THE BLOG
11/12/2014 08:32 am ET Updated Jan 12, 2015

The Costs of German Reunification

The Washington Post via Getty Images

Here's a condensed version of what happened in Germany in 1989-90. The Germans in the East rose up against their authoritarian regime because they wanted freedom. Eventually they also got the German Deutschmark and reunification. The cost of that economic and political reunification was shouldered almost entirely by West Germans while the benefits flowed mostly to the East Germans.

Economist Rudiger Frank has a different view of what happened in those years. He grew up in East Germany, and today lives in Austria where he focuses much of his scholarly attention on North Korea. Because he experienced reunification first-hand and because the Korean peninsula is divided much as the two Germanys once were, he has given considerable thought to what happened between the fall of the Berlin Wall in November 1989 and German reunification one year later. He points out, first of all, that most people in East Germany had quite materialistic desires in 1989, even before the Wall fell.

"If I had to come up with a symbol of German unification, or of our East German revolution, it would be a yellow banana on a white flag," he told me in an interview in April 2013 in Washington, DC. "The banana symbolically stands for tropical fruits, traveling around the world, and basically, consumerism. And that's what, I'd say, 80% of the people in East Germany wanted. The other 20%, or maybe even less, primarily wanted freedom. Of course, those 80% also wouldn't have minded having political freedom. Who wouldn't? But it's nothing that they would really have risked too much for -- away from their TVs and cozy lives, which most of them had."

It wasn't such a surprise therefore when the first -- and last -- free East German elections took place in March 1990 and the majority supported Helmut Kohl's Christian Democrats. "Freedom of travel, real money, and all the things you could buy for it -- that's what they wanted," Frank pointed out. "And Kohl said, 'This is what I'm going to give you.' He was a man whom many East Germans trusted. All the other politicians, they might have had loftier political goals and more balanced approaches, but that's not what the majority cared about. They had heard enough about dreams and ideals, about justice, equality and a land of plenty that was to come someday in the future. They wanted something real, and they wanted it now. Kohl promised to deliver exactly that. So they voted for his CDU."

According to the conventional narrative, once Germany reunited most of the costs fell on the shoulders of those in the west and most of the benefits into the pockets of those in the east. But Frank takes issue with this picture, beginning with the huge financial transfers.

"The transfers didn't end up all in East Germany, they rather passed through it like a boomerang," he said. "Just think about it: what was the money used for? It was used for infrastructure projects, for building up an efficient administration, for the social security network, for investment. Now, who benefitted from all that investment? It was West German companies who expanded to the east. So that was a subsidy to West German industry. Infrastructure projects, highways, roads, telecommunication networks, who did that? West German companies, because all the East German construction companies were either bankrupt or bought up by West German competitors. It was another subsidy to West German industry."

Even the transfer payments for social programs in the East were ultimately a huge boon for West German business. "If you give money to people who are poor, they have a tendency to spend almost all of it," he pointed out. "They don't save much because otherwise they wouldn't need social benefits. And what do they spend it on? On products that they can buy in shops. And if you went to a supermarket -- a West German chain, of course -- in the early 1990s in East Germany, you would have had great difficulties finding East German products. Nobody wanted to have East German products. I mentioned the difficulties we had had spending hard currency on simple things like milk and bread. Even milk and bread were imported from West Germany for a while until we figured out that, oh, yeah, our bread is actually as good as the West German bread (and sometimes even better because it appealed to a more local taste). So that money went back to West German industry. And the value-added tax? The VAT went straight to the federal government."

In the end, Frank pointed out, the German government could never have passed what amounted to a huge Keynesian subsidy measure because it would have run up against the EU strictures on budget deficits. Meanwhile, in return for European support for reunification, Germany essentially agreed to embed itself more deeply into the European Union by supporting the creation of the Euro. An overall assessment of the costs and benefits of German reunification, in other words, must take into account the larger political and economic compromises that made the expansion of the EU possible.

In addition to the topic of reunification, we talked about Frank's time in the East German army, his gradual disillusionment with politics, and how woefully unprepared he was to go to study in North Korea in 1991.

The Interview

If the East German government had somehow procured enough funds to provide bananas in the GDR back in October 1989, and if they hadn't made that mistake at that news conference on November 9, in which they prematurely opened up the Wall -- in other words, if they had allowed for travel in a more organized fashion -- do you think they would have survived longer?

No. Over the mountains are mountains. If they had provided bananas, people would have asked for pineapples. And if they had provided pineapples, people would have asked for kiwis. It would have been endless, and even the richest state would gave reached its limits eventually. As long as a state claims responsibility for everything, this game of demand and delivery is an endless story. You have to have a system that more or less automatically provides the people with a fair chance to get what they want, and makes it clear to them that there are limits to that which have to do with the people themselves, not some state. You want a better car? Work harder, rather than writing a petition to your government. You want a yacht? Go and speculate with real estate. If you win, good for you; if you lose all your money, it's your fault, not the state's. But you should be given the freedom to speculate and to win or lose. The state provides a stable environment, public goods like security and law and education, even social benefits for those who would otherwise have nothing. But that's it.

