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East Germany, West Germany, and their Mezzogiorno Problem: An Empirical Investigation

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  • Hughes Hallett, Andrew
  • Ma, Yue

Abstract

Economic and monetary reunification in Germany has proved to be more expensive than previously thought - and not just for the Germans. If a `Mezzogiorno' problem of continuing fiscal transfers to the East and possible migration flows westwards are to be avoided, there must be convergence in productivity levels. This paper analyses possible convergence paths and the policy regimes which accelerate convergence. The intention is to illustrate the (albeit less extreme) problems facing a European monetary union of asymmetric and incompletely converged economies. Working from first principles, or with the aid of an econometric model, shows that convergence sufficient to avoid a `Mezzogiorno' problem is likely to be slow: perhaps 30-40 years in the German case despite very fast growth in the East. Second, it is not clear that the process is incentive compatible: a substantial part of the servicing and subsidizing costs must be paid by other (non-German) economies in the union without any obvious compensating benefits. Third, to reduce the need for continuing transfers actually requires a policy which promotes price and wage flexibility in the depressed region. This appears to run counter to current market integration in Europe. Such `unpleasant arithmetic' is an important contribution to the monetary union debate, because without it the smooth running of a union of incompletely converged economies will certainly be compromised.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 623.

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Date of creation: Feb 1992
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Handle: RePEc:cpr:ceprdp:623

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Related research

Keywords: Economic Convergence; Fiscal Transfers; Monetary Union; Price Flexibility;

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Cited by:
  1. M. Demertzis & A. Hughes Hallett, 2000. "Wage Inflation and the Distribution of Output Gaps in Europe: Insiders vs. Outsiders," WO Research Memoranda (discontinued) 631, Netherlands Central Bank, Research Department.
  2. Andrew Hughes Hallett & Laura Piscitelli, 1999. "EMU in Reality: The Effect of a Common Monetary Policy on Economies with Different Transmission Mechanisms," Empirica, Springer, vol. 26(4), pages 337-358, December.
  3. Marcus Noland & Sherman Robinson & Tao Wang, 1999. "Modeling Korean Unification," Working Paper Series WP99-7, Peterson Institute for International Economics.
  4. Michael Berlemann & Marcel Thum, 2005. "Blooming landscapes in East Germany?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 6(4), pages 16-22, December.
  5. Bernd Goerzig & Martin Gornig & Axel Werwatz, 2007. "Produktdiversifizierung: Konvergenz zwischen ost- und westdeutschen Unternehmen, Eine Dekomposition mit Mikrodaten der amtlichen Statistik," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 227(2), pages 168-186, April.
  6. Michael Berlemann & Marcel Thum, 2006. "Mittelfristige Perspektiven der Ost-West-Konvergenz," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 13(01), pages 34-39, 02.

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