By: Aidan Levi-Minzi
November 9th marked the 30 year anniversary of the fall of the Berlin Wall: a representation of the political and economic reunification of Germany. The fall of the Berlin Wall was considered a critical point of the Cold War: a victory for democracy. For the East, however, this would mark the beginning of their chase to catch the West with their wealth and economic power.
The Price of Reunification is Still Being Paid Today
With reunification in the early 90’s, many countries east of the Iron Curtain found themselves decades behind Western Europe in their standard of living, productivity, research, innovation, and infrastructure. East Germany was no different. Helmut Kohl, the Chancellor of Germany throughout the 80’s and 90’s, promised to raise the standard of living in the East to match that of the West. In order to do so, Kohl would use Keynesian economics in order to elevate firms based in the East to match the economic power of the West (to many economists’ dismay), even though the former were of much lower value, through the use of public investment. This worked for a bit, but the increasing unemployment rate ruined Kohl’s reputation amongst Germans (he would eventually lose by a large margin to Gerhard Schroder in the 1998 federal elections).
In 1991, the Solidarity Surcharge, a 5.5 percent income tax, was introduced to West Germans in order to rebuild East German infrastructure. This tax is still being paid by Germans today, and although it has been reduced, it cost German citizens £18.9 billion in 2018, and has shifted over £2 trillion worth of resources from West to East in the last 30 years.
Nearly 8,500 state-owned enterprises existed in the East, employing more than 4 million Germans. The Treuhandanstalt, or “Trust Agency” was a government owned agency, introduced in June of 1990, with the main goal of restructuring these firms. All of a sudden, political property, public housing, and nearly 2.4 million hectares of agricultural land and forests became private property to be sold. The Treuhandanstalt would also plan the public infrastructure that would be added to the East, including roads, railways, bridges, and parks. Yet, the unemployment rate and national debt continued to rise. The investment in newly-privatized firms and eastern infrastructure should have been followed with economic deregulation, including lower taxes.
Contributions From the Rest of The World
The reunification of Germany provided huge upside to potential investors, who would eventually pour huge sums of money into the newly merged nation throughout the 1990’s. According to Bundesbank economist Roberto Violi, between 1991 and 1998, Germany received over £1.2 billion from foreign investments.
However, these major investments led to the collapse of the European Monetary System (EMS) in 1992. “The high public and private demand”, wrote economist Hans-Werner Sinn in the 1990’s, “increased German interest rates compared to those in other countries, increased the attractiveness of the German mark as an investment currency, and created strong pressure to appreciate it.” The EMS, which was an adjustable exchange rate set up in 1979 to foster a closer monetary policy cooperation amongst members of the European community, did not resist, and the German mark reevaluated itself and was given a boost in value. European Chancelleries grew more fearful of the increased strength of the united-German mark, agreed to recognize reunification only if Germany agreed to renounce its monetary sovereignty.
Germany Thirty Years After
Today, the East still struggles to keep up with its western counterpart. Corporate restructuring and higher wages did not translate into an economic boost that most politicians expected. The manufacturing industry is being funded by public transfers and new investments (coming both domestically and abroad), but this kind of stimulant takes time to regrow an economy. Meanwhile, emigration is playing a role. Over a million people have left their small towns in the East as they look for more opportunity in larger Western cities. Some Eastern cities, such as Leipzig and Dresden, are responding with an entrepreneurial spirit and are the birthplace of many new German-based tech firms.
Certainly the current health of the Eastern market has never been so robust, but time is passing, and it is still behind most of Europe. All of the companies listed on the Dax30, the top 30 companies in Germany, are located in the West, and of the 500 largest companies in Germany, only 37 are based in Eastern states (17 with Berlin excluded). In short, the economic heart of Germany still beats in the West. The two pieces of Germany have become similar, but many economic, social, and cultural differences still remain, despite massive resource allocation over the past three decades.
The Future: A Search for the Next Chancellor
It is in these situations that the intolerance of political differences could become a serious problem for all of Germany. In the East, the extreme right has received nearly 25% of votes. Whether this is due to economic or social reasons cannot be established, but German Chancellor Angela Merkel has vowed to finish her 15-year tenure by Autumn 2021, when Germany’s next election is due. Politicians are being closely followed by both citizens and political opponents as the deadline for the “k-question”: who will become the next Kanzler (Chancellor)?
The Green Party, which briefly topped the polls earlier this year, has been struggling to find who will lead them as Chancellor. The SPD (Social Democratic Party of Germany), a center-left political party, has decided to stick with Merkel after threatening to leave her coalition. Their new leadership, headed by Norbert Walter-Borjans and Saskia Esken, have softened their demands for large financial changes, including a (euro)12 minimum wage and an increase in public investments. Merkel’s center-right CDU (Christian Democratic Party) is looking to make changes to Germany’s seemingly lackluster technology sector (including 5G networks and artificial intelligence) and as well as making its social-market economy more environmentally friendly, which has sparked consideration of a coalition with the Greens.
However, the power struggle may stunt all of this. Senior CDU politician Armin Laschet fears that potential candidates for the position may be bruised by their own party before being given the opportunity to go up against their opponents, similar to the American primaries. With an ever increasing number of disgruntled East-Germans, both the CDU and the SPD must acknowledge the target on their backs.
Buck, Tobias. (2019, December 5). Germany’s SPD rows back from threat to quit Merkel coalition. Financial Times. Retrieved from https://www.ft.com/content/dcd545aa-1773-1 1ea-9ee4-11f260415385
Charlemagne. (2019, November 28). Post-Merkel Syndrome. The Economist. Retrieved from https://www.economist.com/europe/2019/11/28/post-merkel-syndrome
Gabanelli, Milena. Taino, Danilo. (2019, October 8). Germania: quanto è costata ai tedeschi, all’Europa e all’Italia la caduta del muro. Corriere delle Sera. Retrieved from https://w ww.corriere.it/dataroom-milena-gabanelli/germania-est-ovest-caduta-muro- berlino-costo-riunificazione/817c3d32-f8db-11e9-8af8-3023352e2b21-va.shtml
Heuser, Uwe Jean. (2017, July 1). The Anti-Economist. Zeit Online. Retrieved from https://www.zeit.de/wirtschaft/2017-06/helmut-kohl-chancellor-economic-policy
Liberto, Daniel. (2019, August 26). European Monetary System (EMS). Investopedia. Retrieved from https://www.investopedia.com/terms/e/ems.asp