Topic 9

Germany : Reunification
By Alison Chiu

MAP
OF
EUROP
E

Germany: General Statistics

Germany: General Statistics

Germanys History_Otto von Bismarck

is considered the founder of the
German Empire. For nearly three
decades he shaped the fortunes of
Germany, from 1862 to 1873 as prime
minister of Prussia and from 1871 to
1890 as Germany's first Chancellor.
Otto von
Bismarck
In the war of 1866 he succeeded in defeating Austria
In 1870 Bismarck deliberately provoked the
Franco-Prussian War and as a result was able to obtain
Alsace and Lorraine from France.
Both wars were geared towards German unification.
This victory instigated the kingdoms of Bavaria,
Wrttemberg, Baden and Hesse to join the North
German Alliance, an alliance of Prussia and 17

Germanys History_Otto von Bismarck

Bismarck's greatest achievements,
however, were the administrative
reforms, developing a common currency,
a central bank, and a single code of
commercial and civil law for Germany.
Bismarck also became the first
statesman in Europe to devise a
comprehensive scheme of social security
to counter the Social Democrats, offering
workers insurance against accident,
sickness and old age.
However, it was Germanys desire for
greater power and international influence
that led to it s role in World War I where

Otto von
Bismarck

Germanys History_WW1
World War I or the First World War,
commonly abbreviated as WWI and
formerly called the Great War, was a major
war centered in Europe that began in the
summer of 1914 and lasted until November
1918
The 1919 Treaty of Versailles officially ended
the war
In signing the treaty, Germany
acknowledged responsibility for the war,
agreeing to pay enormous war reparations
and award territory to the victors

Germanys History_Adolf Hitler

At the same time, the Great Depression (19291938) hit Germany harder than any country in
Europe
At the beginning of the 1930s, Adolf Hitlers Nazi
Party exploited widespread and deep-seated
discontent
in Germany
to attract
popular and
The democratic
post-World
War I Weimar
political
Republicsupport.
was marked by a weak coalition
government and political crisis, in answer
to which the Nazi party offered strong
leadership and national rebirth.
In January 1933, Hitler was appointed
Chancellor, he outlawed other political
parties and seized absolute power as
Fuhrer.

Adolf Hitler

Germanys History_Adolf Hitler

From 1929 onwards, the worldwide economic
depression provoked hyperinflation, social unrest and
mass unemployment, to which Hitler offered
scapegoats such as the Jews. He oversaw the
Holocaust which killed an estimated 6 million Jews
and a few million of other nationalities
Hitler imposed a command capitalist economy that
was initially successful
The focus of his program was to build up the military
as rapidly as possible and build up infrastructure
He imposed price controls, compulsory cartelization
and outlawed independent labor unions
Foreign trade and exchange were controlled
Germany recovered quickly from the Great Depression
and achieved two times increased in economic growth

Germanys History_ Started WW2

Hitler became more powerful . From late 1939 to
early 1941, Hitler under Germany conquered or
subdued much of continental Europe and bullied
other European nations into giving into his demands
in a series of campaigns and treaties
Chamberlain promised British support to Poland in
the case of German aggression. A misguided belief in
peace in our time was replaced by a reluctant
acceptance of the inevitability of war.
On 1 September 1939, 62 German divisions
supported by 1,300 aircraft began the invasion of
Poland. At 8pm on the same day, Poland requested
military assistance from Britain and France. Two days

Germanys Division_Post WW2

The war ended with the
total victory of the Allies
over Germany and Japan
in 1945.
After WW2 Germany was
divided into six zones
Two zones were annexed
by Poland and Soviet
Union
Four zones of occupation
with Soviet Union (East),
the United States
(South), Britain (North),

UK Soviet Poland
France US

Germanys Division :
FRG (West) and GDR (East)
The zonal division ultimately led to
the founding of two German states.
1) The Federal Republic of
Germany (FRG) based on
democratic principles, emerged
from the three western zones in
May 1949.
2) German Democratic Republic
(GDR), a communist, centralized
state based on the Soviet model
and led by the Socialist Unity Party
of Germany (SED) In October 1949
assisted by the Soviet Union

