ABSTRACT
For Eastern Germany, unification with Western Germany resulted in quantum (upward) jumps of both the exchange rate and real wages. As a result, Eastern German producers were priced out 413of their markets, including those in Central and Eastern Europe (CEE). By 1993, Eastern German exports to CEE had collapsed to around or below 20 percent of their 1990 levels. The collapse of imports was in the same order of magnitude as Eastern German demand turned away from products of local (Eastern German) and CEE origin. Thus, German unification almost wiped out the CEE region’s trade with Eastern Germany. It was hoped that increased CEE trade with Western Germany would, in the long run, make up for the lost trade with Eastern Germany.
To the surprise of many observers, that expectation has materialized already over a very short period. The increase of CEE trade with Western Germany was spectacular enough to exceed the losses to the CEE region from reduced trade with Eastern Germany. As a result, Germany now ranks first among the trading partners of Central and Eastern Europe, both with regard to exports and with regard to imports, and unregistered exports of CEE countries to Germany appear to have grown vigorously. In the case of Poland, they are estimated to have reached $2.3 billion in 1993, almost exactly the size of the country’s official current account deficit.
These developments are all the more remarkable as they have occurred at a time of recession in Germany, i.e. total German trade declined, while trade with the CEE region increased dramatically. The cyclical recovery currently under way in Germany may trigger an even more dramatic expansion of CEE-German trade, provided the region is capable of meeting demand and the European Union (EU) does not restrict market access.
As German unification was largely financed through capital markets, it did have a significant impact on interest rates, thus raising concern that the CEE region’s cost of capital would be driven up, in this way delaying transformation of its economies. The concern proved to be short-lived. After a brief increase, long-term interest rates fell back, in the wake of the global recession, to near their all-time lows. Although short-term rates remained indeed high for quite a while, this did not affect the CEE region in the same way as Western Europe. There, the combination of German fiscal boost and monetary restraint mattered, whereas in the CEE region it was only the former that made itself felt.
At present exchange rates, wage costs in the CEE region average only one-tenth or less of Western German levels. Even on very optimistic assumptions about growth of labor productivity in the CEE region, a huge wage differential is bound to persist for the foreseeable future. It opens opportunities not only for trade but also for direct investment. German direct investment in the CEE region increased considerably, especially into Hungary and the Czech Republic, where the respective cumulative totals reached DM2.3 billion and DM1.9 billion in 1993, from virtually nil in 1989. Hungary had a head start of about one year, with the Czech Republic catching up rapidly. Poland is trailing behind with relatively meager DM0.5 billion. Although concentration of Germany’s foreign direct investment on the CEE region is now twice as strong as that of its exports, the United States is ranking ahead of Germany as the most important foreign investor in the region. Once Germany has come to grips with the problems posed by unification and once the 414cyclical upturn gains strength, German direct investments in the CEE region are very likely to receive an additional boost.
Unified Germany, while supportive of Central and East European efforts to move closer to the EU, is embedding its policy firmy into an EU context. The ambitions of the Visegrad countries (CEFTA) are clearly directed at early EU membership, on a firm time schedule for entry. However, a number of obstacles stand in the way. Most important, the EU policy has been thrown into turmoil by the partial failure of overambitious Maastricht plans. The present redesign-stage is far from over. Conflicting interests, both within and among EU member states, are likely to delay the CEE countries’ integration into the EU. Prospects for an early commitment, on the part of the EU, regarding the time schedule of CEFTA countries’ access to the EU look slim. Eventual membership, however, looks certain.
