Unification realities make Germans wary of bailout toll

It is often argued that Germany never forgets the damage that the inflation of the 1920s caused and is therefore permanently frightend of the spectre of hyperinflation. In the article belpw, which appears in today's Irish Times the author points out that the unification of Germany created new scars and new worries that have great revelance in the current euro zone crisis.

By PETRA GERLACH-KRISTEN

MANY FEEL that Germany is dragging its feet in resolving the euro-area crisis because of a deep-rooted fear of inflation that stems from the experiences of German hyperinflation in 1923.

It is suggested that old fears are being rekindled by the idea that debt could be monetised again, this time on a European scale. While that may or may not be true, there is a much more recent experience that arguably matters more: German unification.

Unification in 1990 brought in the union between the internationally competitive, democratic west Germany and the economically weak east.

The collapse of the Berlin Wall caused general euphoria and led to a faster unification than pure economics might have suggested. The German mark was introduced in the German Democratic Republic in July 1990, merely eight months after the fall of the wall, and legal union followed in October.

However, the two states thus united were marked by large imbalances, to use today’s favourite expression. Per capita income in the east was about half that of the west, and unemployment was much higher. The German Agency for Labour put the unemployment rate in the east at 14.4 per cent in 1992. In the west, it was 6.4 per cent.

It was an open question at the time how the former east Germans would get used to the western market economy and the smaller role of the state in a capitalist society. However, the sense that the east Germans were Germans and would adjust fast was pervasive.

Accordingly, economic forecasts at the time were marked by optimism. German chancellor Helmut Kohl predicted that the eastern regions would become “blooming landscapes” before long. Of course, we know today that the adjustment has been slow and often painful, in the east and in the west.

Income in the east today still is more than 20 per cent below that in the west.

Unemployment at over 10 per cent is twice that in the west, and the age structure in the east has deteriorated sharply, with massive emigration of the young and well-educated towards the west.

Surveys show that the majority of the former GDR population feels disadvantaged in terms of income. One-third think that east and west will never become fully unified.

The population in the old west, by contrast, has borne, and still is bearing, the financial cost of the unification. The German CESifo group estimates that the net transfers from west to east have topped €1.6 trillion. That exceeds by far the original estimates of the costs of the union: the original fund for the German unification had been allotted €60 billion.

There are two big lessons Germans have taken away from unification. The first is that initial cost estimates were far too low. The bulk of the expense has come from automatic transfers, in particular social welfare spending. This is due to the fact that, compared with the west, the former east Germany takes in little in taxes and is faced with high pension and unemployment payments.

While the current efforts to end the euro crisis focus on loans, not one-sided transfers, it has not escaped Germans that the conditionalities attached to these loans imply an ever-closer integration of the euro area. A close fiscal union might bring automaticities in social spending similar to those in Germany’s recent history. Many Germans remain to be convinced that the pattern in tax receipts and government spending has changed permanently in the crisis countries.

They worry that the rescue funds discussed today will again turn out to have been only the tip of the iceberg.

The second lesson is that similarities between west and east were overestimated – even 22 years after unification, the two are still clearly distinct.

Politically, the old GDR’s landscape differs from that of the west, with far-left and far-right parties finding sizable support. And economically and socially, the idea that its industrious citizens would turn the former GDR quickly into a mirror image of western Germany has proved wrong.

Of course, it is not opportune politically to point out these differences, which helps explain why the experience of unification does not feature in the official discussion of how to end the euro-zone crisis.

Privately, however, Germans are acutely aware of the slow adjustment in the east. This feeds their fear that the crisis countries’ ability to reform is being overestimated as well.

Obviously, the EU member states in difficulty are market economies and thus more similar to western Germany than the old east was.
Nevertheless, many Germans wonder whether it will be possible to restore competitiveness and thus decrease unemployment. And if so, how fast? And beyond economics, can one expect the support for non-centre parties to decline? Unification has taught the Germans to be wary of high hopes.

Petra Gerlach-Kristen is associate research professor at the Economic and Social Research Institute