of circumventing their opposition, Chancellor Schmidt managed to “buy” the necessary votes from the individual Länder (federal states) by making a ‹nancial concession to the government of Saarland, then ruled by a Christian Democrat. This side payment was enough to win Saarland’s support in the Bundesrat, enough to secure approval of the treaty.17 The costs involved in employing economic persuasion as a foreign policy strategy can also involve indirect political costs in terms of loss of trust among members of the sender’s domestic constituency. I refer in particular to the intangible costs to state-business relations in terms of lost goodwill. One illuminating example of such a cost is the ill will toward German of‹cials still visible among the German banking community. The bankers’ chief complaint is that the Kohl government “forced” the private bankers’ hands by negotiating a Paris Club debt reduction agreement with Poland that essentially requires the private London Club to meet the same terms as the of‹cial creditors, that is, forgiving 50 percent of the private Polish debt.18 Moreover, in the past bankers have leveled charges against the German government for politicizing trade, especially in the context of loans made to Poland in the early 1980s. They claim that banks would never have risked such high exposure had Bonn not “encouraged” them to do so for political reasons. These examples could be considered the political costs of arm-twisting or coercing business performance when economic inducements are not enough.

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In the view of many German of‹cials, the ‹nancial dimensions of the economic instruments used in Germany’s incentive policy toward Poland have been, of course, colossal.19 According to calculations done by of‹cials in the German Ministry of Finance the total cost of Bonn’s concessional policy toward Poland from 1969 to 1991 was DM 7.478 billion. If one adds to this amount expenditures that have been anticipated as the result of obligations arising from bilateral and international agreements (DM 4.778 billion), the grand total amounts to DM 12.256 billion. A sectoral breakdown of these disbursements is listed in table 5. To outsiders, however, this ‹gure may appear astoundingly low; it may connote a relatively cheap strategy with which Bonn was able to “buy off Poland” in the past twenty years. In order to give the reader a basis of comparison for the magnitude of these outlays, the ‹nal sum of paid and estimated payments to Poland (DM 12.3 billion) is far less than the amount the United States disbursed for the entire European Recovery Program (Marshall Plan) after World War II, namely $15 billion (calculated in 1990 dollars that amount would be over $90 billion). Yet despite these ‹nancial costs, there seems to be a consensus among policymakers in Bonn that such monetary outlays served a useful and instrumental purpose. In the assessment of former chancellor Helmut Schmidt, the Polish quest for hard currency opened avenues for policymakers in Germany. Bonn was able to provide the Poles with hard currency in order to win political concessions from them.20 The importance of the economic dimension to German foreign policy, especially Bonn’s Ostpolitik, is most evident in its policy toward the Soviet Union during the uni‹cation negotiations. Under the guise of various agreements Germany has agreed to disburse DM 21.62 billion to the Soviet Union in various forms of payments as the “price” for Soviet approval of uni‹cation. In addition to this ‹gure, Bonn has also allocated DM 36.65 billion for guaranteed export credits and another DM 17.1 billion to support sales from East German ‹rms in the Soviet Union/Russia. Altogether German of‹cials foresee expenditures and guarantees to Russia in the amount of DM 75.37 billion.21 Replicating the German “Model”: Can it Be Done Elsewhere? Can the German style of economic persuasion be mimicked by other nations seeking peaceful change? In order for this to occur, states must be able to provide the target state with economic incentives. In this study I argue that this ability depends on two important institutional features: the nature of the foreign economic policy-making process and the types of

TABLE 5. Financial Costs of Economic Persuasion Appropriations for Poland Policy, 1969–91 Tactical Linkages (conditional) Type of Incentive

DM Million

1. 1975 restitution payment for pension liability of Polish forced laborers in the Third Reich 2. 1972 restitution payment for human medical experiments conducted on Poles during the Third Reich 3. Jumbo credit costs: (as agreed November 15, 1989) • Remission of pastdue payments • Conversion costs of future payments into zlotys • Future interest subsidies (until 1999, time of full repayment)

Subtotal Total DM 12,256 million

1,300

143

760

570

161

2,934

Structural Linkages (unconditional) Type of Incentive 1. Indemnification to commercial banks for Polish loan defaults (net sum) 2. Interest subsidies for 1975 jumbo credit 3. New export-credit guarantees (1989–92) 4. 1990 contribution to Polish Currency Stabilization Fund (in form of extended line of credit) 5. Interest subsidies for this contribution (budget estimate) 6. Concessional interest rate set at Poland IV rescheduling agreement (through 1997) 7. Postage subsidies for CARE packages from Germany to Poland (1989–90) 8. Other miscellaneous measures (covered by 1989 and 1990 federal budgets) 9. Development assistance administered by Ministry of Economic Cooperation and Development Subtotal

DM million

5,468

567

2,500

500

100

100

30

20

37 9,322

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instruments available for inducing commercial exchange. The ideal state should possess what I call “managed foreign economic policy” as well as “reward power.” Managed foreign economic policy means a large degree of coordination and autonomy within the bureaucratic process in conjunction with a cooperative relationship with the private institutions of capital. This type of policy process is important for two reasons. First, in order for economic persuasion to be effective, there must be continuity in the sender state’s proffering of economic carrots. Its of‹cials cannot extend incentives one year, only to withdraw them the next due merely to domestic imperatives. Of‹cials need to be shielded from politicization; they must retain competency in order to be effective in dealing with business. Second, governmental of‹cials need to know what business needs in order to perform. They must stay abreast of what dif‹culties business encounters while engaging in commerce with the target state. Reward power is determined not just by the capacity of the state to award incentives itself, but far more by its ability to tap into the vast resources of the private sector. The government of‹cials must be able to harness and channel those resources by getting ‹rms to “perform”—trade, lend, invest, and so on. The main thrust of my argument has been that economic incentives enabled Germany to achieve its political goals toward Poland. Germany employed economic instruments as a means of ripening conditions for political cooperation with Poland. Most explicitly, German policymakers earned the trust of the Polish government by consistently promoting economic cooperation in its political relations with Poland. Throughout the period under examination, Bonn achieved political cooperation by facilitating economic exchange. Key to the successful implementation of this policy has been the ability of the Bonn government to harness the economic resources at its disposal, that is, gaining the support and cooperation of the private economic sector. By doing so, it was able to enhance its reward power. If we review the original dilemma, namely, how to harness the economic resources of the private economy for governmental foreign policy, then we need to understand by what mechanisms the German government was able to “manage foreign economic policy.” German of‹cials were able to effectively translate the private sector’s economic and monetary capacity into political leverage for the achievement of government foreign policy goals. Of‹cials did so by soliciting the support and cooperation of the German business community. By drawing private economic actors into the state’s policy orbit, Bonn could maintain a relatively quiet and harmonious process of formulating and implementing policy. It was able to achieve this process by creating a set of institutional relations linking the

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public and private sector. Figures 12a and 12b illustrate the direction and composition of these crucial linkages. The top triangle (fig. 12a) depicts the ‹rst important component of ideal managed foreign economic policy-making—a bureaucratic process that includes decision making that is politically autonomous (free from politicized interference), but also demonstrates a high degree of coordination and continuity among its of‹cials. As discussed in chapter 2 (see ‹g. 1), the division of labor within the bureaucracy of the German Economics Ministry is such that clear lines of competency have been established functionally between seven divisions (in contrast to nine such divisions for the U.S. Department of Commerce, and eleven for the Department of the Treasury). Vertical integration occurs after decisions/position papers have been prepared and coordinated at the level of “working desks.” Most important, coordination between the three chief ministries responsible for German foreign economic policy—Finance, Economics, and the Foreign Of‹ce—is institutionalized by the singular nature of the Interministerial Committee (Interministerieller Ausschuß, or IMA) (fig. 12b). As discussed in chapter 2, the IMA brings together, on a regular basis, of‹cials within these ministries responsible for decision making regarding the primary instruments of economic persuasion: export and investment credit guarantees as well as tied and untied credits. An important part of the IMA’s procedures is to consult members from the private economic sector as so-called expert advisers. Including representatives from the private sector in this policy- and decision-making organization is institutionalized according to the ministerial rules contained in Paragraph 62, Part I (Strauch 1993, 65). This link to the private sector hinges upon, then, an ideal organization of the institutions of capital, as depicted in the bottom triangle of ‹gure 12a. Until the introduction of Chancellor Brandt’s policy of Ostpolitik (rapprochement) in 1970, from the German government’s founding in 1949 there were no formal diplomatic links between it and the Polish government, based on the convictions of the Hallstein Doctrine (political isolation). It was during this period that the Eastern Committee (OstAus-schuß) assumed its crucial role as a “para-public institution.” That is, in 1952 the German government, by cabinet decree, bestowed the Eastern Committee with the diplomatic as well as economic status to represent German commercial interests in Eastern Europe.22 The Polish government and the German business community, in the form of the Eastern Committee, were thereby coupled by formal, para-public “representative” links. The Eastern Committee and its parent organization, the Federation of German Industry (Bundesverband der Deutschen Industrie), also have

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institutionalized linkages to the German government (see fig. 12b). This formal linkage is of an advisory and consultative nature. According to Paragraph 24, Part II of the standing orders governing the procedures of the federal ministries (Geschäftsordnung der Bundesministrien), relevant experts and interest groups are to be consulted by ministry of‹cials when drafting legislation. These representatives from the private sector also are to be given the opportunity to present their positions on the relevant legislation.23 Thus, the Ost-Ausschuß served to coordinate foreign economic policy not only between Poland and Germany, but also within Germany itself. As a result, of‹cials from the government and the private business sector were able, through the auspices of the Ost-Ausschuß, to build a consensus regarding desired policy toward Poland. This consultative status was particularly crucial during the period of martial law in Poland. Indeed, during this phase the Eastern Committee reverted to its pre-Ostpolitik role (when there were no formal relations between Germany and Poland). The Committee once again functioned as a para-public institution after Bonn broke off diplomatic relations when Warsaw imposed martial law. After diplomatic relations between the German and Polish governments were launched in 1970, the Eastern Committee no longer needed to serve in its role as para-public institution for Bonn by acting as Bonn’s representative in Poland; as a result, its relations with Polish of‹cials assumed an informal nature. However, the normalization of relations between the two nations opened up a new forum for state-business interactions in Germany. Probably one of the most signi‹cant connections between German business and government of‹cials was the Mixed Economic Commission. As a result of a 1970 trade agreement, this organization formalized consultation links between German business representatives and members of the German and Polish governments. As discussed in chapter 3, this body served many critical functions, especially agendasetting and policy application. For example, Thiemer (1985) notes that the Commission played a crucial role in paving the way for large-scale private investment projects in Poland. By meeting at Commission functions, private industry of‹cials and government of‹cials were able to discuss the particulars of the commercial deals before submitting applications for credit guarantees, thus almost guaranteeing their approval. In other words, institutional structures were vital in ensuring the capacity of the German government to implement economic persuasion. When we examine the case of U.S. state capacities we see a different story. The institutional structures of its foreign economic policy process do not provide the same amount of reward power (although the U.S. economy is larger than Germany’s). Moreover, we ‹nd little evidence of man-

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Fig. 12a. Ideal managed foreign economic policy

aged foreign economic policy. Wandycz (1980), in his study of PolishAmerican relations, provides ample illustrations of U.S. limitations in implementing economic persuasion. For example, in the late 1950s and early 1960s the U.S. political objective was to “encourage” evolutionary processes in Warsaw, especially the nationalism arising in most of the East European countries. In 1957 Poland was granted $95 million in export credits to purchase U.S. agricultural surplus. The ‹nal sum, however, was minuscule compared to

