Paul 1. 1. Welfens (Ed.) Economic Aspects of German Unification National and International Perspectives With 19 Figures and 67 Tables Springer- Verlag Berlin Heidelberg GmbH PD Dr. PAUL J. J. WELFENS Universitiit Munster Fakultiit fUr Wirtschaftswissenschaften Am Stadtgraben 9 D-4400 Munster, FRG Pages 384 and 385 of the map of Germany are printed with the kind permission of Westermann Schulbuch-Verlag, Brunswick. ISBN 978-3-642-97381-9 ISBN 978-3-642-97379-6 (eBook) DOI 10.1007/978-3-642-97379-6 librarY of Congress Cataloging-in-Publication Data. Economic aspects of German unification: tional and international perspectives / PaulJ. J. Welfens (ed.). p.cm. Based on papers presented at a conference held at the Paul H. Nitze School of Advanced International Studies, Washington, D.C., Nov. 13-14, 1990, sponsored by the American Institute for ContemporarY German Studies, The Johns Hopkins University. Includes index. ISBN 3-540-55006-2 (Berlin: alk. paper). - ISBN 0-387-55006-2 (New York: alk. paper) 1. Germany-Economic policy - 1990 - Congres ses. 2. Germany-HistorY-Unification. 1990 -Congresses. 3. European Economic Community-Ger many-Congresses. 4. Germany-Foreign economic relations-Congresses. 5. Economics, Internatio nal-Congresses. 1. Welfens, Paul J. J. HC286.8.E26 1992 - 330.943'0879-dc20. 91-46122 CIP. This work is subject to copyright. All rights are reserved, whether the whole or part ofthe material is concerned, specifically the rights of translation, reprinting, reuse of illustration, recitation, broadcasting, reproduction on microfilms or in other ways, and storage in data banks. Duplication ofthis publication or parts thereofis only permitted under the provisions of the German Copyright Law of September 9,1965, in its version ofJune 24, 1985, and a copyright fee must always be paid. Violations fall under the prosecution act of the German Copyright Law. © Springer-Verlag Berlin Heidelberg 1992 Softcover reprint of the hardcover I st edition 1992 The use of registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. 214317130-543210 - Printed on acid-free paper PREFACE Robert G. Livingston Germany's "monetary, economic, and social union" was proclaimed on July 1, 1990 - a decisive step that brought together the liberal, social market economy of West Germany and the centrally planned, communist one of East Germany, the German Democratic Republic. From that day onwards there was no turning back from German unification, and constitutional union followed shortly thereafter, on October 3, 1990. In truth, however, the union of July 1 was a monetary one only. That was the fait accompli. The West German D-Mark became the official medium of exchange in the GDR. The process of economic and social unification, however, only started to begin. Completing that process, not to s~ of political, societal, psychological, and cultural unification, will take many years. Many of the difficulties that Germany will face in uniting economically became evident quickly in the summer and fall of 1990. Professor Paul J. J. Welfens, who was at that time the John J. McCloy Distinguished Research Fellow in residence at the Institute, foresaw some of these problems and convinced us that the Institute should bring together outstanding economists to analyze them for a wider public. Professor Welfens succeeded in interesting a broad range of academic scholars, international civil servants, and researchers from business firms and banks to address what were then a completely new set of unanalyzed, even unanticipated, exciting, and important issues. He convened the Institute's conference November 13-14, 1990, less than five months after monetary union. It was held at the University's Paul H. Nitze School of Advanced International Studies, which provided welcome logistical support. The chapters in this study are the product of the presentations and commentary at that conference. They deal with a range of macroeconomic, microeconomic, national, and international challenges, the dimensions of which have since last November become much more widely recognized. Both the conference and this volume are the product of Professor Welfens's insightful, tireless, and detailed efforts. VI Economic Aspects of German Unification The Institute is deeply grateful to Professor Welfens and to the authors and commentators whose work appears in this volume. We are proud to accord it a place in our publication series. Our appreciation is due also to the John M. Olin Foundation, which funds the McCloy fellowship, as well as to the several generous supporters of the conference on "The Economic Aspects of German Unification:" The Dresdner Bank AG, the Lynde and Harry Bradley Foundation, Lufthansa German Airlines, Morgan Guaranty Trust Company, the Representative of German Industry and Trade in Washington, D.C., the Siemens Corporation, and the Fritz Thyssen Foundation. Robert Gerald Livingston Director, American Institute/or Contemporary German Studies, The Johns Hopkins University Washington, D.C., July 1991 TABLE OF CONTENTS Preface Roben G. Livingston, Director of the American Institute for Contemporary German Studies at the Johns Hopkins University V Introduction Paul J.J. Welfens I 1. POINTS OF DEPARTURE A. EC Integration and Economic Reforms in CMEA Countries: A United Germany as a Bridge Between East and West? Paul J.J. Welfens 9 1. Introduction 9 2. German Unification from a European Perspective 11 2.1 The Path to Unification 12 2.2 The Economic West-East Divide in the Unified Germany 14 2.3 Major Aspects of Germany's Bridging Function 17 3. EC Problems 19 3.1 European Opportunities for Trade and Investment 20 3.2 German Unification and Economic and Monetary Union in the EC 22 3.3 German Unity and the EC's Trade Policy Stance 24 3.3.1 EC Protectionism 25 3.3.2 Restoring Historical Trading Patterns in Central Europe? 