Commentary: Unification tax is the key

The new German proposal for an obligatory interest-free loan to the state by those western firms and better-off individuals who have not invested in the east is a step in the right direction. Although it is not yet official government policy - nothing as controversial as compulsory saving is so simply achieved in coalition politics - the high-level backing for the plan in Chancellor Helmut Kohl's Christian Democratic party indicates this is a high-flying trial balloon. The Finance Minister, Theo Waigel, has also come out in favour of the obligatory loan formula, sweetened by introducing a tax-free element.

The reason why the government is contemplating this 'act of desperation', as a Commerzbank economist describes it, is clear. Despite repeated assurances to the contrary, the government needs to secure new medium-term sources of revenue. The one-year limit, ended in July, on the unpopular 'unification solidarity tax' - an extra 7 1/2 per cent on income tax - was a mistake.

It was indicative of the belief in early 1991 that eastern Germany would by now be well on the way to recovery. It is not.

The government faces pumping in massive transfers of well over DM100bn (pounds 36.8bn) annually for years to come, with little hope of much early return. The capital markets, as record interest rates show, are already over-strained. So, despite continued promises of no further tax increases, western Germans will be paying more in some form or other.

But there is also an important political element to the scheme for an obligatory loan from the better-off. A key to German economic recovery is wage restraint, as the just-resigned head of the German Industrialists' Federation, Heinrich Weiss, argued yesterday. Mr Kohl is convinced that the only way of getting trade unions in western and eastern Germany to accept low settlements next year is by showing them that the better-off, companies and individuals, are now doing their bit for unification. A senior chancellery adviser describes the loan idea as a 'crucial signal of social justice'.

The unions and the opposition Social Democrats have not panned the idea, which augurs well. The more Germany is prepared to finance the development of the east by fiscal means - even if dressed up as compulsory savings - the less necessary high interest rates will be. A credible unification tax is one of the keys to lower European interest rates.