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Fig. 12b. German managed foreign economic policy

Polish desires for $300 million—and that amount came only after two years of negotiations between the two nations. Thus, the aid was too little, and it came too late. Wandycz claims, It is debatable, of course, what more generous aid given more swiftly could have accomplished, but psychologically the most favorable moment was allowed to pass, and American help lacked spontaneity and drama. (1980, 366)

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During the 1960s the U.S. government continued to extend Poland export credits and even granted it MFN status part of the time (by 1961 the United States had granted Poland credits in the amount of $470 million), yet most assessments of this period in U.S.-Polish relations, and U.S.-East European relations in general, concede that U.S. policies had little effect on policies there. One can hardly argue that the Polish regime evolved toward greater freedom or even independence. Should we conclude that economic persuasion failed? I suggest not. Instead, what I argue is that the United States failed to “manage” its foreign economic policy. It could not provide suf‹cient reward power. During the 1960s there was considerable interference by Congress; for example, members of Congress wrangled with President Kennedy over his discretionary powers in foreign trade. In the case of Poland, in 1962 Congress managed to take away Poland’s MFN status, only to restore it later. In 1963, after a period of relaxing export controls, Congress again insisted on subjecting exports to Poland to stricter controls. Although Congress approved a 1964 trade accord with Poland, it changed the terms of credit extension. Poland would no longer be allowed to repay its debts in zloty but would have to pay in dollars, substantially increasing the cost of such credit for the Polish government. In 1966 the Congress tabled President Johnson’s East-West Trade Relations Act and, by removing the president’s discretionary power to interpret the “friendliness” of nations, made Poland ineligible for exports of agricultural surpluses. Finally, in 1967, restrictive amendments to the Export-Import Bank Act prohibited use of bank resources for further credits for Poland. These actions support the claim by Wandycz that “these vicissitudes in American-Polish economic relations were harming one of the principal functions this relationship was supposed to perform, namely tying Poland closer to the Western economy” (1980, 383). It is not surprising, then, that while Poland was the largest East European partner of the United States, the United States lagged far behind other West European nations in East Europe trade. During the 1970s, when the U.S. government implemented its own version of Ostpolitik (namely, détente), it too tried to bring the U.S. business community to its side. Here one can again see that faulty institutions led to failed policy goals. For example, there were attempts similar to the German ones to provide of‹cial support for increased economic exchange between the two nations. Indeed, cooperation was institutionalized in a U.S.-Polish Trade Commission set up after the visit of President Nixon to Poland in 1972. The Department of Commerce went so far as to establish a “U.S. Trade Development Center” in Warsaw. Yet it was to function primarily as an “information center” for Americans seeking business

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opportunities in Poland. Finally, in 1975 an organization similar to the GK was established as a result of the visit by PUWP party chair Gierek to the United States in 1974. During this visit several economic accords were initialed, intended to promote greater economic cooperation between the two nations. As part of these agreements the “Polish-American Economic Council” was established. However, as one scholar of Polish-American relations noted (Wandycz 1980, 397), the institution was “primarily a channel of communication, . . . concerned more with policy formulation than actual promotion of trade.” Indeed, as be‹tted the U.S. ideology of nongovernmental interference in market affairs, the U.S. side was represented by the Chamber of Commerce and not governmental representatives. This is not the case in the German-Polish organization, where German governmental of‹cials continue to play an integral part in the organization’s activities. In the end, expectations about future U.S.-Polish economic cooperation did not even begin to resemble reality. It was projected that U.S.-Polish turnover would reach the ‹gure of $1 billion by 1976 and $2 billion by 1980 (Wandycz 1980); but the ‹nal results were far more modest: as of 1984 turnover between the two had barely reached $500 million (compared to a turnover of $1.8 billion between Germany and Poland). The Art of the Deal What can we learn from this in order to predict future behavior? If the German government seems able to conduct “managed foreign policy” and at the same time possesses “reward power,” what of the United States? The crux of this matter may indeed be coined as “George Kennan, meet Willy Loman.” Can the U.S. government overcome the “shadows of the past”? (Ikenberry 1988). If old institutions shape and in›uence the approach to new problems, then are government of‹cials ›exible enough to adapt to changing conditions? In terms of being able to support commercial exchange, it would appear that the U.S. Department of State is less than ›exible. According to a twenty-‹ve-year veteran, the problem seems to lie in reorienting the bureaucracy. “While it pays lip service to its new commercial role, State’s heart is still in traditional diplomacy. ‘There remains a clear bias in favor of political of‹cers. . . . The apparatus is not geared to the post–cold-war reality.’”24 Another current foreign service of‹cer admits that he spends nearly one-quarter of his time helping U.S. companies, yet he also claims, “It’s not easy for any of us to recycle ourselves for this purpose. . . . the most vital of the diplomatic arts may soon be the art of the deal.”25 Understanding such institutional biases may lie at the heart of the

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problem for nations that fail at managed foreign economic policy. In a fashion similar to this study’s, Stopford and Strange (1991) have examined the problem of how states “compete” in an increasingly interdependent global economy. Although they focus primarily on industrializing nations and what they need to do develop economically, the lessons they draw hold in a similar manner for nations wishing to employ economic persuasion. Among their chief conclusions is the idea that the competitive global market impels governments to seek the help and cooperation of private ‹rms. This introduces the need for triangular diplomacy between governments and multinational corporations, they argue, because states depend on the scarce resources such ‹rms control. Figure 13 depicts Stopford and Strange’s conception of the resulting “triad of relationships.” For them, it is imperative that governments can no longer afford to negotiate among themselves: “they now must also negotiate—if not as supplicants then certainly as suitors seeking a marriage settlement—with foreign ‹rms” (2). Yet private ‹rms also need to seek such cooperation as well as fruitful partnerships. “The traditional players in the embassies and foreign ministries are still in business, but they have been joined by members of other governments’ ministries and by the executives of ‹rms, both local and multinational” (21). The explanation for the difference between those governments and ‹rms that succeed at such negotiating and those that do not is placed squarely on administrative capacity: the ability to manage change and make the most of it. Where this capacity is most important, according to the authors, is during the game of negotiation and action: “the lasting effectiveness of the deal is determined by the success or failure of bargaining on all three sides of the triangle” (23). The authors also rightly note the importance of state-‹rm bargaining as a determinant of power differentials in the negotiating process. Yet in their larger study I suggest that they portray this “triad of relationships” as too informal and involving twodimensional sets of negotiations. Their dashed lines only indicate informal nodes of intersection between two sides of the triangle; in other words, there seems to no simultaneous nexus of all three sides of the triangle. This absence signals, then, a lack of common bargaining space that would include the simultaneous participation of all actors involved in the global competition, that is, both the home and host governments, as well as the ‹rms involved. What I suggest is needed is a formal common bargaining space that would ‹rm up the three-sidedness of the negotiation process. Such a space would de‹ne the realm of communication and thus facilitate cooperation while strengthening the framework for bargaining. The authors cite, for example, a speci‹c case of governmental interaction between Malaysia

Fig. 13. Triangular diplomacy. (The triangle on the left is redrawn from John Stopford and Susan Strange, Rival States, Rival Firms [Cambridge: Cambridge University Press, 1991], 22, fig. 1.6. By permission of Cambridge University Press.)

[To view this image, refer to the print version of this title.]

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and Britain that ultimately harmed interaction between the Malaysian government and British ‹rms (23). A formal common bargaining space could have prevented, or at least mitigated, such harmful effects of intergovernmental relations. In the case of German-Polish economic and political relations, I argue that the presence of such a formal common bargaining space, as provided by the Mixed Economic Commission created in 1974, did allow for successful bargaining by the German government, German ‹rms, the Polish government, and Polish ‹rms. Here the “inner triangle” represents, then, the possibility for managing change by giving space for competing agendas and competing interests to be successfully negotiated. For the strategy of economic persuasion this means enhancement of the sender government’s reward power because its of‹cials can better provide the necessary incentives for the target government by simultaneously providing the necessary inducements for the private sector to perform. This would concur with Stopford and Strange’s claim that success in a competitive market does not necessarily require a strong state, but a shrewd one, a state that is effective not by corporatist authority, nor by muscle-›exing, but by building trust within its society and with foreign ‹rms. The latest changes in the institutional structures of the Department of Commerce lead one to believe that the United States is moving in the opposite direction of becoming an ideal trading state. Jeffrey Garten, undersecretary of commerce for international trade under President Clinton, is adamant that U.S. policy processes must change if the United States is to be able to conduct economic persuasion: “Let’s upgrade our commercial diplomacy, but not destroy it.”26 His recommendations for reforms are squarely in line with the concept of “managed foreign economic policy,” including the creation of more professional export promotion agencies. “Since the Nixon years, the Commerce Department has been a dumping ground for patronage; that must end.” Along with this he sees that the mentality of government of‹cials must change: there must be a consensus on the centrality of commercial interests in foreign policy. Yet if one examines the changes instituted in the Commerce Department after the death of Ronald Brown, that seems doubtful. One of Secretary Richard Daley’s ‹rst acts was to dismantle the “war room” built and designed by Garten and Brown to coordinate Washington’s activities, from ambassadors to the CIA to the president, in tracking major building projects around the world.27 Finally, if the United States is to develop greater reward power it will have to forge stronger and better ties with the private economic sector. Garten, for example, claims that the organization of business-diplomatic interaction in the United States must change. Yet that institutional com-

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ponent also seems dif‹cult to reconstruct. While the late secretary of commerce, Ronald Brown, seemed optimistic that a “uniquely American partnership” could be built between the public and private sectors, even he lamented that “too much time had been wasted in ideological debate on the role the public sector should play, if any, in bolstering private corporations.”28 And the skepticism about any constructive role for the U.S. government seems to be shared by business. “Until the late 1980s the local U.S. Embassy was about the last place an American exporter would look for assistance. Consular of‹ces were famously uninterested in dealing with visiting executives, and they were often inept.”29 Yet this historic animosity will have to change, for, as the U.S. ambassador to South Korea claims, “The fruits of the cold war lie in our ability to trade.”30

Notes

Chapter 1 1. Some of the most de‹nitive works on the art of force are those by Thomas Schelling, including Arms and In›uence (1966) and The Strategy of Con›ict (1963). Regarding coercive diplomacy the seminal works by Alexander George are still setting the tone. See his coedited volumes The Limits of Coercive Diplomacy (1971) and Force and Statecraft (with Gordon Craig; 1990). The continued relevance of Coercive Diplomacy is con‹rmed by its recently revised edition, appearing in 1994. 2. I take the concept of persuasion from Nelson and Eglinton (1993) who apply it in terms of linking aid conditionality to a broad spectrum of desired reforms in the developing countries. However, for them persuasion relies almost exclusively on diplomatic techniques: “Persuasion can take the form of direct discussion between diplomats or technical experts, or less direct forms such as seminars or joint research” (28). Yet their desired outcome is the same as mine in that it is noncoercive, i.e., it persuades the target government that the desired behavior is in its own best interest. 3. My discussion of the concept and utility of economic persuasion has been drawn mainly from contemporary works, including Mastanduno 1992; van Ham 1992; Hanson 1988; as well as Hanson, “Soviet Responses to Western Trade Policies,” paper presented at the Annual Meeting of the International Studies Association, London, England, March 29–April 1, 1989; Rode and Jacobsen 1985; and Baldwin 1985. 4. Hanson does, however, generate one fallacy in his study. He abruptly maintains that “economic aid in the conventional sense is simply not a part of EastWest economic relations” (1988, 8). I argue this interpretation is too narrow as the case of German-Polish relations illustrates. 5. Freeman (1997) develops a similar conception of economic persuasion. He speaks of strategic versus tactical uses of economic measures. A strategic use serves the purpose of “bolstering the independence and enhancing the national strength and potential of another state” whereas a tactical use would include applying commerce as a lever to “move foreign leaders’ minds” (47). 6. This will become clear in my analysis of Bonn’s behavior after the imposition of martial law in Poland in 1981 (see chapter 5). By only halfheartedly supporting sanctions against Poland and the Soviet Union, Bonn damaged its image as a reliable NATO ally, but at the same time it also demonstrated Bonn’s prudent recognition of the need to come to terms with Soviet in›uence in Eastern Europe, as well 163