Germanys Division :
FRG (West) and GDR (East)
Berlin, which lay in the
Soviet (eastern) sector, was
also divided into four sectors
with the Western sectors
later becoming West Berlin
and the Soviet sector
becoming East Berlin, capital
of East Germany.
The Berlin Wall was erected
in 1961 because more than
2.6 million East Germans
escaped to West Berlin or
West Germany from 1949 to
1961 (total population of

Before Reunification
Federal Republic Germany(FRG)_West
Germany
After WW2, West Germanys economy
experienced total collapse. 3 main
problems in the economy :
1) Destruction of transportation of
communication
2) Capital investment which were diverted
to military production had now ceased
3) Economic paralysis from fixed prices,
rationing and monetary inflation
) Received help from the US under the

Before Reunification
Federal Republic Germany(FRG)_West
Germany
Ludwig Erhard (Administrative Director) supported
free markets and a social safety net social market
economy
Erhards contribution to West Germany
1) Established a central bank basis for Germanys
central bank Bundesbank today
2) Introduce Deutschmark to replace Reichsmark at 1:1
ratio for current wages and prices but 1:10 ratio for
all debts this wiped out monetary inflation
3) Removed price and rationing controls thus
allowing enterprise
- This began the German miracle or Wirtschaftswunder

Before Reunification
Federal Republic Germany(FRG)_West
Germany

FRGs Industrial Relations :

- Work council has to be formed in workplaces
with more than 5 employees. Work councils
advise management on their operations
- Workers are elected to the supervisory board
for firms for firms more than 500 employees
FRGs
- Programs under Bismarck which was removed
by Hitler was restored
- New initiatives like child allowance, medical
coverage

Before Reunification
Germany Democratic Republic (GDR)_East
Germany
Plundered by the Soviet Union after
WW2
Came under the Marxist regime
- GDR gradually adopted the
command socialist system
- By 1960s most firms were
nationalized
- Integrated into the Soviet bloc
(Eastern bloc) under the Warsaw Pact

Before Reunification
Germany Democratic Republic (GDR)_East
Germany

1. Successful economy reputed for being the

most
efficient, productive and highest income
command socialist economy among the Eastern
bloc
Was known for exporting relatively
sophisticated goods (optical equipment,
electronics, automobile) to countries of the
Eastern bloc
However when compared to West Germany
(FRG) :
- living standards were believed to be 1/4 of
FRG

Before Reunification
Germany Democratic Republic (GDR)_East
Germany
2. Performed well in basic indicators of social
wellbeing- educational attainment, life
expectancy and infant mortality
3. Large scale firms and
structure
. Firms were large (>2500 workers)
. Kombinate is the organization of firms into
groups which integrated and controlled their
activities
. Result kombinate held large monopoly
powers, set high prices and paid little
attention to efficiency and quality

Political and Economic Reunification (July

1, 1990)
East Germany and West Germany
Adoption of a 1:1 exchange rate between the East
Germanys Ostmark and West Germanys
Deutschmark for all wages, prices and pensions
Conversion of most monetary assets at a rate of 2:1
except for a quota of personal savings which was
1:1
Creation of a common legal and regulatory
environment based on West Germans law
Introduction of social market features like collective
wage negotiation, extensive social insurance and
active worker involvement in company management

After Reunification
Positives
1. Established legal structure, accounting
system and finance from the West
West Germany already have an established
system, East Germany do not have to start
from the beginning. They need to learn and
adapt
2. Supply of entrepreneurship from the West
Again West Germany could provide skilled
personnel to fill in the gap in the Est

After Reunification
Positives
3. Access to EU market
East Germany had accessed to EU markets
to export its products
4. Infrastructure and social safety net
West Germany was willing to improve roads,
communications, housing where it was
lacking in East Germany.
West Germany was willing to compensate all
those made unemployed due to privatization

After Reunification
Negatives
1. Disposition of thousands (8500) of state owned
enterprises through the Treuhandonstalt , an agency
created after the German reunification to
Also meant dissolution of the Kombinate and their
monopoly power. All of GDRs industrial assets were
placed under the Treuhandonstalt
2.
because of better quality and
cheaper goods from the West. This was mainly
caused by the adoption of a 1:1 exchange rate
between the ostmark and deutschmark
3.
in East Germany and increase in
4. Loss of social safety benefits for East Germans like
daycare and subsidized vacation

