Unification realities make Germans wary of bailout toll

OPINIONS: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.