26 4. Germany and the CMEA Countries in a Divided Europe 27 4.1 Support for Eastern Europe: EC-Widening? 30 4.2 Germany's Systemic Transformation as a Model for Eastern Europe? 33 5. Global Perspectives and Conclusions 37 B. Comments Manin Schrenk 44 C. Integrating the East German States into the German Economy: Opportunities, Burdens and Options Lutz Hoffmann 49 1. Introduction 49 2. The Currency Union: Its Genesis and Impact 50 3. Pattern and Extent of Structural Adjustment Needed 55 4. The Starting Position of Individual Industries 60 5. Reconstructing the Capital Stock 63 6. Structural Adjustment Policy 64 7. The Financial Burden on the Public Sector 68 8. Concluding Remarks 69 D. Comments Thomas Mayer 72 VIII Economic Aspects of German Unification E. Macroeconomic Aspects of German Unification Hans-Werner Sinn 79 1. A New Germany 79 2. Unification in International Perspective 80 2.1 A Comparison With Other Eastern Countries 82 2.2 Implications for the West 85 3. The Currency Conversion Problem 90 3.1 Purchasing Power Parity 91 3.2 The Problem of Two-sided Competitiveness 94 3.3 The Money Overhang and the Real Asset Overhang 95 3.4 The Planned and the Actual Money Supply 96 3.5 Wealth Effects of the Currency Conversion 96 3.6 The Bundesbank Unification Gain 98 3.7 Portfolio Reactions 99 3.8 Demand Reactions 100 4. The Privatization Problem 101 4.1 The 49 Rule and the Pre-Coasian State 102 4.2 The Legal Role of the Treuhandanstalt 104 4.3 Risks of the Privatization Process 105 4.3.1 Sluggish Privatization 105 4.3.2 Cross-Subsidization 105 4.3.3 Competition and Market Concentration 105 4.3.4 The Erosion of Sales Prices 106 4.4 Another Method of Privatization 108 5. Structural Unemployment 110 6. Conclusion 113 F. Comments Rudiger Dornbusch 134 G. Transforming a Socialist Economy: Currency Unification, Banking Reform and Capital Markets Karl-Hans Hartwig 143 1. Socialist Economies and Systemic Transformation 143 2. Money and Banking in a Traditional Socialist Setting 144 2.1 Banking System 144 2.2 Active and Passive Money 145 2.3 Two Distinct Monetary Problems 145 3. Money, Credit and Banking in a Reformed System 146 4. Monetary Problems in the Process of Transition 147 4.1 German Economic Unification 147 4.2 Some Lessons from East German Reform 149 4.3 Elements of a Monetary and Financial Reform 150 5. Perspectives 153 H. Comments JUrgen Klose 155 Table of Contents IX II. NATIONAL CHALLENGES I. Labor Markets and Social Security Systems Facing Unification: Systemic Challenges in Germany Doris Comelsen 16.3 1. Introduction 163 2. Labor Markets 164 2.1 Facts and Figures 164 2.2 Perspectives 166 2.3 The Legal Framework 168 2.4 The Promotion of Skills, Training 169 3. Social Security Systems: Health Insurance, Old-Age Pensions 170 3.1 The Systems of Social Security 170 3.2 Health Insurance 171 3.3 Old-age Insurance 172 4. Financing of the Social Security Systems 173 5. Conclusions 176 J. Comments Gerhard Backer 177 K. Environmental Protection: Problems and Prospects in East and West Germany Gunter Streibel 18.3 1. Introduction 183 2. Water Management 190 3. Destruction of Areas 190 4. Noise Abatement 190 5. Outlook 199 L. Comments Peter Palinkas 208 M. Structural Adjustment and Privatization of the East German Economy Claus Schnabel 2.31 1. Introduction 231 2. Structural Adjustment: Necessity and Perspectives 234 3. Deregulation and Privatization 242 3.1 Promoting Competition 243 3.2 Improving Economic Performance 244 3.3 Improving the Public Finances 245 3.4 Widening the Ownership of Economic Assets 245 4. The Treuhandanstalt: Organization, Objectives and Problems 247 5. Privatization Strategies 250 6. Conclusions 252 N. Comments Garry J. Schinasi 256 x Economic Aspects of Gennan Unification O. Government Support for Restructuring the East German Economy Henning Klodt 261 1. Introduction 261 2. The East German Economy in Transition 262 3. Criteria for Evaluating Different Types of Government Support 271 4. Prospects for Economic Policy 276 P. Comments George M. von Furstenberg 286 III. INTERNATIONAL PERSPECTIVES Q. External Aspects of German Unification: The Polish View Andrzej Budzinski 299 1. Introduction 299 2. Short-Term Consequences for Poland of German Unification 300 3. Long-Term Impact of German Unification on the Polish Economy 302 4. Policies Towards Poland's Integration into the United Europe 304 R. Comments John P. Hardt 310 S. Economic Reform in the USSR and Prospects for Trade and Economic Relations with Germany Ruslan S. Grinberg 317 1. Introduction 317 2. Difficult Reform Situation 317 3. Economic Relations with Germany and Western Europe 321 3.1 Economic Relations with Germany 322 3.2 Perspectives 328 T. Comments Angela Stent 330