The Cost of Reunification

How West and East Germany reunified in 1990, why the East's economy collapsed at first, and how large transfers gradually narrowed the gap.

In 1989, the Berlin Wall fell. In October 1990, Germany reunified.

The monetary union

In July 1990, East Germans exchanged their currency for Deutsche Marks, often at 1:1 for wages and savings up to limits, far above market value.

This raised East German wages and savings suddenly.
But East German firms became uncompetitive overnight.

Collapse

East German industrial output fell sharply.
Unemployment soared.
The Treuhandanstalt, an agency set up to privatise East German firms, sold or closed thousands of companies.

Transfers

West Germany sent huge transfers to the East, estimated at well over 1.5 trillion euros over decades.
A solidarity surcharge on income tax (1991) helped fund them.

Progress

Infrastructure in the East was modernised.
Incomes rose, though they remain lower than in the West on average.
Many young people migrated west.

Lessons

Rapid monetary union can cause shocks when productivity differs greatly between regions.

The factory closure

An East German factory that made household appliances couldn't compete once wages were paid in Deutsche Marks. The Treuhand closed it, and thousands lost jobs.

Thinking reunification was economically easy

It caused an industrial collapse and required massive transfers.

Key takeaways

Germany reunified in October 1990.
The 1:1 currency exchange made East German firms uncompetitive.
The Treuhand privatised or closed thousands of firms.
Huge transfers narrowed but didn't close the gap.