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The big bang with the big brother: German unification in its third year

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  • Siebert, Horst

Abstract

East Germany can be considered a laboratory experiment in the economics of transition. Of the three major issues in economic reforms in the transformation process — establishing an institutional infrastructure, creating monetary stability, and accomplishing adjustment in the economy, especially in the firms — two issues were solved nearly instantaneously. Monetary stabilization was achieved by extending the currency area of the deutsche mark to East Germany in the currency union of July 1, 1990. And the institutional infrastructure was, in principle, introduced at one stroke when East Germany joined West Germany, as provided for in Article 23 of the German constitution. Thus, only the third major issue of reform remains to be solved, namely real adjustment in the economy, especially in the previously state-owned firms. In the German case, transformation of a socialist economy and integration of two different economic systems are occurring simultaneously. This creates favorable conditions for eastern Germany in that western Germany can provide it with huge transfers. Thus, one could describe German unification as being the big bang with the big brother. But there are also less favorable conditions that impede the adjustment process: the exchange rate is not available as a shock absorber, and wage equalization is an important issue.

Suggested Citation

  • Siebert, Horst, 1993. "The big bang with the big brother: German unification in its third year," Kiel Discussion Papers 211, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkdp:211
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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
    3. Ngo Long & Horst Siebert, 1992. "A model of the socialist firm in transition to a market economy," Journal of Economics, Springer, vol. 56(1), pages 1-21, February.
    4. Maurer, Rainer & Sander, Birgit & Schmidt, Klaus-Dieter, 1991. "Privatisierung in Ostdeutschland: zur Arbeit der Treuhandanstalt," Open Access Publications from Kiel Institute for the World Economy 1487, Kiel Institute for the World Economy (IfW).
    5. Collier, Irwin L, Jr & Siebert, Horst, 1991. "The Economic Integration of Post-Wall Germany," American Economic Review, American Economic Association, vol. 81(2), pages 196-201, May.
    6. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    7. Schmieding, Holger, 1991. "Die ostdeutsche Wirtschaftskrise: Ursachen und Lösungsstrategien. Anmerkungen im Lichte der westdeutschen Erfahrungen von 1948 und des polnischen Beispiels von 1990," Kiel Working Papers 461, Kiel Institute for the World Economy (IfW).
    8. Boss, Alfred, 1991. "Mittelfristige Perspektiven der Finanzpolitik," Open Access Publications from Kiel Institute for the World Economy 1506, Kiel Institute for the World Economy (IfW).
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    Cited by:

    1. Schellhorn, Martin & Winker, Peter, 1994. "Stochastic simulations of a macroeconomic disequilibrium model for West Germany," Discussion Papers, Series II 235, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

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