Dimensions of German Unification

"Economic, Social, and Legal Analyses"

A. Bradley Shingleton

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367016883
• eBook ISBN: 9780429723544
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

German unification has proven to be a complex, multidimensional process rather than a single political event. Four years after political unification, Germany continues to confront formidable economic, social, and cultural challenges in the unification process. This volume examines some of economic, social and legal aspects of the unification process four years after political unification was achieved.

Part One
German Unification: Economic Aspects

Introduction

Marian J. Gibbon

In the early 1990s European alliances and borders shifted and changed for the first time in nearly half a century As they did, many feared that the Germany which emerged in the new Europe would be a force to reckon with: the combined strengths of the Eastern Bloc’s most advanced economy, and the West’s most stable, would result in an economic powerhouse, ready to dominate a unified Western Europe and an opening Eastern Europe.

At the outset of unification few predicted that the process of creating one Germany would be anything other than smooth, its results anything other than beneficial. Yet after the first giddy days of post-Border, post- Wall Germany, reality struck, bringing with it unemployment, government deficits, higher taxes, and general malaise. It soon became apparent that the East’s most advanced economy had little more than noncompetitive industries to offer, and that significant sacrifices would be required from the West’s most stable economy in order to make unified Germany the economic powerhouse that most had expected it to become. With this revelation came resentment, recriminations, and a severe countrywide recession, the worst the Federal Republic has seen in the postwar period.

In early 1993 Germany’s leading economic institutes published grim predictions for the country’s expected performance during the coming year. Following three years of drastic contractions in the eastern industrial base and growing federal deficits borne out of shoring up the eastern economy, the overall economic outlook was poor indeed. For the western Länder (Germany’s equivalent of states) the best predictions foresaw GNP growth of 0.9 percent. The worst predicted a contraction of 0.5 percent. In reality, 1993 was even worse than predicted, with the economy shrinking by 2 percent, exports dropping off by 8.5 percent, and imports falling by 10.5 percent. At year’s end it appeared that unemployment, which had averaged 2.28 million throughout the year, would soon reach 4.0 million (which it did in March 1994). Predictions for 1994 were not much brighter, at best calling for 1.0 percent growth in the west and 7.5 percent in the east.¹ Both westerners and easterners were left to grapple with a general sense of dislocation as they found their economic security—be that defined by capitalist or socialist terms—turned on its head.

The start of the 1990s has indeed been trying for the Federal Republic’s economy. But in assessing the situation, one must ask two fundamental questions: Without unification, would the economic situation have been that much better? Will unification hold the German economy back in the long run? The answer to both questions is “No.”

Consider the economic condition of the Federal Republic’s primary allies, trading partners, and economic competitors during the same time period. Britain, Canada, France, Japan, and the United States—all have been struggling with changing economic rules and imperatives, as they lose precious investment dollars to low-wage nations in Latin America, Southeast Asia, and Eastern Europe. All have suffered through a recession, which has led to increased unemployment and sluggish spending patterns. And most have seen unemployment in the ranks of white-collar workers, as company’s downsize, looking to cut costs and adjust to the realities imposed by higher overhead costs and tougher international competition. Each country has struggled to redefine its area of industrial strength and prowess and to identify areas of high-tech competitive advantage.

To a certain extent these issues worldwide have been driven by the collapse of the Eastern Bloc, as states have been forced to alter their economic focus moving away from from a Cold War orientation defined by goods produced, primary trading partners, or both. The changes have also been driven, however, by the simple reality that it is cheaper to undertake heavy industrial tasks with low-cost labor or with the assistance of productivity-boosting robots and machines. With these changes, jobs have been lost, and the whole production schema of advanced states have been shifted towards a service economy and away from the industrial sector, the traditional backbone of Germany’s economy. Thus, to lay all of the blame for Germany’s economic woes at the feet of unification costs is an unfortunate oversimplification. With or without unification, western Germany, one of the highest-cost production locations in the world, would have been struggling with many of the same issues it faces today.

