Paying the price of unity

May 12, 1995

Germany may have been unified for almost five years, but the economic repercussions of the incorporation of the German Democratic Republic will reverberate through the European Union for some time yet.

Martin Upchurch of North London Business School said that the hoped-for economic takeoff in the new Lander had not happened, and showed little sign of appearing. Instead Germany had gone heavily into debt to finance unification, forcing the Bundesbank to increase interest rates and to slow down other European economies.

He said that the most likely outcome for the former GDR was that it would become Germany's equivalent of Italy's south: "Where permanent underdevelopment exists side by side with a prosperous region and labour migration from the poor half to the rich half corrects the inbuilt economic imbalance."

Some parts have better prospects than others. Booming construction means East Berlin has lower unemployment than West Berlin. Dresden is likely to attract considerable inward investment and Eisenach has several high-tech industrial plants.

Dr Upchurch said he was not suggesting that unification was a mistake: "People in the East say 'yes and no' when you ask, but most still feel the greater opportunities they now have outweigh the problems. But it might have been better if the process had been more gradual."

He pointed to the irony that the Federal Republic, the state most identified with the concept of the social market, had failed to apply it in the GDR: "Other economies in central and eastern Europe have been privatised gradually, but in Germany the attempt was made to do it all at once."

There was a strong case for maintaining some aspects of GDR social provision and keeping some enterprises open to cushion the transition, he said - echoing to a great extent the arguments of the LSE's Nick Barr in his recent World Bank book on post-Communisttransition.

The price was now being paid in the increased taxes on all Germans, estimated at a real disposable income cut of about 10 per cent, by single-industry towns like Jena which had seen employers Carl Zeiss shed 85 per cent of its former 40,000 workforce, and in particular by women, who are disproportionately unemployed. The birthrate in the former GDR fell by 60 per cent between 1989 and 1992.

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