After Reunification
Negatives
5.
Expenditure on unemployment compensation and
privatization efforts by the FRG was higher than
expected leading to budget deficits and to the
central bank to raise interest rates. West Germany
has transferred payments to East Germany of more
than 1 trillion DM in the 10 years of the reunification
6.
East feels they have been controlled by the West
West resents having to pay high taxes to subsidize
the East

Lessons from the

Reunification
1. Currency valuation
2. Privatization
3. Market restructuring vs planned
restructuring
4. Time frame

Germany and European Union

In 1991 the Maastricht Treaty was signed and the
European Union was formed. Germany was one
of its member states together with France,
Belgium, Italy, Luxembourg and Netherlands
Germany did not want to give up the DM at that
time and insisted on a strict Maastricht criteria
regarding limits on budget deficits and for the
European Central Bank to be established in
Frankfurt where its central bank was located
Because of the re-unification, Germany has a
relationship with Eastern Europe and has been
instrumental in wanting to bring these countries
into EU
This caused uneasiness among France and other
EU members at that time

Germany After Reunification

Post 1990s
Germany experienced chronic unemployment and slow
growth in the 1990s as it adjusted to the re-unification
Germanys economy underperformed compared to
rising stars like Ireland, Spain and UK in the 1990s
GDP
199
Growth 1
Rate

199
2

199
3

199
4

199
5

199
6

199
7

199
8

199
9

200
0

Germany

5.1

1.9

-1.0

2.5

1.7

0.8

1.7

1.9

1.9

3.1

UK

-1.4

0.1

2.2

4.3

3.1

2.9

3.3

3.6

3.5

3.9

Ireland

1.9

3.3

2.7

5.8

9.6

8.2

11.5

8.4

10.9

9.7

France

1.0

1.5

-0.7

2.2

2.0

1.1

2.2

3.4

3.3

3.7

Source : Worldbank
and OECD Data

Germany : 2000 and beyond

Germanys economy saw improvement from mid2000s
In the early 2000s, Germanys economy
accounted for 10% of the GDPs growth in the
Eurozone but in 2010, Germanys economy
accounted for 60% GDP growth in the Eurozone
In this current Eurozone crisis 2010, Germany as
largest
and most influential economy is the
GDP EUs200
200 200 200 200 200 200 200 200 201
Growth
one 1with 2the resources
to keep
3
4
5
6 the
7 euro
8 alive
9
0
Rate

Germany

1.5

0.0

-0.4

1.2

0.7

3.7

3.3

1.1

-5.1

3.7

UK

2.5

2.1

2.8

2.2

2.8

2.7

-0.1

-4.9

1.4

Ireland

5.7

6.5

4.4

4.6

5.3

5.6

-3.5

-7.6

-1

France

1.8

0.9

0.9

2.5

1.8

2.5

2.3

-0.1

-2.7

1.5

Source : OECD
Data

Germany : 2000 and beyond

How did Germany improve its economic growth?
1) Investing into R&D to produce machinery and
heavy equipment of high quality and technology.
2) In early 2005, the government pushed through
an agenda to cut public spending on welfare
unemployment benefits
3) Government also negotiated with labor unions to
cut wages in return for job security for workers
4) In the crisis, the government prevented largescale layoffs of employees by keeping the
number of workers who had to work shorter
hours but took lower pay during the crisis
5) As a result of high quality goods at lower labour
costs, Germany ended up having a trade surplus

Germany : Economy, Politics &

Social
In 2005, Angela Merkel became the first
female Chancellor of Germany in a
coalition of a few parties
Economics : Germany facing a slow
growth post Eurozone crisis due to EU
sanctions on Russia and stagnating EU
demands

References
Kennett, D. (2001) A New View of Comparative
Economic Systems (2ed) Harcourt Publishers
Rosser, J.B. and Rosser, M.V. (1996),
Comparative Economics in a Transforming World
Economy
Schuman et al (2011) How Germany became
the China of Europe Time, Vol 177-9
Rattner, S. (2011) The Secrets of Germanys
Success Foreign Affairs, Vol 90-4