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as with Poland’s internal problems. Moreover, such ambivalent behavior allowed Bonn to maintain its reputation as a reliable trading partner and supporter of détente in Europe. 7. For more sophisticated discussions of the “three faces of power,” see Elkin 1987; Gaventa 1980; Lukes 1974; Bachrach and Baratz 1962; and Dahl 1961. 8. One of the more astute observers of the German political scene noted as late as 1989 that the question of German uni‹cation had been transformed from an issue of enlarging territory into merely an issue of enlarging human contacts (Hanrieder 1989). 9. Theo Sommer, “Aus dem Bollwerk in die Zukunft,” Die Zeit (Hamburg), June 2, 1989, quoting Lord Ismay, ‹rst General-Secretary of NATO. 10. Francois Mauriac, as cited in Hanrieder 1989, 138. 11. Not the least of these tangible costs is the fact that over one-fourth of Poland’s $42 billion debt with the West in 1990 was owed to private German banks and the federal government in Bonn. Of‹cial from the German Federal Ministry of Finance, Division of East-West Finance, interview by author, May 9, 1990, Bonn, Germany, tape recording. 12. These are what Peter Katzenstein refers to as “para-public institutions.” The term comes from his analysis of public policy making in Germany, Policy and Politics in West Germany: The Growth of a Semisovereign State (1987) and is discussed more fully in chapter 3. 13. That business was dissatis‹ed with the prevailing national strategy of economic isolation is evident in the fact that the umbrella trade association for ‹rms active in Eastern Europe came out in support of the Social Democratic Party in the elections of 1969 precisely because it supported the SPD’s platform of normalized political relations with Eastern Europe. Given the SPD’s institutionalized opposition to the positions of business, this was a very unusual stance for business to take. Chapter 2 1. Such interpretations are not binding for the treaty partner, however. An example of such a resolution will be discussed in conjunction with the conclusion of the 1970 Warsaw Treaty in chapter 4. 2. The main proponents of this approach can be found in the collection edited by Helga Haftendorn et al., Verwaltete Außenpolitik (Managed foreign policy) (1978). 3. Cathleen Fisher, Decisionmaking Processes in the Federal Republic of Germany: Patterns of In›uence and Autonomy in West German Foreign Policy, 1979–1987, dissertation, University of Maryland, 1991. 4. The authors cite Fritz Scharpf, “Komplexität als Schranke politischer Planung,” in Politische Vierteljahresschrift, special issue no. 4 (1972): 170, and the joint rules of procedure of the federal ministries, Gemeinsame Geschäftsordnung der Bundesministerien. 5. Eric Frey, Division and Detente. The Germanies and Their Alliances (New York: Praeger, 1987), 89.

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6. Ministerial guidelines, “III. Der Interministerielle Ausschuß für Ausfuhrgarantien und Ausfuhrbürgschaften,” photocopy, n.d. 7. This process, however, is not to be confused with economic democracy. As regards foreign economic policy-making, in Germany it has been characterized as undemocratic, yet enjoying broad support from the political parties and the public (Schmidt 1987). 8. To this must be added the concept of “industrial self-government” (Selbstverwaltung), a traditional method of “sector-related self-steering by the industrial associations. . . . This speci‹cally German form of economic planning and steering was organized at association level, whereby the guidelines for development were formulated by the ‘house bank’ of the relevant sector. . . . If fundamental and wideranging decisions were to be taken then this model could easily be extended into a ‘concerted action’ of those immediately concerned, under the leadership of the ministerial bureaucracy.” Werner Abelshauser, “Von der Kohlenkrise zur Gründung der Ruhrkohle AG,” in U. Borsdorf and H. Mommsen, eds., Glückauf, Kameraden! Die Bergarbeiter und ihre Organizationen in Deutschland (Cologne: BundVerlag, 1979), 426–27, as cited in Parnell 1994, 231. 9. Such an opportunistic use of devolution of public authority is illustrated later in this chapter when discussing the history of the Ost-Ausschuß, the main association for business involved in Eastern Europe. 10. As cited in David Leyton-Brown, “North American Free Trade,” in Richard Stubbs and Geoff Underhill, eds., Political Economy and the Changing Global Order (New York: St. Martin’s Press, 1994), 356. 11. Other interesting anecdotal evidence points to the low-key nature of business associations in the United States. On February 24, 1997, the president of the U.S. Chamber of Commerce announced his resignation after twenty-one years in of‹ce. Although the Chamber claims to be the world’s largest such business federation, its annual budget of $70 million had not increased in the past ‹fteen years. Moreover, the Chamber’s increasing visibility as a sponsor of “business television” has been cited as its most highly regarded achievement, not a particularly economic growth–oriented activity! New York Times, February 25, 1997. 12. “Membership Information,” http://www.nam.org/Programs/membership .html, March 11, 1997. 13. Spindler in particular refers to the so-called Big Three that dominate the German banking system—Dresdner, Commerzbank, and Deutsche Bank. 14. Spindler makes his arguments on the basis of some astonishing ‹gures. For example, in Germany, in 30 of the 100 largest share companies, the voting rights held by banks exceeded 50 percent. In 41 cases the banks’ voting rights amounted to at least 25 percent, suf‹cient to exercise blocking interest under German corporate law (1984, 22–26). 15. Of‹cial from leading German bank, interview by author, August 7, 1990, Frankfurt, Germany, tape recording. This Interministerial Committee is discussed further in the section on export promotion in this chapter. 16. In an extensive article covering the assassination, Der Spiegel (Germany’s most in›uential newsmagazine) claimed that the RAF should feel vindicated in its selection of Herrhausen as Germany’s most powerful ‹gure on the basis of the

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glowing tributes heaped on Herrhausen from both sides of the political spectrum. Herrhausen’s burial reached the proportions of a state funeral. Der Spiegel did not hesitate to remark that the Deutsche Bank, under Herrhausen, became the control board of the German economy, claiming that nothing in German industry and trade went against the will of Deutsche Bank. “Wir können jeden erledigen,” Der Spiegel no. 49 (1989): 14–22. 17. The original term was “ein Kind der Not.” Otto Wolff von Amerongen, interview by author, July 12, 1990, Cologne, Germany, tape recording. An interesting bit of proof that Bonn has displayed remarkable continuity with the Weimar Republic as far as its politics vis-à-vis Eastern Europe are concerned is the fact that Wolff’s father was the chairman of the “Russia Committee” (Rußland-Ausschuß). Active during the Weimar Republic it, too, was responsible for normalizing economic relations between the two newly formed countries of Weimar Germany and the Soviet Union. For readers familiar with Mancur Olson’s thesis that one explanation for West Germany’s postwar “economic miracle” was due to the wartime destruction of special-interest groups it may come as a surprise to learn of this continuity. See Mancur Olson, The Rise and Decline of Nations (1982). 18. One striking example is the role Otto Wolff von Amerongen played in establishing relations with Communist China in the postwar years. As far as Poland is concerned, Otto Wolff (as well as the leading German industrialist, Berthold Beitz from Krupp AG) traveled to Poland at the behest of Adenauer several times in the 1950s and 1960s. Wolff, interview, August 11, 1990. 19. The following is from an OA memorandum. “Ostausschuß der Deutschen Wirtschaft,” TD, n.d., Ost-Ausschuß archives, Bundesverband der Deutschen Industrie, Cologne, Germany. 20. Figures are from Kreile, “West Germany,” 192. 21. See Wandycz 1980 for a fascinating and illuminating account of the failed U.S. strategy toward Poland in the postwar period. 22. Comptroller’s report to the Board of Directors in The Annual Report of the Eximbank 1974 (Washington, D.C.: Government Printing Of‹ce, 1974), 38. 23. This citation and historical account from Geir Lundstad, The American Non-Policy Towards Eastern Europe, 1943–47 (1975), 322. 24. The following information is taken from former National Security Adviser Horst Teltschik’s (1991) memoirs. 25. For the most meticulous description of the historical institutional approach see Sven Steinmo, Kathleen Thelen, and Frank Longstreth, Structuring Politics (1992). Chapter 3 1. Peter Katzenstein, Policy and Politics in West Germany: The Growth of a Semisovereign State (Philadelphia: Temple University Press, 1987). 2. The following information is from a memorandum written by the ‹rst PK Chair. Dr. G. D. Gärtner, TD, n.d., Ost-Ausschuß archives, Bundesverband der Deutschen Industrie, Cologne, Germany.

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3. Internal memo from Ost-Ausschuß archives, February 17, 1971, photocopy. 4. The following information is taken from Otto Wolff von Amerongen’s opening address at the ‹rst meeting of the Poland Committee on May 24, 1971; photocopy, OA archives. 5. The PK was to play an important role in the aftermath of martial law in Poland when it gathered information on the concrete consequences for German ‹rms, e.g., broken contracts and delayed payment on already completed deliveries. The PK then worked with of‹cials in the German embassy in Warsaw to see that these contracts were honored. The Ministry of Economics and Foreign Of‹ce, in turn, used this information to pressure the government in Warsaw by saying that only when commercial relations were normalized would political relations be normalized. Typed documents and embassy cables, 1982–84, Ost-Ausschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 6. Memorandum from the Ministry of Foreign Affairs, mimeograph, May 3, 1971, OA archive. 7. See the various forms of written correspondence between the OA staff and of‹cials of the Ministry of Economics, Ost-Ausschuß archives, Bundesverband der Deutschen Industrie, Cologne, Germany. As is discussed in chapter 6, it was at one of the GK meetings that the decision was reached to normalize ‹nancial relations between Bonn and Warsaw after they had been frozen due to Poland’s declaration of martial law in 1981. 8. This assessment is based on archive material made available to the author during visits to the BDI and OA, summer 1990, Cologne, Germany. 9. Staff members of Ost-Ausschuß, interviews by author, spring and summer 1990, Cologne, Germany. 10. Ministry of Economics to Ost-Ausschuß, TL, December 10, 1977, Ost-Ausschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 11. Ost-Ausschuß Rundschau (Cologne), April 9, 1975, 9; Bundesverband der Deutschen Groß- und Außenhandels-Jahresbericht (Cologne) (1974/75): 24. 12. For further information see “United States,” in Organisation for Economic Co-Operation and Development, Export Credit Guarantees (Paris: OECD, 1995), chapter 23. 13. For its resources it is dependent upon a combination of appropriated and borrowed funds (at least since the 1990 Credit Reform Act). The subsidy components of U.S. credits are ‹nanced out of a total subsidy appropriation while the remainder is borrowed from the U.S. Treasury (which for FY 1993 was $757 million, up from FY 1992’s $603 million). Ibid. 14. The following assessment is based on information from the Federal Ministry of Finance. Of‹cial from the Federal Ministry of Finance, interview by author, May 9, 1990, Bonn, Germany, tape recording. 15. In the case of Poland, a third type of ‹nancial aid was administered, the special one-time, so-called jumbo credit of 1975, which was eventually declared a “political” credit. 16. Information from the Federal Ministry of Finance. Of‹cial from the Federal

