The opportunities and risks of an economic transformation

When the Berlin Wall fell 30 years ago, the citizens of the German Democratic Republic regained their civil liberties. Since then they have been able to travel without any restrictions and freely choose where they want to live and work. The fall of the Berlin Wall was followed with a rapidity that was historically unique, by measures that paved the way for the reunification of Germany: the first free election of the Volkskammer (People’s Chamber) of the German Democratic Republic on March 18, 1990; the creation of the Wirtschafts-, Währungs- und Sozialunion (Economic, Currency, and Social Union) on July 1, 1990; and finally, the dissolution of the German Democratic Republic and the region’s entry into the area of application of the Basic Law of the Federal Republic of Germany, which marked the unification of the two German states. However, the integration of the economies of East and West Germany is a long-term process that still presents challenges today. To find out more, we interviewed Daimler’s Chief Economist, Jürgen W. Müller, who was born in the year the Berlin Wall was built. He has worked at the Group since 1987.

Firstly, let’s talk about the period immediately after the fall of the Berlin Wall. What was new for the citizens of the German Democratic Republic?

In addition to the limitations that the citizens of the German Democratic Republic experienced in many areas of their daily lives as a result of the planned economy, opportunities to buy consumer goods were inevitably also extremely restricted. The SED regime determined what people were allowed to consume, how much of it, and at what prices. After the Berlin Wall fell, the people of East Germany came into contact with West Germany’s consumer society for the first time, and thus they also encountered its wide variety of goods, some of which had previously been completely unknown to them. So it was no great surprise that the years 1990, 1991, and 1992 were marked by Germany’s highest levels of consumption in the past three decades. At some points, the growth rates were greater than four percent.

What did the economic situation in the German Democratic Republic look like?

Before the borders were opened, many people had believed that the economy of the German Democratic Republic was technologically very advanced and served as a role model for the Eastern bloc. However, after the fall of the Berlin Wall, there was extreme disillusionment concerning the level and the performance capability of East Germany’s industry in particular. It was very obvious that for years there had not been any competitive thinking: Productivity was low, some of the goods were of poor quality, and the products were not competitive in the international market.

How did industries in the East develop after the end of the division between the two German states?

The Economic, Currency, and Social Union state treaty between the Federal Republic of Germany and the German Democratic Republic went into force in July 1990. Among other measures, this treaty included the 1:1 introduction of the deutsche mark in the eastern part of Germany. This was an important indication of German unity and the solidarity of the country as a whole. However, in economic terms the unified currency had rather negative effects on the East. The East had approximately 30 percent of the per capita economic strength of the West. In purely economic terms, uniting two regions with great economic disparities into a single currency zone means that opportunities for economic growth will be made more difficult in the structurally weaker region.

Why were the opportunities for economic growth limited for the East after the introduction of the deutsche mark?

In terms of social policy, there was no alternative to the 1:1 transition to the deutsche mark. However, once the two national currencies had been harmonized, the East German companies had to keep up with those of the “old” federal states right after unification. By contrast to the countries of Central Eastern Europe, which also experienced economic transformations in the 1990s, the industries in the new federal states had no floating exchange rate as a buffer. This sudden changeover imposed a process of contraction on East German industries that in some cases had drastic effects.

What happened after the Economic, Currency, and Social Union came into force?

Germany now faced the challenge of merging the East German and West German economies. This was a difficult undertaking, because it involved two fundamentally different economic systems. To carry out the reconstruction of the East, the government established the Anstalt der treuhänderischen Verwaltung des Volkseigentums (Agency for the Fiduciary Management of the People’s Property), or Treuhandanstalt (Trust Agency) for short. The Treuhandanstalt was a corporation under public law that began the process of integrating the planned economy of the East into the social market economy of the West. At the beginning of 1995 it was renamed the Bundesanstalt für vereinigungsbedingte Sonderaufgaben (Federal Agency for Special Tasks Related to Reunification).

How did the Treuhandanstalt go about its work?

The approach taken by the Treuhandanstalt is still controversial today, and many of its activities have attracted strong criticism. The combines were broken up, and the parts were sold to private investors. Some 80 percent of the companies went to West German buyers, 14 percent went to foreign buyers, and only six percent stayed in East German hands. As a result of this radical restructuring, many East German companies could not survive and disappeared altogether. They had no chance of adapting themselves to the new conditions of the market economy. As a result, more than 2.5 million people lost their jobs.

How did the people of East Germany deal with the collapse of their economy?

In view of the high unemployment figures, many young and well-educated people moved to the federal states of West Germany during that period. They found better career opportunities there. The economy of the new federal states still had to be rebuilt. This migration of skilled workers to the West made it especially difficult to forge ahead with the structural development and reconstruction of the East.

What measures were carried out as a part of national policy to improve the economic status of the new federal states?

There were transfer payments from the West to the East. These payments included tax and financial compensation payments, social expenditures, expenses for general federal services, and growth-oriented expenditures. Some of this money was invested in the expansion of the infrastructure, and research projects were established in the region in order to attract more industry. In some cases this worked out well.

What did the reunification mean for Daimler?

The reunification enabled Daimler to set up new locations in the eastern part of Germany. Today we are represented in all of the new federal states, and we employ almost 5,000 men and women in this region. The fall of the Berlin Wall also accelerated the scrapping of the Iron Curtain. Because Eastern Europe was opening up, Daimler was able to penetrate the Eastern European market. Today it produces vehicles in large plants in locations such as Kecskemét, Hungary and also in Moscow since 2019.

In your opinion, how has the reunification affected the German economy?

It’s clear that the main focus of the reunification was the social and social-policy component. The economic merger was more or less the huge challenge that accompanied it. Today we have still not completely succeeded in bringing the living conditions in the East into line with those of the West. Nonetheless, in my opinion the economic aspect of German reunification has also been a success. A process in which an economic system is transformed from the ground up and integrated into another one is a long-term project that can’t be completely finished even after 30 years. Processes of this kind take time, and they should definitely be given time.

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