What of the eastern states, with raging unemployment and a decimated industrial base? Are they not worse off in postunification Germany? Although their difficulties are severe, the answer remains “No.” Eventually, the east’s economy, with its rotting core of industrial machinery and equipment, had to collapse. Its goods were noncompetitive, and the need for upgrading capital equipment was intense.

Although the pain of transforming the economy of the neue Bundesländer may be great, it is analogous to that of removing a bandaid: the pain can be short and sharp, or long and drawn out. There is no question that the transition is and has been painful. Unofficial unemployment estimates for the five new states remain in the 40 percent to 50 percent range, and transfer payments continue to sustain living standards throughout the region. Some positive signs, however, suggest that the pain may soon be abating. In 1993 per capita investment was 140 percent higher in the east than in the west. While Germany’s overall GNP shrank in 1993, in the east alone GNP grew 7.1 percent, and predictions for growth in 1994 range from 6.0 percent to 7.5 percent.² Infrastructure is being rebuilt at a state-of-the-art level in the five new states and many of the country’s ultra hightech investments are being located there.³ These facts and figures indicate that the worst part of the transition period in the east may soon be over.

To imply that unification has been without cost—east and west— would, however, be shortsighted. One of the most pressing issues challenging policymakers at this time is Germany’s growing budget deficit. During the postwar period officials in the Federal Republic of Germany were loath to undertake debt-incurring government spending. With unemployment nationwide at record levels, however, and with the neue Bundesländer demanding significant levels of investment and transfer payment assistance, the government’s deficit has been on the rise. It is predicted to reach 2.5 percent of GDP in 1995.

Quite suddenly, Germany, with its world-renowned social safety net and high level of public services, is finding itself squeezed, trying to cut corners, and to identify sources of additional revenue. As a result, taxes are increasing, health care, welfare, and educational programs are being scaled back, and a number of key state-owned enterprises, such as the post office and rail system, are being privatized. Policymakers are struggling to bring expenditures and revenues back into line.

Again, however, what is apparent is that the current economic situation in Germany is not that different from that of many other industrialized nations. While there is indeed an added drain because of the east’s need to rebuild, overall, Germany is facing the same set of challenges confronting policymakers elsewhere. Thus, the proper question is, can Germany and its partners effectively address these issues, both individually and collectively. With sufficient political will, they certainly can.

The successful conclusion of negotiations on the General Agreement on Tariffs and Trade, progress in strengthening the European Union, greater ties with the economies of Eastern Europe—all are steps which Germany is taking towards focusing economic strength at home on ties with the global economy. In addition, the issue of Germany as an investment location—the so-called Standort debate—gives policymakers a focus which is independent of east-west divisions. As this issue becomes of increasing concern, it will be a vehicle that truly unifies the approach of policymakers and businesses to the German economy. In the transition away from immediate postunification divisions, such a vehicle is necessary, positive, and timely.

Ultimately; there is and should be remarkable faith in the German economy’s ability to rejuvenate and to survive; the challenges of unification and industrial change as a strong and powerful economic locomotive. In a survey of more than 500 top European business leaders, performed by Harris Research in early 1994, Germany was judged to have the best chances of any European economy in overcoming untena-bly high production costs. The German respondents were particularly sure of their economy’s resilience.⁴ There is a clear belief among top managers that in the long run the hackneyed comparison to Germany’s first Wirtschaftswunder (economic miracle) will once again prove true. As managers act on this optimism, and as policymakers tackle current issues with the same tenacity as they attacked the initial challenge of unification, a competitive Germany will indeed emerge.

The papers in this section provide an overview of key issues pertaining to Germany’s economic situation and economic policy since unification. Frederick R. Fucci’s paper begins Part 1 with “Whither the Treuhandanstalt?”, a review of the state agency’s fast-paced and controversial privatization of eastern enterprises. Mark J. Jrolf’s case study of the privatization of a Treuhand enterprise follows. Entitled “The Politics of Restructuring Business Enterprises in the Former GDR: The Case of EKO Stahl,” the paper illustrates the tensions emerging among Brussels, Bonn, and the new states as Germany works to mainstream the East.

