Academic journal article Business Economics

International Perspective: Reunification in Germany - Its Economic and Financial Implications

Academic journal article Business Economics

International Perspective: Reunification in Germany - Its Economic and Financial Implications

Article excerpt

West Germany will pay a huge price for reunification by subsidizing the social security system in East Germany, by supporting and financing investments in the presently extremely poor infrastructure in the GDR and by offering attractive fiscal incentives to au who are ready to make direct investments in the GDR. Expansive fiscal measures will cause some acceleration in the inflation rate. The German Bundesbank will tighten its restrictive policy somewhat further. Capital market rates already have increased by more than I percent; not much further increase is expected. The DMark exchange rate will be kept quite stable by high (real) interest rates and positive long-term economic prospects of reunification.

WHEN THIS COPY of Business Economics reaches its readers, German monetary union (GMU) will have been realized. But at the time of writing this article (late April), only the general set of rules for this undertaking is as yet defined. There is no modern credit system in place in the GDR. There is no financial bureaucracy that has experience in collecting VAT or individual or corporate taxes on the basis of clearly defined laws. The GDR has huge long-term delivery contracts with other East European countries, especially with the USSR, based on nonconvertible transfer-rubles and at fixed prices. Who will take on the inherent risks * Klaus Wieners is Chief Economist, Westdeutsche Landesbank Girozentrale, Dusseldorf, West Germany. He also is Vice Chairman of the German Association of Business Economists and a council member of the European Federation of Business Economists. of these contracts after reunification? On the corporate level, even top management has no idea whether the products of its company are competitive in a free market, because present cost and price structures are hopelessly distorted by politically motivated interventions. The top manager of a big Kombinat (state-owned combine) has an annual income of 30,000 East German marks, a foreman in the same company of 20,000 marks. Compare this with the 500,000 deutschmark annual income of a top manager and the 60,000 deutschmark income of a foreman in a West German company of similar size. And now imagine what will happen when, from july 1, 1990 onwards, companies of the two German states will compete with each other within the same economic and monetary framework. AN UNPRECEDENTED EXPERIMENT

What is going on in Germany is an incredible and unprecedented undertaking. Most economic experts argued for a long time that this would lead to an economic disaster; they recommended a step-by-step-approach over three to five years with a common currency only at the end, not right at the beginning. It is still a controversial issue in the inner-German debate whether a clear-cut program with a fixed medium-term time table, proposed and decided by the two German governments in january 1990, would have succeeded in calming the political and economic unrest in East Germany and in stopping the outflow of 2,000 to 3,000 people per day to West Germany. But the interim government in East Germany felt it had no political mandate for such wide-ranging decisions, and finally there seemed to be no alternative to offering the GDR the fast realization of economic, social and monetary union.

What will happen from july I onwards? Will it be the starting point of a second German economic miracle (as the government hopes) or will it end in disaster? Nobody can give a precise answer yet. There is absolutely no parallel in the past to such an undertaking. Therefore, we have no prior experience and - as you may imagine - under these circumstances models cannot be of any help, either. Some argue that the first economic miracle in Germany, which started in 1948, demonstrated that it is sufficient to give people a fair chance of realizing their economic ambitions in a market economy to create an economic breakthrough. But don't forget that the newly established Federal Republic of Germany started in a sort of a closed shop, with strict controls on all trade and financial relations to the outside world and with only limited competition from abroad. …

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