Germany Economic and Financial Policy in the 1990’s

The process of economic convergence

With the signing of the treaty (1990) which established the economic, monetary and social union between the Bundesrepublik Deutschland (BRD) and the Deutsche demokratische Republik (ex DDR), the German federal government found itself engaged in a gigantic financial effort, aimed at bringing possible the economic and productive conditions of the eastern part of the country to the standards prevailing in the western regions. The strategy adopted to guide the transition process of the former GDR towards the market economy hinged on four main instruments: the launch of a public works program for the modernization of the infrastructural system, financial support for private investments, the productive reconversion of the industrial apparatus.

During the first phase of the economic integration process, the impact on the Eastern Länder was negative. In particular, the loss of traditional outlets in Eastern Europe, following the dissolution of COMECON, the difficulties in exports to Western markets and the closure of thousands of companies, which turned out to be no longer profitable after the opening to the market, caused in less than two years, a drop in income by more than 50 %, a drop of more than two thirds of the indices of industrial production and the emergence of mass unemployment. From 1993 onwards, however, the income of the eastern region began to show a positive pace of development, with a growth in GDP that remained until 1996above 5 % on an annual average. This growth, in addition to the modernization of infrastructure networks, was fueled above all by the expansion of the construction sector and some service sectors (in particular credit, air transport and tourism). The role assumed by industry in the new conditions of economic development was, on the other hand, more limited.

The industrial sector of eastern Germany was penalized by the privatization policy adopted, which ended up favoring the interests of the large West German business groups, to the detriment of employment and investments in the eastern part. In fact, at the end of 1994, the Treuhandstalt (THA), the parastatal body in charge of completing the privatization process, had transferred 95 % of the approximately 30. 000 East German companies to investors not resident in the former GDR, managing to safeguard employment for only 30 % of the over 4, 5millions of employees involved in the sales plans. Furthermore, against a company value estimated at 600 billion marks, the THA had raised 325 billion marks from the privatization process, leaving a debt of over 275 billion marks to be borne by the federal budget.

In 1997 is the growth rate of GDP East (opened a new economic phase, characterized by a sharp contraction of the construction sector, which dragged 1, 6 %) below the western (2, 2 %). This imbalance is also continued in the first half of 1998, despite a slight recovery (1, 9 %) favored this time from the industrial sector.

The discontinuous trend of income growth in the Eastern regions indicates that the production system has not yet reached that level of self-propulsive development capable of accelerating the process of bringing the two areas of the country closer together. In fact, the convergence of the eastern regions towards the economic-productive conditions of the western Länder, despite having made some progress, is still incomplete. The distance that separates the two areas with regard to productivity levels and the incidence of labor costs remains strong, with a penalizing effect on investment flows towards the East. Furthermore, the unemployment rate, which continued to rise incessantly, was found to be much higher in eastern Germany (19,1998) than the one recorded in the western Germany The differences in consumption and disposable income are, on the other hand, almost leveled off. The population of the Eastern Länder was able to count, in fact, on a volume of net transfers (approximately 1000 billion marks between 1991 and 1997) which allowed a growth in consumption separated from the trend in incomes and employment, thus making sustainable otherwise destabilizing levels of unemployment (v. tab.).