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Ministry of Finance, interview by author, May 26, 1992, Bonn, Germany, tape recording. 17. The Kreditanstalt für Wiederaufbau (KfW) implements those bilateral development projects that involve ‹nancial assistance. One exception to this practice was when Poland was granted a special credit in 1975, as discussed in chapter 5. In an interesting twist, the bulk of its monetary resources comes from funds “recycled” from the European Recovery Program. That is, the United States provided funds for the so-called Marshall Plan which are now used to support German development projects, both within and outside the Federal Republic. 18. Interview with of‹cial from Hermes, Bonn, May 26, 1992. 19. Kniefall, or the act of falling to one’s knees, is a term used to designate the early attempts of Brandt and Schmidt at political reconciliation with Poland. The historic moment in 1970 that Chancellor Brandt fell to his knees in front of a memorial to the Warsaw Uprising upon his ‹rst of‹cial visit to Poland is symbolic for many of this policy of atonement. This private assessment is taken from an interview by the author with a leading of‹cial in one of the three big German banks, May 22, 1992, Frankfurt, Germany. 20. Of‹cials from Commerzbank and Dresdner Bank, interviews by author, August 6–7, 1990, Frankfurt, Germany, tape recordings. 21. Sixty-two annual international trade fairs have been held in Posen, Poland. Members of the West German business community have been attending these for the past forty years. In 1990, the delegation from the FRG was the largest at the Posen Fair. See, for example, the remarks by the West German ambassador to Poland, Dr. Günter Knackstedt, foreword to 1990 Posen Trade Fair Guide, ed. Federal Ministry of Economics (Munich: IMAG, 1990), 6–7. 22. Memorandum by Otto Wolff von Amerongen, TDS, May 24, 1971, OstAusschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 23. Roland Pac, Foreign Trade Research Institute, interview by author, May 22, 1990, Warsaw, Poland, tape recording. 24. Helmut Wiehn, Deutsche Babcock, interview by author, May 16, 1990, Berlin, Germany, tape recording. 25. Of‹cial from the Polish Foreign Trade Research Institute, interview with the author, May 22, 1990, Warsaw, Poland, tape recording. 26. Interview by author with of‹cial, Federal Ministry of Economics, Bonn, May 14, 1992. 27. Overseas Private Investment Corporation, “Executive Summary,” Washington, D.C., GPO, September 1991. 28. European Commission, “G-24 Assistance Commitments—Assistance Type by Donor,” Brussels, facsimile, November 8, 1997. Chapter 4 1. See Krasner 1978 for his impeccable discussion of how to de‹ne (and defend) a nation’s interest. 2. While I am not claiming that German-Polish reconciliation alone was a suf‹cient condition for German uni‹cation, it can be argued that it was unquestionably a necessary condition.

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3. Willy Brandt was particularly sensitive to this need to rely on the United States for West Berlin’s representation. As the mayor of Berlin during the construction of the Berlin Wall he experienced ‹rsthand the limits of American willingness to come to West Berlin’s rescue at the risk of confronting the Soviets. After a letter exchange with President Kennedy, in which Brandt called for a ‹rmer U.S. response and Kennedy replied that “military con›ict could not be contemplated,” Brandt drew the lesson, “Was it this letter that raised the curtain to reveal an empty stage?” (1992, 4). It is equally striking that in this nearly 500-page memoir, Brandt opens the book with his experiences as mayor during the construction of the Berlin Wall. 4. Indeed, there was a growing fear in Bonn that it could become victim of a “superpower condominium”; that Moscow and Washington could, in the name of détente, negotiate arrangements over Bonn’s head that were detrimental to its interests. This fear began with the nuclear test bans negotiated under the Kennedy/Johnson administrations and continued with the SALT agreements under Nixon. 5. The other four principles were: (1) The goals of freedom and democracy came ‹rst, before unity; (2) Berlin was considered to be the capital of Germany and as such served as a bulwark against the East; (3) The Four Powers formed the imperturbable basis for all East European and German-German deliberations; and (4) The border with Poland in the east was to remain an open issue. Bender calls these the ‹ve principles of German unity, upon which a consensus rested among all political parties (1986, 43–46). 6. The Soviet Union, in its capacity as one of the Four Powers, was considered to be too vital to German interests to ignore diplomatically. Yugoslavia, on the other hand, was not too important, and when it recognized the GDR in 1957, Bonn broke off all diplomatic relations with Belgrade (Bender 1986, 44–45). 7. Assessments of this policy generally agree that Bonn was trying to use its economic capacities for foreign policy purposes. This was especially the case since the anticipated bene‹ts for the German business community were not expected to be very signi‹cant. However, improving trade relations with West Germany was important to East Europe. Bonn was therefore hoping to manipulate this opportunity by developing the trade missions as surrogate diplomatic channels. Indeed, as later events demonstrate, the missions did serve as important political modes of communication (Hanrieder 1989, 178–79). 8. Helga Haftendorn (1989) gives a succinct account of Germany’s “triad of goals.” She refers to Germany’s national interests as (1) peace and security of the German territory; (2) unity and freedom for all Germans (including East Germany); and (3) economic well-being. 9. The actual report reads, “The Alliance can carry out its second function to pursue the search for progress towards a more stable relationship in which the underlying political issues can be solved. Military security and a policy of detente are not contradictory but complementary.” North Atlantic Treaty Organization, NATO-Basic Documents (Brussels: NATO Information Service, 1981), 98–99. 10. One incident in particular conveyed Washington’s determination to force the issue of détente for Bonn. In the summer of 1963, Moscow, London, and Washington drafted a nuclear test ban treaty that was to include East Germany as

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Notes to Pages 70–74

well. This would have been a de facto recognition of the government in East Berlin. Bonn, of course, protested strenuously, but to no avail. The prevailing German attitude is best summed up by the remark of one Christian Democrat in the Bundestag: “The Soviets are the victors. They have stabilized their position in the ‘zone’ [Bonn’s derogatory Cold War term for the GDR]. . . . We are the victims of American detente policy. . . . I am reminded of Versailles.” Heinrich Krone, “Aufzeichnungen zur Deutschland- und Ostpolitik 1954–1969,” in Adenauer-Studien III, ed. Rudolf Morsey and Konrad Repgen (Mainz: Matthias-GrünewaldVerlag, 1974), 176–80. 11. In accordance with the Potsdam agreements, signed by the four wartime Allies in 1945, Poland was awarded 103,000 km2 of former German territory in exchange for Poland sacri‹cing 180,000 km2 to the Soviet Union. The Federal Republic never of‹cially recognized the Potsdam agreements as forever binding, arguing that they were provisional agreements until such disputed issues would be resolved within the context of a peace treaty (which, of course, was never signed). Thus, it was this 103,000 km2 territory over which Bonn was still claiming sovereignty. 12. This saying is in reference to the fact that the borders of Poland had been revised three times in the twentieth century, in addition to the historical trauma of Poland’s division and disappearance as a sovereign nation from 1772 until 1918. 13. For a more detailed discussion of the issue of ethnic Germans in Poland (and the dif‹culty of ascertaining their “Germanness”), see Davis 1994. 14. While unity of nation did not necessarily mean the reuni‹cation of the nation, this preamble was nonetheless initially interpreted to imply this. In other words, other forms of state unity would have been constitutionally permissible. Indeed, in the immediate months after the opening of the Berlin Wall on November 9, 1989, there was talk of a German confederation that would have allowed for the two German states to continue to exist side by side. 15. The treaty’s of‹cial title reads “Treaty Between the Government of the Federal Republic of Germany and the Government of the People’s Republic of Poland on the Trade of Goods and Economic and Scienti‹c Cooperation.” 16. Benno Zündorf, Die Ostverträge (1979), 65. 17. See, for example, the memo sent by the German Foreign Ministry’s special representative in Warsaw to the Foreign Ministry in Bonn. Memo number 467/70, photocopy, Ost-Ausschuß archives, Cologne. Copies of the memo were immediately passed on to the Ministry of Economics as well as the of‹ce of the Ost-Ausschuß. The memo stressed the need to ‹nd solutions to the problem of increased trade with Poland. At this point, the main hindrance seemed to be lack of transparency among Polish authorities. 18. Handelsblatt, June 26, 1970. 19. This had been a contentious point between the two nations, since both had been signatories of the GATT organization for some time yet Poland did not enjoy MFN status. For this reason Polish economic experts had been accusing West Germany of not fully honoring its international obligations (Cziomer 1988). 20. This issue of liberalization was a point of controversy between Germany and

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its EC partners. Voices were heard within Germany calling for the negotiation of a common trade policy among the EC members for dealings with the East. This was not achieved until 1988, nearly twenty years later, during Germany’s rotation as head of the EC Council. 21. This was apparently not yet a serious obstacle to expanding exports since members of the German business community believed that by modernizing its economy Poland would be able to pay off the upcoming credits required for import ‹nancing. Here Polish elites concurred in their assessment that wide-scale use of foreign credits would provide the means for importing the needed technology from the West. 22. Letters and notations from January 22, 1971, and February 17, 1971, photocopies, OA archives, Cologne. This incident seems all the more remarkable given the traditionally friendlier ties between business and the CDU/CSU than with the SPD. 23. Indeed, Germany had no valid trade agreements with either Czechoslovakia or the Soviet Union during the 1960s since both refused to accept a “Berlin clause” (Schäfer 1979, 185). 24. The preceding information was taken from an internal memo in the archives of the Ost-Ausschuß, September 22, 1971, photocopy. 25. It is important to note that the treaty only contained the “foundations for normalization” and did not entail the normalization itself. The following interpretations are from Karl Hartmann, “Schwierige Normalisierung zwischen Bonn und Warschau,” Osteuropa 23, no. 3 (March 1973): 161–73; and Benno Zündorf, Die Ostverträge (Munich: Verlag C. H. Beck, 1979), 65–70. The name Zündorf is a pseudonym. It was not until some time after this book was published that it was revealed that the author had been a staff assistant to Egon Bahr, the main architect of Chancellor Brandt’s Ostpolitik, which speaks to its impeccable source of inside information. 26. While there was no legal linkage between the various East Treaties, they were all part of a package. The treaties were components of a political whole consisting of connecting pieces: losing one piece would mean the entire package would collapse. Bonn claimed without a Berlin Treaty there would be no rati‹cation of the East Treaties, while Bonn’s negotiating partners claimed that without rati‹cation of the Warsaw and Moscow Treaties, the Berlin Treaty would not go into force. Thus, it was not until the conclusion and rati‹cation of the East Treaties in their entirety (Moscow Treaty, 1970; Warsaw Treaty, 1970; Prague Treaty, 1973; and the Basic Treaty, 1972) that Bonn was ‹nally able to establish diplomatic relations with the nations of Eastern Europe. 27. Süddeutsche Zeitung, May 13/14, 1972 as cited in Ortmayer 1975, 149. 28. Internal memo written by a member of the German Ministry of Economics, May 22, 1974, photocopy, Ost-Ausschuß archive, Cologne. 29. For this discussion, see Kreile 1978 as well as FAZ, Blick durch die Wirtschaft, May 24, 1973, and BGA-Jahresbericht 1974/75, 23. 30. Klaus Bolz and Peter Plötz, Erfahrungen aus der Ost-West-Kooperation (1974), 49.

