Ten years ago, in 1990, Western and Eastern Germany became unified. After a short period of unrest in 1989, unification was finalised incredibly fast and came as a surprise to all, laymen and experts alike.
In the following years, Western German political, economic and social institutions were transferred to the former German Democratic Republic (Eastern Germany). Together with this, considerable amounts of money and expert knowledge were transferred to create the "flourishing landscapes," which then German chancellor Helmut Kohl had promised the Eastern Germans before unification.
Considerable changes were achieved and Eastern Germans today enjoy a standard of living much higher than in all other transformation states in Central and Eastern Europe. However, still some urgent economic problems are unsolved and an economic convergence is far from being achieved. This series takes a retrospective look on ten years of German unification.
To understand German unification in 1990 and its economic impact, a look to the period before 1989 is important. Not only political unification was the main goal of Western German governments, but economic relations between Western Germany (the Federal Republic of Germany, FRG) and Eastern Germany (the German Democratic Republic, GDR) also played a special role in the long way from German division to eventual unification.
In 1945, the four occupying powers (the USA, United Kingdom, France and the Soviet Union) decided in Potsdam that Germany was to be administered as an economic unity. While political division and the foundation of the FRG and the GDR in 1949 made this obsolete, economic relations remained. The special situation of Western Berlin (an island surrounded by the GDR) made interzonal economic contacts necessary, and after the failed boycott of Western Berlin in 1948 German interzonal trade always played a prominent role in economic and political perspective.
Innerdeutscher Handel (East-West trade) was not carried out in scarce foreign currencies but in special Verrechnungseinheiten (VE) (units of account). In many respects this gave the GDR an advantage over other Socialist states, which only could carry out trade in hard currency, usually dollar.
Even as Western Germany became integrated in the European Community, trade between the Germanies was excepted from any tariffs or quotas on goods. Only the politically imposed restrictions of trade in technology (according to the so-called cocom list of sensitive goods) was applied for the GDR as part of the Socialist bloc.
With the policy of rapprochement and peaceful coexistence since the late 1960s, economic relations became a new dimension. Western Germany became the second trading partner for the GDR with around 12 per cent of its foreign trade, after the Soviet Union, which accounted for around one third. With reductions on the VAT, trade was additionally promoted.
For Western Germany this had an important political dimension: While since the Grundlagenvertrag of 1972 (the basic treaty regulating the relations of the FRG and the GDR) the GDR insisted on the existence of two independent German states, even the leader of the GDR, Erich Honecker, had to admit that there were still special trading relations.
Intense competition, debt crisis
In the 1970s, the competition between the economic systems of East and West was intense. The goal of the leadership of the GDR under Honecker was to overtake Western Germany in production. One reason was that Eastern Germans had (differently from the people in other Socialist countries) easy access to Western German TV and could directly compare their unfavourable living standards with those of their brethrens in the West. In the effort to grant their citizens better living standards, consumption goods and technology goods were imported from Western countries and Western Germany.
This led to an accumulation of debt, which came to a sudden end in 1981, as Poland and Romania defaulted on their debt. In that time, the GDR had accumulated debts of around USD ten billion and could not raise any more money on Western financial markets. However, the special relations to Western Germany helped to overcome this crisis. In 1983 and 1984, two unconditional credits of DEM one billion (then USD 357 million) each were guaranteed by Western Germany.
After the debt crisis, the GDR tried to increase exports to improve the balance of payments. However, the poor quality of Eastern German goods made trade with the West increasingly difficult. Therefore, more than 55 per cent of all exports were rather raw materials and intermediate inputs of low quality. Especially, mineral oil products were important, since the GDR enjoyed relatively cheap supplies from the Soviet Union. This led later to the bizarre result that the GDR suffered as much as oil exporting countries from the price drops in oil in the late 1980s.
Besides trade, licence productions of Western goods (the most famous were Salamander shoes) accounted only for a small part of economic co-operation. Until 1989, joint ventures were impossible, since the GDR feared the extended contacts for political reasons. The reforms of other Socialist states in this respect, such as the Hungarian reforms, were seen by the increasingly phobic Socialist leadership of Honecker with mistrust, as a deviation from the orthodox Socialist way.
Financial flows from the West
One of the main reasons of the superior performance of the GDR compared to other Socialist countries was the steady flow of Western German money. Besides the credits mentioned above, annually those flows were estimated at around DEM 2.5 billion.
This included an annual maintenance fee of DEM 575 million for the transit route from the FRG to Western Berlin (a motorway full of potholes); fees for special services (such as postal services or visa fees); the revenue from so-called intershops (with Western goods, mainly for Western tourists and those with relatives in the West) and tourist hotels; and the forced exchange of DEM 25 (or DEM 15 for retired persons) daily for visitors of the GDR at the fictitious rate of 1:1 (DEM for Ostmark). Additionally, Western Germans sent packages for an estimated DEM 750 million annually to Eastern Germany.
What was the Western motivation for these transfers? First of all, the special situation of Western Berlin was in question. While Eastern Berlin was the "capital of the GDR," Western Berlin was seen by the GDR as special territory, not part of the FRG. The isolated location gave the East some leverage, but transfers and the transit route helped to foster relations between Western Berlin and the FRG. Moreover, transfers also improved long term relations to the East.
While direct conditionality was avoided, financial transfers were sometimes openly, sometimes implicitly linked to improvements in East-West relations. This concerns the border regime with the many dead fugitives as the most visible point of Western criticism. But this concerns also the increased possibilities of personal visits of people from both parts of Germany. In 1987, far more than three million Eastern Germans could visit the Western part of Germany. This not only was important for the families and their cross-border ties, but it also confirmed the status of Germany as one nation.
Complexity of impacts
Did economic co-operation before 1989 facilitate the survival of the regime or did it accelerate its decline? In a retrospective, it becomes clear that economic co-operation is Janus-faced. Later accounts of East German politburo officials show that without Western financial aid the GDR might have collapsed even earlier than 1989.
The last two Socialist governments in late 1989 and 1990, led by Krenz and Modrow, tried desperately to get another Western German credit to stabilise their political situation. Critics note that Western German financial flows might have unnecessarily prolonged Socialist survival in the GDR.
But on the other hand, East-West economic co-operation might have had a decisive impact on peaceful unification. Western aid and trade could not overcome the economic difficulties of centrally planned economies, but it could alleviate the poor living conditions in the GDR while simultaneously improving official relations. The leadership of the GDR was always aware of the long-term destabilising impact of these relations for their regime.
This is the reason why they tried to avoid the co-operation in the form of joint ventures like in the late 1980s other Socialist countries tried out. Even if the Western financial flows might have extended survival of the socialist regime, it is questionable if an earlier collapse in the early or mid-1980s in the different international environment would also have led to a peaceful unification process.
In a comparison of the results of transformation processes in Central Europe and in other regions, like the Balkans, the political and economic stability after transformation is striking. In that respect, the later German unification was helpful for stabilisation: without the dissolution of the Eastern bloc made possible by Gorbachev's renouncement of the Breznhev doctrine, a destabilised Eastern Germany would have led to unpredictable consequences.
Dr Bernhard Seliger, 8 January 2001
The author works at the Graduate School of International Area Studies of Hankuk University of Foreign Studies and does also research at the University of Witten/Herdecke, Germany.
[The next article in this series will answer the question, how institutional change was achieved in Germany after 1989.]