Economic Consequences of German Reunification - PowerPoint PPT Presentation

1 / 19
About This Presentation
Title:

Economic Consequences of German Reunification

Description:

The intent was to ultimately govern Germany together. ... The Soviet zone became the German Democratic Republic (East Germany) ... – PowerPoint PPT presentation

Number of Views:124
Avg rating:3.0/5.0
Slides: 20
Provided by: stefans88
Category:

less

Transcript and Presenter's Notes

Title: Economic Consequences of German Reunification


1
Economic Consequences of German Reunification
2
Overview
  • German History after 1945
  • Policy Strategy for Reunification
  • Impacts of Reunification on Germany
  • Impacts of Reunification on Europe
  • The Situation Today

3
The 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

4
Four 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)

5
East 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)
7
West 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.

8
Reunification
  • 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.

9
November 9th, 1989
10
The 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.

11
East 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
12
The 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
13
The 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
14
The 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.

15
European 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
16
EMS 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.

17
The 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.

18
The EMS Crisis
From Sinn, H.W.. 1996
19
Investment Today
From The Spiegel Online, 2005
  • Despite trillions of Euros being poured into the
    former East Germany, the GDP has not increased.

20
References
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.
21
The Situation Today
From The Spiegel Online, 2005
Write a Comment
User Comments (0)
About PowerShow.com