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United country – three decades after the Wall came down

The Berlin Wall, once the symbol of the divided Germany, has now been gone for longer than it ever existed. But the differences within the country are still visible. However, recent research suggests that different economic development does not always follow the former inner-German border. Apart from the west-east divide, differences also emerge between the south and the north or between the cities and the country.

04. March 2019

Authors IWH

The Berlin Wall as the symbolic embodiment of divided Germany has now been gone for longer than it ever existed. The third decade without this demarcation line drew to an end in 2019. Cold reality quickly replaced the euphoria after the fall of the Wall and reunification. The people in the east of Germany experienced the collapse of economic structures and the loss of millions of jobs. The political powers were faced with the challenge of promoting a rapid process of cohesion across the country, but without endangering the economic stability of united Germany or its role as a reliable partner in Europe and the world. With this in mind, it appears apt to ask what Germany, which completed reunification as a sovereign state just under one year after the fall of the Wall, looks like three decades later. This article explores the answers. It presents the findings of studies on the economic situation and the development of reunified Germany. In a first step, it illuminates Germany’s economic position within an international comparison. Then it casts an eye over the regional differences that prevail across the country in the third decade after the collapse the GDR.

How has Germany’s economic position changed in an international comparison since reunification? In Germany, per capita gross domestic product (measured in purchasing power parities) during the early nineties was, on average, approximately equivalent to that of all major advanced economies (Group of Seven – G7), and only the United States – by far the most prosperous member of the group – ranked higher. For a longer period afterwards though, per capita gross domestic product in Germany grew at a significantly more sluggish pace than the average within this set of countries. That was by no means inevitable. After all, growth rates in the East German economy were even quite high at the time due to the ongoing process of convergence. But reunification also brought burdens that curbed the growth trend in Germany. The public sector, for instance, gobbled up a considerably larger slice of the production potential. While in West Germany the public sector revenue ratio – relative to gross domestic product – was 43% prior to reunification, it had risen to 48% in reunified Germany by the mid-nineties. Compounding this trend was the significant slump in the country’s competitiveness in the early years of united Germany. This was caused by a stronger D-Mark (rising by 17% in nominal effective terms between 1989 and 1995) and domestic inflation caused by increased consumer spending after reunification. Moreover, the introduction of the D-Mark in former East Germany, the consequent conversion of wages at a 1:1 ratio and the following, considerable increase in wages inevitably eroded Germany’s competitiveness. It is worth noting that the degree of openness in the German economy as the ratio of total exports and imports relative to gross domestic product slumped considerably in the years following reunification. This observation was by no means inevitable, either. After all, the surge in demand precipitated by reunification and the competitiveness deficit among German companies could just as easily have led to a rise in imports as well. But imports grew at a moderate rate in the first half of the nineties, and demand in the east was mainly satisfied by supply from the west of Germany. The domestic market became increasingly important to West German companies, while the significance of exports dropped significantly, initially at least. The current account balance flipped suddenly into the red.

But the German economy has recovered from its weak phase in the middle of the last decade and per capita production has tended to grow at least as quickly as the average of other G7 states. The labour market reforms of 2003 to 2005 are frequently cited as reasons for this turnaround. However, it was the resurgent export market that mainly strengthened the German economy, a trend that had set in at the end of the nineties.

Many companies succeeded in increasing their labour productivity by outsourcing unproductive value chains abroad. Besides, the manufacturers of capital goods which are eminently important for Germany benefit as a result of increased demand for these products on fast-growing emerging markets, most notably China. Ultimately, therefore, the collapse of the Iron Curtain promoted internationalisation of the German economy to a particular extent, and the degree of openness, relative to the size of the country, is now remarkably high.

Are the 30 years of united Germany a success story from an international perspective? The answer depends on the scale: the German economy was, when all’s said and done, able to assert its position within the group of major industrialised nations, but the gap to the United States has nevertheless widened. The reason for the faster improvements in US-American productivity is, to a significant degree, explained by the strength of the country’s digital economy. To a large extent, the digital economy did not emerge until after German reunification. The German word “Handy” (for mobile telephone) did not enter common parlance until 1990, and the US-American National Science Foundation first made the Internet available outside of universities in the same year. Technical progress in the IT sector remains driven significantly by the United States, and the world’s five most valuable companies in 2017 all maintained a digital business model and were domiciled in the US. Narrowing the gap in the digital economy will be tricky. But it is worth considering the general issue of why the conditions for the emergence of new technologies were and remain seemingly more favourable across the Big Pond than here in Germany, as well as what can be done to remedy the situation. In doing so, it is essential to remember that Germany’s unusually high current account surplus does not have its roots in outstanding competitiveness, but expresses instead a reluctance among investors to put boots on the ground in Germany.

Following this description of Germany’s economic position in an international comparison, the next section will turn its attention to the economic situation in the reunified country. Defined in economic terms, the disappearance of the Berlin Wall and the establishment of a united Germany were a case of economic integration. Once the border was opened, residents of former East Germany were allowed to choose freely where they wanted to live and work. With the introduction of the currency, economic and social union in mid-1990, east Germany became part of a wider region of European integration, in which there were no restrictions on the freedom of movement for production factors. There was a general assumption that the significant differences in regional development would gradually converge over time. At the time, the gap between west and east dominated the perceptions of territorial disparities in Germany. But that was hardly surprising. Four decades of German separation would inevitably leave traces.

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Dr Gerhard Heimpold
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