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Notes to Pages 82–90

31. Indeed, by 1975 exports dropped by 11.1 percent. Deutsches Institut für Wirtschaftsforschung, Wochenbericht, no. 43, vol. 14 (1976), 133. 32. Furthermore, Warsaw had to admit that beyond a few “bombastic” declarations, negotiations with France had had few concrete results. See NZZ, March 19, 1975. 33. Although the establishment of a Mixed Economic Commission had originally been included as a part of the 1970 Treaty, it was never constituted. Hence, a “new” commission was established by statute of the 1974 Treaty and was to add industrial cooperation as one of its main tasks. 34. Interview with author, Berlin, May 16, 1990. 35. Bulletin des Presse- und Informationsamtes der Bundesregierung, no. 132, November 8, 1974, Bonn. Translation by author. 36. “In diesem Junktim ist eine Erstarrung der Positionen eingetreten, die keinerlei Chancen für eine baldige Lockerung verspricht.” NZZ, March 19, 1975. 37. Warsaw actually lost out to a counterbid made by the Soviet Union. As part of this agreement the USSR was to deliver electricity from a nuclear power plant near Kaliningrad that was to be built by German ‹rms. 38. “Wir sind der Meinung, daß die gegenwärtige Haltung der FRG keine wirkliche Grundlage und Atmosphäre für eine solche Normalisierung schafft,” FAZ, March 19, 1975. 39. See, for example, a letter sent by an Ost-Ausschuß of‹cer to an of‹cial in the German foreign of‹ce in Bonn. Letter number IV/3–10–11/2, October 11, 1973, photocopy, Ost-Ausschuß archive, Cologne. 40. See, for example, the memo sent by executives in the Ost-Ausschuß to of‹cials in the Foreign Of‹ce and Ministry of Economics, letter number IV/3–10–11/1, October 30, 1974, photocopy, Ost-Ausschuß archive, Cologne. Chapter 5 1. Interview with the author, July 13, 1990, Hamburg, tape recording. 2. It has been noted that the economic pressures on Honecker at that time dictated to East Berlin the necessity for more cooperation with the West. The GDR needed trade agreements and credit badly. Bonn was willing to accommodate these needs but expected concessions in return, mainly the easing of human conditions, closer contacts between the people of the two German states, and freer exchanges of ideas and information (Grote 1979, 194). 3. This assessment differed substantially from American appraisals. The New York Times headline screamed “Jerry don’t go” the day President Ford was scheduled to leave for the Helsinki Conference. But as one German foreign policy expert argues, this was not a surprise since the United States “had no interest in a common Europe” (Bender 1986, 204). 4. Press and Information Agency of the Federal Government, Dokumentation zur Ostpolitik der Bundesregierung, 12th ed. (Leck: Clausen und Bosse, 1988), 80–81. 5. Die Zeit (Hamburg), October 12, 1973.

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6. Handelsblatt (Düsseldorf ), November 2, 1973. 7. Süddeutsche Zeitung (Munich), January 26, 1974. Indeed, it did require faceto-face discussions between Schmidt and Gierek to reach a compromise on the upper limits of the ‹nancial concessions. However, these high-level meetings took place at the periphery of the August 1975 CSCE conference because no agreement could be reached before then at the lower echelons of negotiations. Gierek did not visit Germany until the summer of 1976. See chapter 4 for a more in-depth discussion of these events. 8. This concept of a negotiated “slave trade” was in fact con‹rmed by Helmut Schmidt himself. Schmidt, interview. 9. Süddeutsche Zeitung (Munich), April 2, 1974. 10. Frankfurter Allgemeine Zeitung, August 5, 1975. 11. Die Welt (Hamburg), August 6, 1975. 12. Noteworthy in this context is the fact that this particular criticism came from Franz-Josef Strauß, a conservative CSU member. Less than seven years later, he would be the instigator of a DM 1 billion credit for the GDR, which provided the “incentive” for East Berlin to allow East Germans to travel more freely to West Germany in ever larger numbers. 13. This was the assessment by a member of the German business community who has had years of experience in making business deals with Poland. Kersten, interview. 14. Petra Pissula, resident scholar on Poland at HWWA, interview by author, February 21, 1990. Hamburg, Germany, tape recording. 15. Summary remarks furnished by the German Ministry of Economics, in preparation for the First Annual Meeting of the Mixed Economic Commission, March 17–18, 1975, in Warsaw. Federal Ministry of Economics, TD, n.d., OstAusschuß archives, Bundesverband der Deutschen Industrie, Cologne, Germany. 16. For example, this was the conclusion reached by the German delegation at the ‹rst annual meeting of the Sub-committee on Electro-technical and Electronics Industry (a suborganization of the Polish-German GK) in Frankfurt, February 13, 1976. Protocol of the Sub-committee on Electro-technical and Electronics Industry, TD, February 13, 1976, Ost-Ausschuß archives, Bundesverband der Deutschen Industrie, Cologne, Germany. 17. Protocol of the ‹rst annual meeting of the Polish-German GK, March 17–18, 1975, in Warsaw. Polish-German Mixed Economic Commission, TD, n.d., Ost-Ausschuß archives, Bundesverband der Deutschen Industrie, Cologne, Germany. 18. In a different conclusion reached by one scholar of Ostpolitik, Kreile (1978) claimed that the government supported capital exports at this time as an alternative to “importing” Gastarbeiter (guest-workers, Germany’s less acrimonious term for foreign workers, usually recruited from Turkey). Such a move would also improve the international division of labor. 19. Typed documents, spring 1976, Ost-Ausschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 20. Olszewski at a press conference, Handelsblatt (Düsseldorf ), June 1, 1976.

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Notes to Pages 95–100

21. Fridrichs in a statement to the press, Handelsblatt (Düsseldorf), June 4, 1976. 22. Protocol of the Second Annual Meeting of the Mixed Economic Commission, TD, June 2–3, 1976, in Bonn, Ost-Ausschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 23. Press statement by economics minister Hans Fridrichs, Nachrichten für Außenhandel (Eschborn), June 14, 1976. 24. According to an interview with a Krupp of‹cial, the coal gasi‹cation plant never went into operation. Bach, interview. 25. An anonymous government of‹cial in Bonn, as quoted in the Frankfurter Allgemeine Zeitung, August 29, 1980. 26. However, there are many scholars who claim the real beginning of the crisis dated back to 1975 with Soviet proxy advances in Angola and the start of the production of SS-20s to be deployed for use in Europe (Lowenthal 1984/85, 303–29). 27. Remarks by former chancellor Helmut Schmidt, interview by author, July 13, 1990, Hamburg, tape recording. For another assessment, see Woyke 1982. 28. Typed documents, summer–fall 1981, Ost-Ausschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 29. The following interpretation is based on material in the Protocol of the Fourth Annual Meeting of the Mixed Economic Commission, TD, May 17–18, 1978, Ost-Ausschuß archive, Cologne, Germany. 30. Protocol of the Fifth Annual Meeting of the Mixed Economic Commission, TD, June 7, 1979, Ost-Ausschuß archive, Cologne, Germany. 31. Bonn actually checked with Paris of‹cials in this matter and found little basis for accepting the Polish account of affairs. TD, n.d. Ost-Ausschuß archive, Cologne, Germany. 32. Handelsblatt (Düsseldorf), June 30, 1980. 33. Financial Times (London), August 13, 1980. 34. Handelsblatt (Düsseldorf), June 30, 1980. 35. Der Spiegel, no. 33, August 11, 1980. 36. Noteworthy is the fact that Dresdner Bank was the leading bank in the consortium of 25 German banks. Its CEO at that time was Hans Fridrichs, Schmidt’s former minister of economics and the chief force behind the 1976 DM 2 billion Hermes credit guarantee for Poland. 37. Financial Times (London), July 5, 1980. 38. Der Spiegel, no. 33, August 11, 1980. 39. Der Spiegel, no. 42, October 13, 1980. 40. International Herald Tribune, August 13, 1980. 41. See the remarkable article by Rudolf Herlt, “Banken beugen sich Bonn,” in Die Zeit (Hamburg), August 29, 1980, which gives a fascinating account of Schmidt’s and economics minister Otto Graf Lambsdorff’s “lobbying” efforts with the German banks. 42. Frankfurter Allgemeine Zeitung, August 27, 1980. 43. Süddeutsche Zeitung (Munich), August 15, 1980. 44. See in particular the accounts by Der Spiegel, “Banken reichlich knauserig,”

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no. 33, August 11, 1980 and Rudolf Herlt, “Banken beugen sich Bonn,” Die Zeit (Hamburg), August 29, 1980. 45. Frankfurter Allgemeine Zeitung, December 15, 1981. 46. This assessment is based on correspondence between the Ost-Ausschuß and various ministries in Bonn in the immediate weeks after Poland declared martial law. OA archives, Cologne. 47. See Schmidt’s (1987) own account of these accusations in his memoirs, Menschen, especially pages 312–14. 48. Comments by leading West German bankers made at the Annual Meeting of the Federal Association of German Banks in December 1981, Etage Informationen für Unternehmer (Munich), December 21, 1981. 49. Internal Ost-Ausschuß report, December 31, 1981. 50. Interestingly, despite Warsaw’s declaration of martial law and the West’s unanimous condemnation of this action, Handlowy (the Polish bank responsible for managing Poland’s sovereign debt) nonetheless contacted twenty-three Western banks in the days following the December 13, 1981, crackdown. Bank of‹cials pleaded for a temporary credit of $350 million. The loan was to be used to pay the interest due on Poland’s loans; this money was crucial because otherwise the newly signed rescheduling programs would not take effect. The of‹cials’ efforts were to no avail; all the banks turned down the request. Chapter 6 1. Jozef Czyrek, interview with the author, Warsaw, August 17, 1990. 2. This is how a German diplomat has de‹ned the goals of the FRG in accordance with the Brief zur deutschen Einheit that was attached to the Moscow and Basic Treaties (Jötze 1984, 300). 3. For more speci‹c details see “Zur europäischen Friedensordnung als Perspektive für die Politik der Bundesregierung,” a speech given by Genscher before the Paasikivi Society in Helsinki on November 2, 1983, printed in Bulletin 1983, ed. Press and Information Agency of the Federal Government (Bonn: Press and Information Agency, 1983), 1085ff. Compare this to the statements by deputy minister Alois Mertes before the Deutsche Gesellschaft für Osteuropakunde in Berlin on October 15, 1983, speech printed in Bulletin 1983, 981. 4. Because of numerous and vociferous peace demonstrations throughout the Federal Republic, the fall of 1983 was referred to as the “Heißer Herbst” (hot fall). Moreover, the SPD itself reversed its support for the dual-track decision at a 1983 special party congress. This prompted members of the Social Democratic conservative wing to publish a collection of essays warning of the dangers of “equi-distance” in matters of security and alliance loyalty (Maruhn and Wilke 1984). 5. This determination by the Conservative-Liberal coalition to make closer German-German ties one of their key priorities was exempli‹ed by the 1983 DM 1 billion credit to the GDR discussed earlier. 6. Financial Times, March 13, 1986. 7. Dr. Claudia Wörmann, interview by author, February 16, 1990, Cologne,

