Thayer Watkins
Silicon Valley
& Tornado Alley

The Economics of the Unification of Germany

Unification was not the real issue with respect to Germany. The Germany that came into being in 1870 was an artificial creation of Prussian political maneuvering. It did not include all of the German-speaking areas of central Europe. Specifically it excluded Austria because Prussia saw Austria as too powerful a competitor to Prussian domination of a German state. Germany, Austria and the German-speaking areas of Switzerland functioned quite well as separate political entities and will do so in the future. As long as there is relatively free travel and trade between them there is no need for them to be unified. Likewise there is no need for the unification of the Scandinavian states or the unification of the United States and Canada.

Had East Germany (the German Democratic Republic) been a rational democratic state with a modern economic system there would have been no significant difference between living standards there and those in West Germany (the Federal German Republic). With no significant differences in the quality of life there would have been no need for military control of the border and people would have been able to travel back and forth freely. But the German Democratic Republic (GDR) was not a modern democratic state; it was, at best, industrial feudalism with the people treated as serfs if not industrial slaves. The problem then was the extinction of the GDR and the only feasible means of achieving that was the merger of East German with West Germany. That merger was not as simple and painless as the Germans thought it would be.

Above all it has been costly. West Germany was generous, perhaps overly generous, toward the East Germans in the first few years. The subsidies are continuing nearly fifteen years after unification. In recent years the subsidies have amounted to the equivalent of $110 billion per year. Yet the discrepancies in living standards have not been erased. The former Communist Party has morphed itself into a social democratic party and commands the support of about 30 percent of the voters in the New Lander, the states which were part of East Germany. When East Germany collapsed and an East Germany communist leader said, "We will do better next time," everyone scoffed. With the electoral success of the former communists not everyone is still scoffing.

The East German political system was an abomination. It was unproductive in part because such a high proportion of its population and resources were devoted to policing the rest of the population. One technique for controling the population surprised and shocked the West when it was revealed. State Security maintained an archive of samples of body odors of people who were thought to be security risks. When some political incident occurred such as the posting of a political wall poster the security police would take German Shepherd dogs to the scene to pick up a scent. The dogs would then be taken to the warehouse archives of the body odor samples were kept. The police would select a set of samples of those they thought might have been the perpetrators of the so-called crime. If the dogs indicated that there was a match among the set with the scent from the crime scene then the police would arrest the culprits, who would be mystified as to how the police was able to identify them.

The waste of resources and the moral crimes of the security police were less of a problem for unification than the wrong-headed economic policies the government. The planned economy built manufacturing plants that could not survive without subsidies. The government provided those subsidies but no more than necessary for their survival. The state-owned enterprises then suffered from a shortage of modern equipment. The plants were overstaffed adding to their financial problems. The plants coped with their inefficiencies by neglecting or refusing to abide by reasonable environmental policies. Pollution became endemic. The central planners coped with the lack of productivity by holding down workers pay and by restricting the resources devoted to producing consumer goods. The net result was a system in which the government pretended to pay workers and the workers pretended to work. Decades of government socialistic rhetoric destroyed not only the spirit of entrepreneurship but also the value of self-reliance for major elements of the population.

Chronology of Reunification

(To be continued.)

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