AWKWARDLY, CAPITAL FLOWS EAST FAR FROM GOD, CLOSE TO GERMANY

''Poor Mexico," that country's longtime ruler, Porfirio Diaz, is said to have lamented. "So far from God, and so close to the United States."

A not dissimilar lament may be heard these days from a number of the Soviet Union's former East European satellites. Having escaped Russia's unwelcome discipline, they are falling into the clutches of an attractive but imposing new suitor. On the one hand, they welcome West Germany's attentions. On the other, they worry about things going too far, too fast.In Western Europe and North America, it's the potential geopolitical impact of German reunification that grabs the headlines. But in Eastern Europe, concerns about one Germany are secondary. Whether or not the German Democratic Republic is swallowed up by the Federal Republic of Germany, Germany's raw economic power has become the major fact of life.

West Germany's trillion-dollar output dwarfs that of all the East European nations combined. Its seemingly permanent trade surplus, by far the largest in the world, gives it ample supplies of capital and makes it a natural supplier of funds to countries facing critical capital shortages. Its industrialists, fed up with high wages at home, have been searching vigorously for alternative locations to manufacture for the West European market. Eastern Europe, close at hand, full of educated workers who speak at least a smattering of German and enjoying duty-free access to the European Community, is a natural.

As the newly installed non-communist governments of Eastern Europe ponder how to go about transforming their creaky state-dominated economies along capitalist lines, Germany looms large in their thinking.

Western economists, bankers and government officials are giving them lots of free advice about selling off state-owned companies, establishing stock markets, encouraging foreign investment and removing barriers to international trade. Those who are now running the East European governments know that, in general, this counsel is sound. They also know that if they follow it their economies will become appendages to West Germany's in short order. Already, political criticism of German economic domination is mounting. "We don't like to talk about this publicly," a high-ranking official of one former communist state said recently. "It's a very sensitive issue."

The East Europeans, then, face a contradiction: They want and need foreign capital and foreign trade, but they also want to keep a lid on the German presence.

The problem is most acute in Czechoslovakia, where the interim government of Vaclav Havel is in the midst of drafting laws on privatization and foreign investment.

Czechoslovakia went in for big Stalinist-style enterprises, so its economy is dominated by only a couple of dozen state-owned firms. If those companies were put on the market, West Germany's industrial giants would snap them up overnight. To prevent that, the government plans to break the combines up and auction off the pieces separately. "If a German company and a non-German company offer the same bid, we'd prefer to sell to the non-German company."

Hungary shares these concerns about German domination - one reason, perhaps, that the red tape was cut quickly when General Electric and General Motors wished to make major investments. Poland, disappointed in the apparent disinterest of American investors, has put out the welcome mat for Japanese and South Korean companies just to have some kind of counterweight to the West Germans.

And even East Germany worries about its fellow Germans: Were it to lift the rules overnight, its entire economy might easily be taken over by capitalists from the West. The East German government announced Thursday that it would begin to sell state-owned industries to private investors on March 15. But land and fixed assets will be available only to East German nationals, not to foreigners - including West Germans. This, a government spokesman explained, will prevent "the arbitrary sale of assets and property."

Dealing with this new German question is difficult. A country proclaiming its faith in free markets can't make formal exceptions when it comes to citizens of a particular foreign country. What it can do is structure its economy to ensure that competition precludes anyone, including Germans, from dominating it.

Selling off state-owned companies in small pieces, creating and enforcing antitrust laws, promoting employee stock ownership plans and limiting the share of bank assets that can be controlled by any one institution are means to that end. All are likely to be employed in Eastern Europe. But they are unlikely to reduce the uncomfortable German presence, whether there are two Germanys or one.

For the full story: Log In, Register for Free or Subscribe