ABSTRACT
The currency union between the two Germanies of 1 July 1990 was the cornerstone of the dramatic process of the country’s reunification after forty-five years of division between the democratic West and the Soviet bloc. The currency union itself, however, was a disaster according to all conventional economic criteria, as well as relative to the expectations that had been raised by the West German federal government. Technically, the disaster had been caused by the conversion rate of the East and West German currencies, which was set at 1:1 for private savings up to 6,000 DM per person and at 1:2 (one West German Deutschmark to two East German Marks) for any amount beyond that, as well as for the state budget and for stocks or industrial assets. Given the productivity gap between East and West German labour, this meant a revaluation of the East German currency of some 300 per cent. Consequently, commodities produced by the East German economy—based on outmoded technology—were not saleable at prices which covered their costs. Industrial output fell dramatically (to 46 per cent of its 1989 level by December 1990), causing mass unemployment at an official rate of 13 per cent in 1991 and, according to the federal labour authority itself, an underlying rate of 32 per cent in 1991/92 (cf. Siebert 1992). In 1993 gross domestic product (GDP) accounted for just 57 per cent of total domestic demand in East Germany. The remaining 43 per cent was made up by transfers to households. According to the Organization for Economic Cooperation and Development (OECD), ‘almost two thirds of internal demand for domestic goods and services (i.e. total domestic demand minus imports) is generated by public consumption and investment spending. The remaining one third is largely accounted for by that part of private domestic demand which cannot be satisfied abroad, i.e. purchases of services’ (OECD 1994:24). In 1997 self-sustaining growth was still not in sight in East Germany (cf. DIW/IfW/IWK 1997).
