ABSTRACT
In the early fall of 1989 the Bundesbank which is German Central Bank, was worried about mounting inflation. If the outlook for Germany improves significantly in the 1990s while the government and the private sector are still borrowing large amounts to finance unification, high interest rates will attract more and more international funds to the German market. During the first few months after currency union, the German bond markets have absorbed the extra public borrowing without any signs of major strain. The government's financing plans and fears of inflation have kept interest rates high in Germany, The Bundesbank has not hesitated to hike rates when the inflationary pressure has become too great. The most problematic consequence of economic and monetary union is its effect on East German firms. Certain areas of East Germany, particularly the large cities of Dresden and Leipzig, have a long industrial tradition.
