Soul-Searching over an Earlier Monetary Union
Wallace, Paul, The Independent (London, England)
As the European Union considers practical steps towards achieving economic and monetary union by 1999, it seems strange that so little attention has been paid to the laboratory experiment that has been going on in the very heart of Europe. In July 1990, German economic and monetary union took effect. What is the scorecard five years later?
The initial perception of reunification was that it would create an economic giant. East Germany had long been seen as the powerhouse of the Soviet bloc, a testament to the ability of Prussian economic culture to overcome the drawbacks of Communism.
As the skeletons tumbled out of the cupboard, however, revealing the dire state of the East German economy, the mood changed abruptly. Now the view was that the West German economy had shackled a ball and chain to its feet. Here was an eastern Mezzogiorno in the making, a region like the south of Italy, that would act as a permanent brake on the healthy part of the economy.
But that wasn't the only problem. With or without the new states, this was a giant going to seed. The criticisms were most ferocious inside Germany, as senior industrialists expressed their alarm about a country that was overpaying itself and under-working. Productivity might be higher in absolute levels than rival countries such as the UK, but it had been improving at a sluggish rate for many years.
Industry matched its words with deeds. A big shake-out in labour ensued, with payrolls down by some 15 per cent in the past five years. Household names like Mercedes-Benz swallowed their pride and announced far-reaching programmes of reform.
The restructuring - ferocious by the standards of a social market economy - seemed to do the trick. Germany recovered much more strongly than had been expected last year on the back of buoyant world trade. Its traditional strength - investment goods bought on quality rather than price - seemed to be paying off again. As economic activity turned up, there was a big improvement in productivity and unit labour costs fell dramatically.
Equally important, the eastern economy, which had gone into free-fall after the initial shock of reunification, began to show signs of life. In 1994, eastern Germany grew at nearly 10 per cent, a rate expected to be sustained this year.
The tables were turned, or so it seemed. The initial optimism about economic prospects for a united Germany appeared justified. The Germans might have bitten off more than they had first thought; but they were going to make a go of it.
Yet on the occasion of the fifth anniversary, the mood is once again one of soul-searching. In part this is a response to emerging signs of an unexpected slowdown in the German economy, with the IFO business conditions indicator well down on the level reached at the turn of the year. But it also reflects deeper concerns about the health of the pan-German economy.
Yes, there are signs of life in eastern Germany. But the real surprise would have been if the drip-feed of subsidies from the West had not brought about some revival to an economy in intensive care.
The scale of the transfers has been quite extraordinary. Year after year, some 5 per cent of the national income of one of the richest economies in the world has been shifted east. In 1995, they are set to fall for the first time since reunification. But at DM150bn (pounds 67bn), it is as if the entire receipts from income tax to the UK Treasury - and more - were being shipped east.
Yet most of the transfers have not gone into rebuilding the East. They have gone into bolstering the income of those unwelcome poor cousins who came knocking at the door of their rich relations in the West. Some two- thirds of the flow of money has gone into consumption.
The need for income support on so grand a scale is stark evidence of the economic collapse that occurred in former East Germany in the early 1990s. …