Adam Posen’s paper on Germany’s banking system, “Less than a Universe of Difference: Evaluating the Reality of German Finance,” argues that the country’s vaunted “relationship banking” may not be as influential as once thought. Indeed, Posen cautions against emulating the contemporary German financial system given the changes and problems now buffeting the system.

In “Germany at Maastricht: Diplomacy and Domestic Politics,” Collette Mazzucelli reviews Germany’s role defining the European Monetary Union. Her discussion highlights not only the influence of the European Union on Germany’s economic policies but, like Jrolf’s paper, also illustrates the ongoing tensions among Brussels, Bonn, and the Lander. This tension is likely to remain in German policymaking, as the EU continues to take shape in the coming years.

Finally, in “Standort Deutschland” Michael 2üumwinkle discusses Germany’s efforts to retain and attract long-term productive investment. Ultimately, as noted above, this issue—more than any other—is likely to compel Germany to truly unify its economic policies and to move the country forward as one unit into the twenty-first century.

Notes

1. Thomas Hanke, “Schwerer Weg aus der Talsohle,” Die Zeit, 7 January 1994, 9.

2. “Eastern German Investment Rises,” The Wall Street Journal, 25 March 1994, A6; see also Hanke, “Schwerer Weg,” 9.

3. As only one example among many, Siemens is reportedly planning to build one of the most modern microchip plants in Europe outside of Dresden. The project is expected to cost approximately DM 2 billion and create 1,200 jobs.

4. Nikolaus Piper, “Unternehmen Europa im Härtetest,” Die Zeit, 4 March 1994, 12.

1
Whither the Treuhandanstalt?

Frederick R. Fucci

In the early days of her tenure as president of the Treuhandanstalt, THA, the state privatization agency, Frau Birgit Breuel was fond of observing that the agency was the world’s largest holding company, but that it was the only one whose mission was to sell off all its assets and then dissolve itself as quickly as possible. Her audiences often greeted this statement with polite incredulity. Now that—according to the Treu- hand’s own reckoning—the lion’s share of its privatization work has been accomplished, and it is preparing to dissolve the Treuhand structure that has been in place since German unification, it is time to take stock of what the Treuhand has accomplished, draw lessons from its policies and practices, and assess plans for continuing its unfinished work.

German Unification and the Founding of the Treuhand

The first version of the Treuhand was created in June 1990 pursuant to a law passed by the only democratically elected Volkskammer in the forty-year history of the German Democratic Republic (GDR).¹ The law was based on the premise that the command economic model had to be abandoned and created an agency that would regroup all of the GDR’s industrial and other holdings and then attempt to sell them off to private investors. With so little private property in the GDR, few problems arose from transferring ownership to one trusteeship agency. The agency was housed in the seat of the GDR’s House of Ministries on Leipziger Straße, against the east side of the Wall between Potsdamer Platz and Checkpoint Charlie.² Because the House of Ministries, complete with its Orwellian-sounding name, housed numerous GDR ministries with influence over economic questions, including the ministry responsible for planning, it was thought logical to locate the new privatization agency there.

At the time, some eight thousand separate industrial companies existed in the GDR. Organized into legal entities called Volkseigentumsbetriebe, or “people’s property companies” (VEBs), these companies were often huge industrial conglomerates integrated vertically to ensure the supply of inputs through the various phases of production. Most VEBs also had all sorts of ancillary activities and holdings not directly related to the production of their goods, such as kindergartens, canteens, vacation homes, and consumer goods outlets. Four million citizens (out of a total population of about 17 million) were considered “industrial” employees when the Treuhand was created, without regard to whether they were directly involved in the production of the company’s products or in one of its ancillary activities. The Modrow government blithely assumed that the value o...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Foreword
• Preface
• Acknowledgments
• Acronyms
• PART ONE German Unification: Economic Aspects
• PART TWO German Unification: Social and Cultural Consequences
• PART THREE German Unification: Comparative Legal Issues
• PART FOUR Alumni Conference Speeches
• About the Contributors
• About the Book and Editors
• Appendix A: Chronology of German Unification
• Appendix B: Articles of the German Law with Respect to Unification
• Index