East Germany – not an economic succes story (2 graphs)

Update: @Twundit, who was there in 1989, is a kind of ‘life-twittering’ the pictures he made in Berlin.

Twenty five years ago the Berlin Wall came down. Which was and is a good thing: East Germany was a stagnating bureaucratic dictatorship. After ‘Die Wende’, West-Germany kind of adopted East-Germany and the West-Germans paid trainloads of money to enable a ‘one system’ reunification. I read somewhere that the costs must have been around 2 trillion or between 30.000 and 40.000 Euro per West-German. That’s a lot. In an economic sense, however, reunification was less than a total success. Unemployment (unknown in East-Germany, at least in its open variant, hidden unemployment may have been considerable) not only became sky-high (15% in 1994, i.e. four years after reunification) but even increased to an unheard of maximum of 18,7% in 2005 (graph 1).  Source: Der Spiegel. Only the Great Financial Crisis in combination with austerity policies would lead to rates which were as high (Ireland, the Baltics) or even higher (Spain, Greece), levels which were unthinkable during the cold war era. And this despite massive out-migration, despite massive transfers and despite massive investments in infrastructure. And despite massive ‘structural reforms’. It was only as late as 2007 and 2008 that unemployment really started to decline – not thanks to the Hartz-reformen or something like that but because domestic demand finally started to increase, again. As Simon Wren-Lewis shows (graph 2, unemployment is known as a lagging variable). Compared with the swift and sustained decline of unemployment during the Wirtschaftswunder (1950-1959) developments in East Germany were in fact a bit of a disaster. Remarkably, the Eurozone invokes the same structural reforms/cut domestic demand policies which did not work in Germany to solve problems in countries like Greece, Spain and Italy – which might mean that it could take another twenty-five years before unemployment in these countries will come down to sustainable levels. The good news: unemployment rates in East-Germany starts to approach the rates in North-Germany.

Graph 1. Unemployment.

Graph 2. Components of demand