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Notes to Pages 108–11

Germany, tape recording. I am indebted to Dr. Wörmann, the former staff director for German-Polish relations at the Ost-Ausschuß, for this term and for her assessments of the political economy of German-Polish relations. 8. Helmut Kohl to Otto Graf Lambsdorff, TLS, photocopy, January 19, 1984, Ost-Ausschuß archives, Bundesverband der Deutschen Wirtschaft, Cologne, Germany. 9. In particular, Genscher had wanted to lay a wreath at the grave of the priest Jerzy Popieluszko, who was clumsily murdered by Polish secret police in October 1984. 10. Later known as “funeral diplomacy,” Bonn was able to use the occasions of Andropov and Chernenko’s burials as opportunities for informal dialogue with Warsaw and East Berlin. In particular, Kohl used these episodes in his attempts to shield intra-German relations from the prevailing East-West tensions (Hanrieder 1989, 214–15). 11. For this and the following accounts, see the book written by von Weizsäcker’s press spokesman, Friedbert P›üger, Richard von Weizsäcker. Ein Portrait aus der Nähe (Stuttgart: Deutsche Verlags-Anstalt, 1990), 319. 12. However, there were signs that Kohl realized the necessity of modifying some of his views. In early 1985, he agreed to address the controversial organization of West German expellees from Silesia (now a part of Poland). This touched off a heated debate about the implications for Bonn’s recognition of the postwar status quo. In the face of relentless criticism, and worried about the effects on Germany’s international image, Kohl revised his text and punctuated his speech with references to his government’s respect for the territorial borders to the east (McAdams 1986, 146). 13. The bilateral debt rescheduling agreement was signed by Bonn and Warsaw on September 8, 1981, and covered the DM 647 million payment that would have come due December 31. Under the terms agreed upon, Poland was given a fouryear grace period, followed by a four-year schedule to repay the debt by 1989. These were the conditions worked out at the multilateral Paris Club negotiations on April 27, 1981, after Genscher’s visit to Warsaw. Süddeutsche Zeitung, September 9, 1981. 14. This is the sum of Poland II, the second rescheduling agreement signed in 1985, which covered Warsaw’s debts from 1982 through 1985. Figures from the Ministry of Finance, Bonn, photocopy, 1990. 15. Interview with of‹cial from Ministry of Finance, Bonn, May 9, 1990. 16. Interview with of‹cial from Ministry of Finance, Bonn, May 9, 1990. 17. Interview with of‹cial from Ministry of Finance, Bonn, May 9, 1990, as well as Federal Chancellor’s of‹ce, April 12, 1990. 18. This interpretation is based on a copy of Kohl’s letter, OA archives, Cologne. 19. The Financial Times, March 13, 1986. The actual guarantee was not ‹nalized until March 1986, at which time France and Austria followed suit. 20. This interpretation is based on press releases from the Ost-Ausschuß, OA archives, Cologne.

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21. Handelsblatt, March 25, 1985. 22. Neue Züricher Zeitung, October 26, 1985. 23. Handelsblatt, November 29, 1985. 24. At the 10th Party Congress of the Polish United Workers’ Party, June 29–July 3, 1986, Party Chief Jaruzelski was able to successfully defend and set in motion his stabilization and restructuring policies. See the account given in Bingen 1986. 25. As cited in Larrabee 1989, 6. 26. However, Phillips is careful to point out that important differences remained between the Ostpolitik positions of the CDU/CSU and the SPD. The SPD favored a more comprehensive security component, while the Kohl government merely emphasized economic cooperation with the Soviet Union and East Europe in addition to arms control. 27. Handelsblatt, November 29, 1985. 28. Jozef Czyrek, interview with the author, Warsaw, August 17, 1990. 29. Handelsblatt, May 14, 1987. 30. This could be interpreted as a measure of sensitivity, according to Richard Cooper (1972). 31. Bulletin, published by the Bonn Presse- und Informationsamt, May 27, 1987. 32. The following interpretation is based on copies of the letter exchange, OA archives, Cologne. 33. Interview with of‹cial from Ministry of Finance, Bonn, May 9, 1990. 34. Ibid. 35. Ibid. 36. Spokesperson for the Bundesverband des Deutschen Exporthandels, Frankfurter Allgemeine Zeitung, May 25, 1987. 37. Tomala 1987. 38. Ibid. 39. The following interpretation is based on the Protocol of the Seventh Annual Meeting of the Mixed Economic Commission, May 25–26, 1987, Warsaw, OA archives, Cologne. 40. For his efforts at normalizing ‹nancial relations with Warsaw by proposing a new debt rescheduling agreement (which, of course, would have enabled Bonn to ‹nally receive payments from Warsaw), Bangemann was lambasted by the president of the Bund der Vertriebene (League of Expellees). Herbert Czaja accused the economics minister of “irresponsible use of tax revenues” and of neglecting his constitutional duty to protect the 1.1 million ethnic Germans in Poland. Report by the Deutsche Presse Agentur (DPA), May 23, 1987. 41. Süddeutsche Zeitung, November 13, 1987. 42. Interview by the author with of‹cial from the Ministry of Finance, Bonn, May 9, 1990. 43. Frankfurter Allgemeine Zeitung, March 3, 1988. 44. Die Welt, December 6, 1985. 45. Wirtschaftswoche, January 22, 1988.

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Notes to Pages 122–27

46. Remarks in an interview with the conservative newspaper Die Welt (Hamburg), January 28, 1989. 47. At the behest of German president Richard von Weizsäcker, Rakowski was invited to attend the seventy-‹fth birthday celebrations planned for Willy Brandt. Before issuing the invitation, Weizsäcker consulted with both Kohl and Genscher, and both gave their enthusiastic approval. P›üger 1990, 320–21. 48. Assessment made by the Polish expert of the OA staff, TDS, October 1989, OstAusschuß archive, Bundesverband der Deutschen Industrie, Cologne, Germany. 49. Of course the term free and open is relative since a quota was set in advance of the June elections, which automatically gave the PUWP and its block parties 60 percent of the lower house (Sejm) seats, with 35 percent for the opposition and 5 percent for Catholics loyal to the government. 50. Other determinants were the Bundestag resolutions and Constitutional Court rulings, all of which made abundantly clear that no border decisions would be binding until an all-German nation could be formed. Presse- und Informationsamt der Bundesregierung, Bulletin, no. 75 (July 13, 1989): 653. The declaration was meant to resolve a heated political debate between Kohl’s coalition partners. In particular, Theo Waigel of the CSU and Hans-Dietrich Genscher of the FDP had been arguing in opposite directions in recent statements as to the ‹nality of the Oder-Neiße border. Neue Züricher Zeitung, July 14, 1989. 51. Josef Abaffy, “Warten auf Warschau,” Handelsblatt (Düsseldorf), August 29, 1989. 52. Die Welt (Hamburg), June 30, 1989. 53. The following assessments are based on information contained in the internal OA communications as well as its correspondence with the Chancellor’s Of‹ce and Ministry of Economics. OA archives, Cologne. 54. Memo from OA staff executive to OA chair, October 9, 1989, OA archives, Cologne. 55. Memo from OA staff executive to OA chair, October 16, 1989, OA archives, Cologne. 56. Ibid. 57. Of‹cial estimates from Bonn are that the credit will have cost the government DM 1.9 billion all total due in particular to the interest rate subsidies. 58. That these two dramatic events—Kohl’s trip to Warsaw and the opening of the Berlin Wall—occurred at the same time is most likely coincidence. However, it is interesting to speculate what would have happened had Kohl stuck with his original schedule, which was to leave for Warsaw November 10. That would have meant that the Wall would have opened before Kohl’s departure. If that had been the case, perhaps the chancellor’s visit might have canceled or postponed, or the agreements signed might have been different. 59. Jozef Czyrek, interview with the author, Warsaw, August 17, 1990. At that time Czyrek was minister of state under President W. Jaruzelski. 60. See con‹dential report made by an of‹cial in the Federal Economics Ministry and dispatched to the of‹ces of the Ost-Ausschuß, OA archives (Cologne: mimeograph, n.d.).

Notes to Pages 128–40

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61. Speech held before the German Society for Foreign Policy, Bonn, February 7, 1990. Reprinted in Europa-Archiv, no. 6 (1990): 195–202. 62. Speech delivered at the VI. Annual German-Polish Forum in Posen, Poland, February 22, 1990, reprinted in Ludwig 1991b, 206–8. 63. See the remarks made at the joint press conference conducted by the French and Polish presidents and prime ministers, Paris, March 9, 1990, as well as the Joint Declaration issued by Jaruzelski and Michael Gorbachev in Moscow, April 13, 1990, both reprinted in Ludwig 1991b. 64. For complete details of these riveting negotiations, see Teltschik 1991, especially 319–42. 65. Aside from philosophical changes, there have also been important structural changes. Of primary signi‹cance was the introduction of a yearly quota of 225,000 on the number of repatriates that may resettle in Germany. Furthermore, only those born prior to the 1993 resettlement policy are entitled to repatriate status; this will eventually put an end to the issue of ethnic German citizens living outside the boundaries of Germany. 66. Federal Press Agency, Bulletin, November 16, 1989, 1094–98. 67. Horst Waffenschmidt, “We Shall Not Forsake the Germans in the Resettlement Areas,” Declaration made by the Commissioner for Repatriates of the Federal Government, Minister of the Interior, photocopy (January 1993). 68. Federal Ministry of the Interior, “Resettlement Policy 1993,” photocopy (January 1993). 69. Figures were given to the author during interviews with of‹cials from the Ministry of Economics, Bonn, June 1992. Chapter 7 1. Marc Levinson, “Let’s Make a Deal. America’s Diplomats Are Learning a New Credo: Sell! Sell! Sell,” Newsweek, November 23, 1992, 45–46. 2. See in particular the remarks made by Chancellor Schmidt as well as Otto Wolff (chair of the Ost-Ausschuß) at that time. 3. This conclusion is also validated by Bonn’s experiences with East Berlin. For example, in 1960 West Germany terminated an inter-German trade treaty with East Berlin because East German of‹cials refused to comply with Bonn’s demands for greater transparency between the two countries. Bonn gained nothing by this negative sanction. In comparison, Bonn achieved monumental successes in the 1970s when it made various monetary outlays (transit payments, payoffs for the release of political prisoners, etc.) to East Berlin in exchange for improved communication between the two Germanies (Knirsch 1979). 4. At the time Ruhfus wrote this article, he was undersecretary in the Foreign Ministry in Bonn. 5. As reported in Klaus Bolz, “Bilaterale Außenwirtschaftsbeziehungen zwischen Polen und der Bundesrepublik Deutschland,” Osteuropa 38, no. 7–8 (1988): 703. 6. Indeed, by the end of the 1980s Polish security ideology had transformed

