Title: Economic Consequences of German Reunification
1Economic Consequences of German Reunification
2Overview
- German History after 1945
- Policy Strategy for Reunification
- Impacts of Reunification on Germany
- Impacts of Reunification on Europe
- The Situation Today
3The Potsdam Conference 1945
- President Truman, Premier Stalin, and P.M. Attlee
meet. - The intent was to ultimately govern Germany
together. - The agreements fell apart soon after they were
made. - France did not feel bound because it did not
participate - Cold war tensions and vague wording resulted in
different interpretations
4Four Occupational Zones
- Germany was subdivided into 4 zones
- Berlin was also divided into 4 similar zones
- The Soviet zone became the German Democratic
Republic (East Germany) - French, British, and American zones united to
form the Federal Republic of Germany (West
Germany)
5East Germany
Check Point Charlie
- Established an authoritarian government with a
centralized command economy. - Became the wealthiest and most advanced country
in the Eastern bloc but still well below western
standards. - Political freedoms were denied
- Mass defections to the West prompted the
development of the GDR border system.
Courtesy of Stephen Windsor
From Dornbusch R., H. wolf, and L. Alexander
1992
6(No Transcript)
7West Germanys Wirtschaftswunder
- West Germany developed a capitalist social
market economy and a democratic parliamentary
government. - Prolonged economic growth fuelled the economic
miracle of the FRG. - The economy was primarily built upon industrial
activities.
8Reunification
- In 1989 Hungary removed border restrictions with
Austria - More than 13,000 East Germans escaped to the West
through Hungary - Gorbachev pressurized the GDR to accept change.
- In October 1989, the entire East German cabinet
resigned and travel restrictions were removed. - Citizens began manually knocking down the wall.
9November 9th, 1989
10The Economic Plan for Unification
- West German industrial efficiency was expected to
quickly overcome the economic challenges. - East German currency would be exchanged for West
German currency at a rate of 11 - East German wages would be raised to Western
standards immediately. - Private Debts would not be eliminated.
- Property rights were not clearly defined.
11East German Firms Could not Compete
- Artificially high wages in the East resulted in
high unemployment. - GDP dropped while a thirst for imported goods
increased. - Exports remained at low levels.
From Dornbusch R., H. wolf, and L. Alexander
1992
12The West German Burden
- By 1996, the amount of money absorbed by East
Germany was 50 larger than the GDP - 160 billion DM was from public investment
- 75 billion DM was from private investment
From Sinn, H.W.. 1996
13The West German Public Debt
- East German workers began competing for West
German jobs - The unification expenses were funded through
borrowing rather than tax increases. - Historically low German debt skyrocketed.
From Dornbusch R., H. wolf, and L. Alexander
1992
14The EMS
- The European Monetary System (EMS) was designed
to keep European currency exchange rates within a
narrow band. - Germany was the key currency because it had the
highest GDP. All other currencies tried to match
German monetary policy. - This was accomplished by interest rate
fluctuations and the buying and selling of
foreign exchange reserves.
15European Interest Rates
- As investment in East Germany grew, the interest
rates rose in Germany. - This caused an interest rate increase reaction
from the rest of Europe. - Interest rates in Sweden and Ireland rose as much
as 500
From Sinn, H.W.. 1996
16EMS Crisis
- Neighboring European countries raised their
interest rates in an effort to protect their
currencies from devaluation. - Interest levels peaked on Black Wednesday in
September of 1992. - In order to keep pace with the rising value of
the DM, other nations raised interest rates and
experienced currency devaluations. - The British pound and Italian lira were
temporarily suspended at the peak of the crisis.
17The Real Value of the Deutschmark
From Sinn, H.W.. 1996
- The value of the German Deutschmark also
increased relative to other European Currencies. - To counteract this devaluation, other countries
raised interest rates.
18The EMS Crisis
From Sinn, H.W.. 1996
19Investment Today
From The Spiegel Online, 2005
- Despite trillions of Euros being poured into the
former East Germany, the GDP has not increased.
20References
Berg, S., S. Winter, and A. Wassermann. 2005.
The Price of a Failed Reunification. Spiegel
Online International. Sept. 2005. Sinn, H.W..
1996. International Implications for German
Reunification. Brookings Papers on Economic
Activity. 1/1996 pp.1 28. Dornbusch, R., H.
Wolf, and L. Alexander. 1992. Economic
Transition in Eastern Germany. Brookings Papers
on Economic Activity. 1/1992 pp.235
272. Miles D., and A. Scott. 2005.
Macroeconomics and the Global Business
Environment. John Wiley Sons. N.J.
21The Situation Today
From The Spiegel Online, 2005