Economic Bulletin , News of 11 December 2014

Reunification - An Economic Success Story (Copyright)  Berlin Brandenburger Tor

by Karl Brenke, Marcel Fratzscher, Markus M. Grabka, Elke Holst, Sebastian Hülle, Stefan Liebig, Maximilian Priem, Anika Rasner, Pia S. Schober, Jürgen Schupp, Juliane F. Stahl, Anna Wieber in: DIW Economic Bulletin 11/2014

People’s expectations after the fall of the Berlin Wall 25 years ago and of reunification in 1990 were huge. The government promised to create “flourishing landscapes” within a few years. The euphoria of reunification came not only through the desire to finally become one country and one nation again but also had tangible economic reasons: the people from East Germany wanted better economic prospects, more opportunities to realize their potential, and ultimately to create more well-being for themselves and future generations. West Germans were hoping for a boom. This promise very quickly proved to be an illusion. And, solely from an economic perspective, economic policy errors were made, such as monetary union at an exchange rate that caused East Germany’s economic competitiveness to fall rapidly and, at least initially, contributed to a sharp rise in unemployment. In addition, privatization through the Treuhandanstalt was probably premature. Nevertheless, did reunification fail from an economic policy perspective? It would be misguided to take the political promises of whirlwind prosperity as a measure of the success of reunification. It is difficult to answer the question as to what are realistic objectives and criteria for a systematic economic policy evaluation of reunification. The convergence of living conditions in eastern and western Germany is a measure that comes close to assessing this objective. It would be misleading, however, to equate convergence with complete equality of all economic indicators. Equality of income, productivity, or assets will never be achieved in any economy or country. There will always be differences between regions, and even within regions, in any small or highly integrated country. The different regions in western Germany have not undergone this process since 1945, which would have led to full economic convergence, had the country not been divided. Quite the contrary: there are often temporary divergences, i.e., diverging living and economic conditions, sometimes relatively poor regions transform into the most productive. Bavaria is just one example of western Germany experiencing such a process. Countries such as Italy and Spain have very large and persistent differences across regions that have not evened out for centuries but have actually become even greater through globalization. This present DIW Economic Bulletin is intended as an initial contribution to the economic policy evaluation of reunification. To what extent have income, productivity, and wages converged in western and eastern Germany? How has reunification influenced different population groups? How have assets and well-being developed in both parts of Germany? These are the key questions analyzed in the first part of this DIW Economic Bulletin.

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