180

Notes to Pages 140–52

from the doctrine of “one enemy [Germany], one friend [Soviet Union],” to “two friends [Germany and the Soviet Union/Russia]” (Ludwig 1991b). 7. Remarks by minister of state Jozef Czyrek, interview with the author, Warsaw, August 17, 1990. Czyrek was a member of the Polish Politburo as well as secretary of the Central Committee in the 1980s. 8. See Henry Kissinger’s distrustful criticisms of the dangers of Ostpolitik and the subsequent need to monitor it and, if necessary, hold it in check, White House Years (Boston: Little, Brown, 1979), especially 410–11. 9. For an insider’s account of U.S. suspicions, see Kissinger 1979. 10. As Chancellor Kohl’s former national security adviser, Horst Teltschik, describes in detail, Lech Walesa was quite concerned that West Germany would lose interest in Poland once the Berlin Wall was breached. He expressed apprehension that Poland could once again become a victim of history (Teltschik 1991, 13). 11. For a riveting account of Chancellor Kohl’s bargaining tactics see Teltschik, especially pages 220–21; and chapter 7, entitled “Credits and Cooperation as Catalyst.” This is an account of how Kohl was able to proffer Gorbachev a DM 5 billion carrot: by personally contacting the CEOs of Deutsche Bank and Dresdner and “encouraging” them to supply the money. 12. Export Credit, 239. For a particularly extensive comparison of export credit policies, see The Export Credit Financing Systems in OECD Member Countries (Paris: OECD, 1990), 4th ed. 13. Bundesministerium für Finanz, Finanzbericht 1994, Bonn, August 1993. 14. Figures are as of December 31, 1988. PlanEcon Report, November 3, 1989, 61. 15. This problem became particularly acute in the 1980s when German banks seemed to be pro‹ting from generous tax laws at the same time they were receiving compensation from the German government for delinquent state-guaranteed loans. As a result, the tax laws in Germany were rewritten in 1984 to prevent such abuses, but only after they received extensive coverage in the German press. 16. Figures are from an internal report from the Ministry of Economics, July 20, 1992. 17. Interview, Helmut Schmidt, July 13, 1990. 18. Interview with banking of‹cials from the Big Three German banks, Frankfurt, June 1992. 19. Such remarks come mainly from of‹cials from the Ministry of Finance, much more interested in preserving ‹nancial stability. However, some in the Foreign Of‹ce also feel Bonn has done substantially more than Polish elites are willing to appreciate. Remarks made to author, spring 1990. 20. Interview with the author, Hamburg, July 13, 1990. 21. The preceding ‹gures are from an internal report from the Ministry of Finance, Bonn, January 20, 1992. The ‹rst sum (17.72 billion) includes DM 13.4 billion from the treaty regulating the withdrawal of Soviet troops from East German territory. 22. For a detailed discussion on the origins and functions of the Ost-Ausschuß, see Karl-Heinz Schlarp, “Das Dilemma des westdeutschen Osthandels und die

Notes to Pages 153–61

181

Entstehung des Ost-Ausschusses der Deutschen Wirtschaft 1950–1952,” in Viertaljahreshefte für Zeitgeschichte 41, no. 2 (April 1993): 223–76. In this article Schlarp claims that the Ost-Ausschuß ful‹lled more a diplomatic function than an economic one since it was assumed that trade with the new command economies of Eastern Europe would only be of symbolic value for the German economy. 23. Manfred Strauch, “Lobbying in Bonn und Bruessel,” in M. Strauch, ed., Lobbying. Wirtschaft und Politik im Wechselspiel (1993), 65. Strauch also notes that ministries may demand relevant material from the interest groups themselves. Since this formal consultative function is restricted to national interest groups, these procedures also privilege such peak associations as the Eastern Committee and Federation of Germany Industry over regional interest groups. 24. Roger Cohen, “Cabinet Secretary Promises Closer U.S.-Industry Links,” New York Times, June 13, 1993. 25. Marc Levinson, “Let’s Make a Deal,” Newsweek, November 23, 1992. 26. Jeffrey E. Garten, “Business and Foreign Policy,” Foreign Affairs 76, no. 3 (1997): 76. 27. David Sanger, “Remixing Trade and Diplomacy,” New York Times, July 9, 1997. 28. Cohen, “Cabinet Secretary Promises Closer U.S.-Industry Links,” New York Times, June 13, 1993. 29. Levinson, “Let’s Make a Deal,” Newsweek, November 23, 1992. 30. Levinson, “Let’s Make a Deal,” Newsweek, November 23, 1992.

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Index

Adenauer, Konrad, 39, 67, 69 Afghanistan, 5, 29, 87, 96, 114 Aho, C. Michael, 35 Alerassool, Mahvash, 5 Allied Powers, 39, 68, 72, 78–79, 126 Arab-Israeli con›ict, 87 Ausfuhrkredit-Gesellschaft (AKA), 34, 54 Austria, 93, 110, 145 Bach, Wolfgang, 94 Baldwin, David, 4, 6, 8–9 Bangemann, Martin, 109–12, 114–16, 118–19 Bank of America, 99–100 Banks: American, 31, 99–100, 104, 112, 116–17, 144–46; German, 34, 36–39, 42, 44, 54, 58, 63, 74; German banks in Poland, 24, 48, 58–59, 89–90, 92, 93–95, 97–100, 101, 104, 109–10, 112, 115–19, 144–46, 148, 150 Bayne, Nicholas, 13 Beitz, Berthold, 94, 111, 121 Belarussia, 148 Berghahn, Volker, 24 Berlin Wall, 15, 67, 113, 125–26, 128 Bern Union, 53 Bilateral investment treaty (BIT), 8, 23, 63; German-Polish, 62, 119, 123, 125, 146; United States-Polish, 147 Bingen, Dieter, 79–80, 89, 91–92, 108 Bismarck, Otto Von, 16 Bolz, Klaus, 54 Boulding, Kenneth, 11

Brandt, Willy, 3, 18, 58, 67, 70, 71, 72–73, 80, 88, 91, 92, 140, 152 Brazil, 145 Brezhnev, Leonid, 98, 140 Brown, Ronald, 25, 160 Brzezinski, Zbigniew, 103 Bulgaria, 53 Bulmer, Simon, 17 Bundesverband der Deutschen Industrie (BDI). See Federation of German Industry Canada, 145 Castro, Fidel, 3 Chernenko, Konstantin, 109 Christian Democratic Union (CDU), 37, 49–50, 75–76, 92, 105–6, 114–15, 122, 148 Christian Socialist Union (CSU), 49, 75–76, 92, 105, 115, 121 Citicorp, 45 Coercion: diplomatic, 4–5; economic, 4–5; military, 5, 13, 138 Cohen, Stephen, 27, 31, 34, 35–36 Conference on Security and Cooperation in Europe (CSCE), 17, 88–89, 128 Conradt, David, 38 Coordinating Committee for Multilateral Export Controls (CoCom), 7 Cordesman, Anthony, 5 Council on Mutual Economic Assistance (COMECON), 43, 52–54, 84, 126 Crawford, Beverly, 24 Cuba, 3 195

196

Index

Czechoslovakia, 44, 75, 103, 107, 130 Cziomer, Erhard, 84, 92 Czyrek, Jozef, 105 Daley, Richard, 160 D’Estaing, Giscard, 98 Détente: commercial, 7, 43; East-West, 26, 43, 58, 61, 70, 88, 96, 98, 106, 108, 114, 157; German-German, 88, 106–8, 113; German-Polish, 85, 87, 89, 111; political, 7. See also Normalization of German-Polish relations; Rapprochement Deutsche Bank, 38, 44 Dresdner Bank, 38, 44 East Europe: Brandt government and, 67–70, 71, 76, 79; ethnic Germans, 129–32; European Community, 54; German uni‹cation, 15, 23; Hallstein Doctrine, 39, 68–69; Kohl government and, 106; Ost-Ausschuß and, 38–39, 73, 152–53; reform process, 62, 122; Schmidt government and, 88, 96, 101; Soviet Union, 68; U.S. policy toward, 20, 25, 43, 70, 156; U.S. trade policy and, 43–44, 47, 55, 63, 156–57; Western credits for, 116–17, 144; West German banks and, 58, 145; West German policy toward, 15, 17–18, 26, 39, 58, 140; West German trade policy and, 29, 42–43, 47, 52–53, 55, 57, 61, 63, 69, 81–82, 90, 141, 144–45 Eastern Committee. See Ost-Ausschuß der Deutschen Wirtschaft East Germany. See German Democratic Republic (GDR) East Treaties (Ostverträge), 78–79, 105, 140; Basic Treaty, 105; Moscow Treaty, 78; Warsaw Treaty, 50, 77–80, 89, 105, 109, 123, 127 East-West relations: confrontation, 67, 87, 96, 98, 106–7; credit relations, 58, 116; détente, 7, 25–26, 68, 88, 96,

108; trade, 7, 26, 57, 141; U.S. trade policy in, 27, 43, 156; West German trade policy in, 61, 82. See also East Europe Eckstein, Harry, 16 Economic persuasion, 3–8, 51, 160; German capacity for, 47–48, 63, 74, 92, 133, 152–53; German-Polish relations as case study of, 16, 22, 27, 42, 67, 72, 90, 104, 142; institutional requirements of, 11–12, 20–21, 26, 47, 148–51, 158; power of, 10, 137–38; United States capacity for, 47, 143, 154, 160 Erhard, Ludwig, 69 Ethnic Germans, 3, 19, 70–71, 78, 80, 84, 89, 90–91, 105, 112, 121–22, 123–24, 127, 129–33, 139 European Community (EC), 13, 17, 52, 54, 74, 84, 132, 141; Council of Ministers, 54 European Recovery Plan. See Marshall Plan European Union. See European Community (EC) Export credit guarantees, 12, 52; U.S. use of, 43, 54–56, 57, 59, 143, 154; utility of, 19, 138, 143–44, 152–53; West German use of, 23, 34, 52–56, 62, 89, 94, 97–99, 100–101, 105, 110–12, 119, 123, 143–45, 147, 149–50, 153 Export-Import Bank (ExIm Bank), 43, 55, 59–60, 156 Federal Association of Wholesalers and Exporters, 39, 81, 118 Federal Republic of Germany (FRG): Bundesbank, 34, 54; Bundesrat, 79, 92, 143, 148; Bundestag, 27–28, 75, 79, 92, 104, 119, 143, 148; bureaucratic institutional structures, 28–31, 54, 143–44; 151–53; Deutschlandpolitik, 69, 71–72, 88; Family Uni‹cation policy, 84, 86, 90–91,

Index 129; Federal Agency for Overseeing Credit Affairs, 117; Federal Budget Act, 57; Federal Constitutional Court, 80, 89; Grundgesetz (Basic Treaty), 72, 123; Interministerial Committee (IMA), 34, 38, 54, 143, 152, 155 Federation of German Industry, 37–39, 50, 60, 152 Foreign aid, 14, 41; United States, 43; West German, 58 Foreign direct investment, 14, 31, 34, 52, 60, 61–62, 151; German in Eastern Europe, 63; German in Poland, 62, 93, 97–98, 116, 119, 124–25; guarantees for, 8, 23, 125, 142, 146–47, 152; U.S. in Eastern Europe, 63; U.S. support of, 63, 147. See also Bilateral investment treaty (BIT) France, 15, 17, 25, 73–74, 82, 93, 95, 98, 110, 128, 144–46 Free Democratic Party (FDP), 37, 105, 107, 113, 115 Freeman, John, 10 Fridrichs, Hans, 90, 95 Garten, Jeffrey, 160–61 General Agreement on Tariffs and Trade (GATT), 73–74 Genscher, Hans-Dietrich, 15, 92, 100–101, 106, 108, 113–14, 121, 129, 140 German Democratic Republic (GDR), 3, 15, 113; Deutschlandpolitik, 71, 88, 105, 126; East German migration, 107, 124; Kohl government, 107–8, 113–14 ; nonrecognition of, 39, 68–69; Schmidt government, 98, 102; war reparations, 71; West German trade and commerce with, 29, 80, 144, 149 German minority. See Ethnic Germans German-Polish border, 17–19, 70–71,