The state is not supposed to be responsible for the distribution of all these things. The same goes for liberties like travel. I don't think that the state has the right to grant me the permission to travel. It's my right to travel, and nobody has the right to limit that. That's how it should work. In socialism, no matter how benevolent the state would be, it's still a state that reserves for itself the right to tell me what's right or wrong, what I should do and what I should not do. So I think, no, it would not have helped to have a few more bananas and more open borders. It would perhaps have prolonged the whole thing a little bit, but people would have left East Germany and gone elsewhere, and then the system would have collapsed anyway. Plus, we had a historical window of opportunity: a very weak Soviet Union with a Mikhail Gorbachev who didn't really know what he was doing and who completely screwed up his empire. To my benefit, of course. So I'm grateful.

You're grateful for his imperial incompetence.

Yes, but I don't think Russians feel the same way. Helmut Kohl did a very good job in this regard, in pulling Gorbachev to his side. I think despite, or perhaps because of his characteristics - a very conservative, stubborn, self-confident man - Kohl was the only one at that time in Germany who could have done that. That's why, in hindsight, I think we were kind of lucky that we had Kohl. Not that I ever really liked him personally. He was not a very likeable person to me, and I did not like his political background. But he did exactly the right thing at the right time. He was ruthless, determined, almost brutal. But I think it benefitted us a lot. The British and French were very skeptical about German unification -- for very good historical reasons. Kohl broke their resistance. He got along very well with the American president Bush senior at that time, which was crucial. Kohl used Bush to convince Maggie Thatcher and Francois Mitterrand that a unified Germany would not be dangerous, and he obviously was able to bribe Gorbachev into just looking the other way by offering him some economic benefits that Gorbachev needed desperately at that time because everything was collapsing back home in Russia.

In a way, we are paying the price for that right now with the European crisis. Part of the deal was that Germany would give up part of its sovereignty by joining the EU, its ultrastrong currency by joining the Euro, to invest its economic power into a common union and thereby deliberately lay down its arms, so to speak. That convinced the others. The Germans were willing to pay the price. I think it's been worth it -- it's just that hardly anybody looks at it that way anymore. It's now 23 years after 1990, and few people understand why we decided to form the European Union, why we agreed on a joint currency. The first Euro bills were introduced in the year 2002, but the decision was made in the early 1990s, right after German unification, and clearly in connection with this event. That's been the same old logic that a few decades earlier led to the decision to place the European capital in Brussels, a French speaking country, and the parliament for a few weeks per year resides in the French city of Strasbourg. Both are German concessions to the very skeptical French.

People forget the historic compromises.

But I think the outcome was worth the sacrifice, and I think Kohl did the right thing in pushing so hard for a fast unification History would have been completely different if he hadn't done it. That window of opportunity was open just for a short moment. One, two, three years later: who knows what would have happened. The Russians would have said no, and they still had four-power status in Berlin. Germany was divided, legally, thanks to World War II. Without the consent of the other countries, German unification would not have happened.

According to that, you would probably agree that it was necessary at that time to downplay the costs of reunification in order to gain West German support.

I agree. They were downplayed. German unification was a political decision, not an economic one. But I also think nobody was really aware of all the costs, not even the top leadership. And besides, I don't really think the monetary costs were as high as everybody thinks right now.

In other words, in the long-term, there have been other trends that have compensated for the amount of money that's been spent in cash transfers and so on.

Yes. The transfers didn't end up all in East Germany, they rather passed through it like a boomerang. Just think about it: what was the money used for? It was used for infrastructure projects, for building up an efficient administration, for the social security network, for investment. Now, who benefitted from all that investment? It was West German companies who expanded to the east. So that was a subsidy to West German industry. Infrastructure projects, highways, roads, telecommunication networks, who did that? West German companies, because all the East German construction companies were either bankrupt or bought up by West German competitors. It was another subsidy to West German industry.

Social security? OK, this went directly to East Germans. But if you give money to people who are poor, they have a tendency to spend almost all of it. They don't save much because otherwise they wouldn't need social benefits. And what do they spend it on? On products that they can buy in shops. And if you went to a supermarket - a West German chain, of course - in the early 1990s in East Germany, you would have had great difficulties finding East German products. Nobody wanted to have East German products. I mentioned the difficulties we had had spending hard currency on simple things like milk and bread. Even milk and bread were imported from West Germany for a while until we figured out that, oh, yeah, our bread is actually as good as the West German bread (and sometimes even better because it appealed to a more local taste). So that money went back to West German industry. And the value-added tax? The VAT went straight to the federal government.

Now do the math. How much of all that really remained in East Germany? The story of the huge transfer is only partially true. In a way, it was a major but very well hidden Keynesian subsidy measure that never ever would have passed the scrutiny of the EU unless, of course, it had been disguised as a big West German sacrifice as part of German unification.

That's a good point. If you go back to that period of time between March, the first elections, and October, the reunification, was there anything that should have been done differently in your perspective?

To read the rest of the interview, click here.