Why German reunification is still a good idea
Ph. The fall of the Berlin wall has not sufficed to erase differences between East and West. Shutterstock
Gonçalo Pina, ESCP Business School
When asked about my opinion on German reunification, I usually respond that I think it is a good idea, and that we should do it. This is, of course, a joke, as Germany is now united with no official internal borders. However, 35 years after the fall of the Berlin Wall, the division between West and East Germany remains clearly visible, with the victory of the far-right Alternative for Germany (AfD) in the state of Thuringia in Sunday’s state parliamentary elections a case in point. A quick glance at economic and social statistics tells us these divergences show no sign of disappearing in the near future.
Today, compared to the East, West Germany has higher income levels, lower unemployment rates, more firms, fewer hours worked, more millionaires, higher car ownership, higher voter participation, less preference for extreme political parties, higher share of younger citizens, higher proportion of immigrants, higher number of religious affiliations, and more waste produced. These and other differences can be seen in the animated graphic above.
Historical significance
The differences in the graphic above clearly coincide with the former border between West and East Germany, now referred to as the Former Territory of the Federal Republic and the New Länder, respectively. The historical separation of Germany after World War II created two countries with opposing economic and social systems that diverged for more than 40 years.
However, the explanation for the current differences is more complex than just this massive shock. In fact, a trio of authors has shown that the same regional disparities already existed before the establishment of the German Democratic Republic (GDR). For example, in 1925, the “West” already had a lower share of working-class workers, more self-employment, lower voting shares in extreme parties, higher church attendance, and lower female labour participation. Furthermore, the destructive impact of World War II was larger in the East, and there was selective migration from East to West immediately after the war and just before the Wall was raised.
Approximation but no lasting convergence
The idea that reunification would yield long-term convergence was probably wildly optimistic. It is true that East Germany inherited well-functioning institutions from West Germany. It also went through a privatisation process that was better than people initially thought, and received large financial transfers from the West that were used to finance social expenditure and investment. However, after an initial improvement in living standards in the East, economic conditions quickly deteriorated, and the population shrunk. Fiscal transfers may have reduced the divergence between the two regions but they did not deliver sustained convergence.
This is hardly surprising, given that disintegration was a much more significant shock than reunification. After more than four decades of separation, production infrastructure did not return to the original spatial distribution after reunification. Furthermore, the manner in which reunification was conducted likely exacerbated these disparities.
Unanticipated psychological impacts
Convergence is not just about money, and some measures that may have seemed justified from a strictly economic point of view have had unexpected impacts, particularly on the psychology of individuals, which plays a role that is equally important and difficult to measure in economic affairs. For example, job losses related to the privatisation of state-owned enterprises in the East decreased individual trust, reduced political engagement, and increased support for radical parties, as Kellermann’s work has shown. These sentiments of distrust have now become deeply entrenched. Support for extreme parties is not diminishing, and many of these voters oppose the European project. On Sunday 1 September, the AfD won the state election in Thuringia, marking its first-ever victory in a state election, and came a close second in Saxony. A recently formed populist left-wing party, BSW, came third in these elections.
Thirty-five years after reunification, there is no clear path back to convergence for the former East German states. On the contrary, we are currently experiencing political and policy paralysis. This has been aggravated by major geoeconomic shocks that have hit Germany in recent years, such as the Russian invasion of Ukraine, which increased inflation, and the Fortress China strategy, which reduced German exports to China.
Political, economic and social fragmentation is back.
European inequalities
To make matters worse, German reunification occurred in a context of more general divergence between European regions. As worrying as it may be, the German situation is far from being an isolated case within the European Union. Around the same time, another unification took place in Europe. The Maastricht Treaty, which went into effect on November 1, 1993, marked the foundation of the European Union (EU). It led to an increase in cooperation among member states, development of European institutions, and set the stage for the creation of a common currency, the euro. However, much like German reunification, it did not lead to regional convergence within the European Union, as one might have expected.
Similar divides to those between West and East Germany exist in other European countries, such as the urban-rural divide in France, but also within the European Union, where peripheral regions have struggled, with a few exceptions. The path to sustainable recovery for these peripheries is unclear.
Instead, several factors make us fear that we are drifting toward political and economic disintegration within European states and Europe, as the recent experience with Brexit shows.
Better allocation of funds
While these problems cannot be easily solved, I would still like to suggest two avenues to explore. One promising area focuses on the effectiveness of EU funds. As discussed in my joint article with Jérôme Creel ThisGenEU, there is an urgent need to significantly change the level and use of EU funds in order to address the real challenges of today, beyond just future climate change targets.
We now know much more about how EU funds can be used effectively. One problem is that some local governments may be tempted to respond to these funds by cutting public spending, which risks undermining their intended effects. Therefore, it is crucial to target funds that foster medium-term growth and to combine them with policies that enable peripheral regions to use them more productively, in order to avoid a “Dutch disease” type of situation.
Dutch disease
This term refers to a situation where financial inflows cause economic distortions such as rising wage costs, overheating the real estate market, or excessive concentration of investments in low-productivity sectors and end up harming a country’s economy in the long run. Politically, it can also lead to an institutional “Dutch disease”, where excessive reliance on external funds weakens incentives to reform local institutions, creating institutional blockages and ineffective governance.
For example, European funds should be supervised by Europeans and not by local authorities. Disconnecting their management and use from local political authorities is crucial. Similarly, industrial policy should be implemented at the European level, in order to balance competition and coordination between different regions. Regional governments could also be given more responsibility in the provision of public goods to ensure healthy competition between regions.
More free trade?
Second, the European Union is still far from being fully integrated. Despite the EU’s commitment to free trade and a single market, there are too many constraints on trade. Even for trade in goods, the reality is far from a true single European market. Services represent an even bigger untapped market. It is essential to free trade from the current EU version of “free trade”.
For example, reducing regulatory differences, labour market restrictions, infrastructure asymmetries and improving cross-border connections, as well as strengthening capital market integration, would allow EU economies and regions to specialise more in the production of goods and services for which they have a genuine comparative advantage. According to the factor price equalisation (FPE) theorem found in many economics textbooks, this would result in a more efficient allocation of resources within the EU and greater convergence of prices across Europe. The convergence would likely include wages and other sources of income.
Of course, further research and discussion are needed to explore these and other options for overcoming the current challenges of economic divergence. These are existential questions for both the EU and Germany, especially in the current context of heightened geopolitical uncertainty.
The solution to the challenge of German reunification may not lie in Germany, but within the European Union. The combination of effective European funds and deeper European integration has the potential to ensure economic convergence and to strengthen the political and social fabric of both Germany and the EU. German reunification continues to be a good idea, because we all stand to gain from it.
Gonçalo Pina, Associate Professor for International Economics, ESCP Business School
This article is republished from The Conversation under a Creative Commons license. Read the original article.