197

73, 77–79, 80, 84, 88–89, 90, 105, 127–29, 132, 138, 142 German uni‹cation, 15–19, 23, 44–45, 103, 133, 140–42; Brandt government, 67–69, 71–72; Four powers agreement, 126, 128–29, 142; Kohl government, 106, 114, 127; Schmidt government, 88; Soviet policy toward, 44–45, 129, 140, 142, 144, 147, 149 Gierek, Eduard, 80, 89, 91, 94–95, 98–100, 157 Goldstein, Joshua, 10 Goldstein, Judith, 40–41 Gorbachev, Mikhail, 112–14, 129, 142 Great Britain, 93, 95, 145, 146, 160 Haftendorn, Helga, 27, 29, 87 Hager, Kurt, 113 Hall, Peter, 12–13 Hallstein Doctrine, 39, 69–70, 152 Handlowy Warszewie, 98 Hanrieder, Wolfram, 20, 47 Hanson, Philip, 6, 10 Hartwick, Hans-Hermann, 42 Helsinki conference. See Conference on Security and Cooperation in Europe (CSCE) Hermes-Versicherungs AG (Hermes), 52–57, 89, 92, 94–95, 97–99, 109, 114–16, 142–43 Herrhausen, Alfred, 38 Hitler, Adolf, 16 Holland, 62, 146 Honecker, Erich, 88, 102, 107–8, 113–14 Hönsch, Jörg, 102, 104 Hungary, 53, 57, 123, 125, 145 Hunter, David, 5 Ikenberry, G. John, 157 Intermediate-Range Nuclear Forces (INF), 96, 107 International Monetary Fund (IMF), 59, 111, 119, 121, 127

198

Index

Iranian hostage crisis, 5 Iron Curtain, 16, 129 Israel, 87, 93 Italy, 73–74, 95, 98, 145–46 Jackson, Michael, 113 Jacobsen, Hanns-Dieter, 7, 43, 58, 62 Jahnke, Joachim, 26, 51, 61 Japan: MITI, 31; Polish debt and, 104, 145–46 Jaruzelski, Wojciech, 102, 108–9, 128 Jervis, Robert, 9 Joffe, Josef, 69, 71, 88 Johnson, A. Ross, 140 Karl, Wolf-Dieter, 28 Katzenstein, Peter, 28, 47 Kennan, George, 137, 157 Keohane, Robert, 40–41 Knorr, Klaus, 4, 11–12, 20, 41, 46, 47 Kohl, Helmut, 15, 25, 44, 90, 105–9, 110, 121–25, 127–28, 138, 141, 144, 148 Korte, Karl-Rudolf, 107 Kovrig, Bennett, 43 Krasner, Stephen, 36 Krause, Joachim, 28, 29 Kreditanstalt für Wiederaufbau (KfW), 34, 54, 63, 90 Kreile, Michael, 27, 42 Kriesberg, Louis, 16 Krupp AG, 94–95, 121 Kuwait, 5 Lambsdorff, Otto Graf, 101–2, 108 Larrabee, F. Stephen, 106, 108, 113 Lasswell, Harold, 6 Levinson, Marc, 35 Linkage: economic, 4–5, 11, 13, 25, 47; West German policy of, 21, 34, 77, 84, 123, 125; Paris Club policy of, 127; structural, 7, 11, 19; tactical, 7, 19; U.S. policy of, 20, 27 London Club, 104, 145, 148 Lowenthal, Richard, 96, 106

Ludwig, Michael, 142 Lukes, Steven, 10 Malecki, Marian, 62 Managed foreign economic policy, 12, 25–26, 27, 50, 73, 151–52, 153, 157–58, 160 Mann, Golo, 79 Marshall Plan, 149 Martin, Lisa, 13 Mastanduno, Michael, 4, 5, 7, 10, 11, 19, 25, 36, 47 Mazowiecki, Tadeusz, 103, 123, 125, 141 Mexico, 45 Michnik, Adam, 67 Mitterrand, Francois, 25 Mixed Economic Commission (GK), 48, 50–51, 83–86, 93, 95, 97–98, 110, 112, 115, 119, 132, 153, 157, 160 Most Favored Nation status (MFN), 8, 9; Poland and U.S. support for, 156 National Association of Manufacturers, 37 Normalization of German-Polish relations: Brandt government and, 67, 71, 72, 76–80, 85; economic, 19, 58, 72, 101, 115; Kohl government and, 105, 108, 111, 113–16, 122; political, 4, 15–16, 18–19, 58, 127, 140, 142, 153; Schmidt government and, 91. See also Détente; Reconciliation North Atlantic Treaty Organization (NATO), 15, 44, 70, 96, 104, 128, 142; Harmel Report, 26, 70, 106 North Korea, 4 Oder-Neiße line. See German-Polish border Olszewski, Jerzy, 95 Organization for Security and Cooperation in Europe (OSCE). See Conference on Security and Cooperation in Europe (CSCE)

Index Organization of Petroleum Exporting Countries (OPEC), 55–57, 144–45 Organized capitalism, 26, 36, 50, 154 Orzechowski, Marian, 113–14 Ost-Ausschuß der Deutschen Wirtschaft (OA), 38–40, 48–51, 52–53, 60–61, 73, 75–77, 81, 85, 94, 97, 103, 121–22, 124–25, 152–53 Ostpolitik, 17, 117, 128, 140, 149, 153, 156; CDU, 105, 114; SPD, 49, 68, 72, 88, 96, 152 Overseas Private Investment Corporation (OPIC), 63 Para-public institutions, 26, 47, 48 Paris Club, 13, 59, 102, 111, 118–20, 126–27, 145–46, 148 Paris peace conference, 44 Patterson, William, 17 Peaceful change, 3–6, 10, 11, 13–14, 18–20, 137, 139, 149; German-Polish relations, 67–68, 104, 105, 139 P›üger, Friedbert, 16, 112 Phillips, Ann, 89, 96, 112, 114 Poland: Chamber of Commerce, 48, 50, 60, 76; embargo against, 15, 102–4, 109, 114, 139; martial law, 15, 24, 59, 102–4, 110, 114–15, 118, 129, 138, 139, 153; Nazi occupation of, 18, 70, 80, 94, 150; of‹cial debt, 24, 59, 98–101, 104, 108, 109–12, 115–18, 119–21, 125, 126–27, 129, 138, 144–46, 148; World War II forced laborers, 89, 150 Poland Committee (PK), 39, 48–49, 60–61, 77, 83, 85–86 Posen trade fair, 48, 60 Potsdam agreements, 15, 68, 70, 78, 89, 90. See also Oder-Neiße line Putnam, Robert, 13 Rakowski, Mieczyslaw, 3, 103, 122, 140 Rapprochement, 17, 67–68, 138, 152 Reagan, Ronald, 40, 45, 96, 103–4

199

Reconciliation, 5; Franco-German, 17, 109; German-German, 140; German-Polish, 16–18, 70, 79–80, 85–86, 91, 109, 111, 113, 122–23, 125; West German and East European, 67, 69, 91, 148 Red Army Faction, 38 Reward power: concept of, 12, 20, 46, 64, 137–38, 151, 160; German use of, 73, 97, 100, 101, 104, 106, 111, 133; United States use of, 153, 156–57, 160 Rockman, Bert, 41 Rode, Reinhard, 7 Romania, 53, 80, 130, 145 Rosecrance, Richard, 11, 20 Ruhfus, Jürgen, 139 Russia. See Soviet Union Schmidt, Helmut, 24, 38, 58, 87–89, 90–92, 94, 96, 98–100, 102–4, 106–7, 118, 120, 125, 138, 144, 148, 149 Schmidt, Manfred, 34 Schon‹eld, Andrew, 36 Schröder, Klaus, 57, 59, 61, 116 Schroeder, Gerhard, 67 Schüller, Alfred, 43 Schweigler, Gephard, 69 Seppain, Helene, 25, 41 Silesia, 84, 121, 132 Skubiszewski, Krzysztof, 15, 128 Social Democratic Party (SPD), 37, 49, 67, 96, 104, 106, 113–14, 144 Solidarity, 102–4, 121–23, 126 South Korea, 161 Soviet Union: Afghanistan, 5, 29, 87, 96; demise of, 62; East Germany and, 113; embargo against, 5; ethnic Germans in, 129–30; France and, 98; German restitution for war crimes, 148; German uni‹cation and, 23, 44–45, 128–29, 140, 141–42, 147, 149; Gorbachev reform program, 112, 114; Hallstein Doctrine, 39, 68–69; NATO and, 15;

200

Index

Soviet Union (continued ) Ost-Ausschuß, 124–25; pipeline agreement, 74; Poland and, 98, 100, 102, 107, 109, 120, 126, 128, 140; U.S. relations with, 44, 67, 96, 103, 107; U.S. trade policy and, 25, 27, 41; Warsaw Pact, 140; West German banks and, 45, 58, 99, 144; West German relations with, 68, 70–71, 88, 96, 103, 107–8, 109, 114, 124, 129, 140; West German trade policy and, 41, 53, 60, 149 Spindler, J. Andrew, 38, 144 Stalin, Josef, 16 Stopford, John, 158–60 Strange, Susan, 158–60 Strauß, Franz Josef, 106–7 Streeck, Wolfgang, 35 Technology transfer, 5, 12, 14, 52, 60, 68, 72, 74, 83, 94, 112, 138 Teltschik, Horst, 44 Third Reich (Nazi Germany), 71, 80, 84, 147–48, 150 Third World, 55, 90, 144–45 Tomala, Mieczyslaw, 118 Trading state, 11, 13, 26, 28, 31, 40–41, 154–55, 160 Trager, Frank, 20 Ukraine, 4, 148 Ulbricht, Walter, 67 United Nations, 68, 79, 88 United States: Agency for International Development (AID), 59; Commerce Department, 31–32, 152, 157, 160–61; Congress, 35, 43–44, 59, 63, 156; Export Administration Act of 1969, 25; export credits, 43, 54–57, 143, 156; Johnson adminis-

tration, 156; Kennedy administration, 70, 156; Nixon administration, 156, 160; policy of bridge-building, 43; relations with Cuba, 3; State Department, 31, 34, 157; Tied Aid Credit Program, 59; Trade Action Coordinating Committee, 36; Trade Act of 1974, 35; Treasury Department, 31, 33–34, 152 Van Ham, Peter, 7 Vatican, 102 Wagner, Ulrich, 43 Wagner, Wolfgang, 105 Waigel, Theo, 121 Walesa, Lech, 103, 123 Walter, Nobert, 141 Wandycz, Piotr, 43, 154, 156–57 Warsaw ghetto, 18, 58, 80, 92 Warsaw Pact, 53, 140 Warsaw Treaty. See East Treaties (Ostverträge) Weaver, R. Kent, 41 Wec, Jozef-Janusz, 113 Wehner, Herbert, 104 Weizsäcker, Richard von, 16, 109 Wiehn, Helmut, 83 Wolff von Amerongen, Otto, 39, 48, 60, 111, 121–22 World Bank, 118 World War II, 20, 37, 38, 44, 53, 61, 67, 71, 77, 80, 82, 84, 89, 128, 149 Wörmann, Claudia, 53, 61 Yugoslavia, 55, 93 Zündorf, Benno, 78 Zysman, John, 35, 36, 38, 42