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Explore the latest strategic trends, research and analysis This article is published in collaboration with VoxEU. This is an abridged translation of an article that first appeared in German in Frankfurter Allgemeine Zeitung see Sinn and Sinn Europe is debating further moves towards a transfer union, following the implicit and explicit transfers in the form of fiscal rescue programmes and monetary bail-out operations by the ECB.
French President François Hollande and his young Minister of Economy Emmanuel Macron are now proposing a fiscal union complete with a common budget, a pooling of old debts, a common deposit insurance, a common unemployment insurance, a common finance minister and a common parliament Hollande and Macron As their proposal happens to coincide with the twenty-fifth anniversary of German reunification, which has led to the establishment of an intra-German transfer union, it might be useful to review the German experience in detail before further, and irrevocable, steps are taken to transform the Eurozone.
In fact, it crypto forum english out that the German example should actually serve a warning for those who want to move ahead as quickly as possible, since it has been far less successful than outsiders seem to assume.
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While East German cities have all been beautifully renovated and reunification succeeded politically, East German crypto forum english has seen very little progress in the last twenty years. Over the 19 years from early to latea net number ofEast Germans emigrated to the western portion of the country, on top of thewho had done so in the years before.
If GDP is calculated not with reference to the population as a whole but in terms of people in gainful employment, the convergence looks somewhat better. This is, however, not a particularly relevant measure, because the labour productivity measured in this way can be raised to any level by wage rises and the associated elimination of less productive jobs.
East-West Germany convergence Notes: 1. A further point is the artificial inflation of eastern GDP resulting from salary harmonisation telegram bot crypto the public sector. The lack of productivity convergence contrasts sharply with the convergence in living standards, which has indeed evolved satisfactorily.
This is in part the effect of a progressive tax system, which automatically redistributes from west to east, but also of the transfers via the federal budget, the Solidarity Pact II and the pension system. The effect exerted by the national pension system can be seen in the upper two curves of the chart. These figures result from the generosity with which the pension-relevant years of East Germans were incorporated into the western pension system, recognising their long and uninterrupted occupational histories under communism.
All of this has been extremely costly for West Germany.
Currently, the net transfers through public budgets amount to 70 billion euros per year, totalling some 1. What lies behind the stall in economic convergence? In our opinion, it is the overhasty adjustment of wages. As the chart shows, the effect of this wage bargaining-by-proxy was that hourly wages rose significantly faster than overall productivity in terms of GPD per capita This was expected and observed early crypto forum english see Sinn and Sinn Anything below the one-to-one currency conversion would have reduced the real income of East German citizens and would have provoked a revolt.
However, the proxy wage negotiations made wages increase to much higher levels. It is no surprise that international investors, who namų darbas mamoms champing at the bit, revised their investment plans in view of this reality, deciding eventually not to come.
Sony, for one, chose crypto forum english vacate its planned European headquarters at Potsdamer Platz in Berlin.
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Investments fuel wage rises, because they increase the demand for labour, but wages cannot run ahead of investment, since investors will then fail to come. It is like revolving doors at the airport: you can only cross them at a moderate pace — if you rush, they will stop. The German government tried to avert the disaster by instituting massive tax relief to counter the devastating effects of the wage rush.
This spurred investment in capital-intensive companies and property, but created only a few jobs. In the end, three-fourths of the industrial jobs in the former East Germany were lost. While 4. It is true that many jobs were created in construction and services, but these are areas safe from international competition.
Despite mass emigration and early retirement, the unemployment rate in the new federal crypto forum english including Berlin today is 9. The Social Union agreed in the summer of between West and East Germany, and later anchored in the Reunification Treaty, cushioned the consequences of massive unemployment through social transfers. However, the social transfers themselves created further unemployment, since their nature as replacement income in effect set a floor for the wages below which, understandably, East Germans were not willing to work.
The artificially inflated wages that originally had resulted from the bargaining-by-proxy became thus permanent. Seen in this way, the social transfers managed to create a stagnating equilibrium that still today fails to exploit the potential inherent in a well-functioning market economy.
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East Germany squandered thus the head start it had over the other ex-Comecon countries upon joining the EU. Since the other countries joined the EU only inEast Germany could have taken advantage of joining a million-consumer market 15 years ahead of the rest. Fresh investment would have flowed to East Germany, spurring labour demand.
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In this way, the labour unions could eventually have pushed through permanently higher wages without reducing competitiveness — probably even higher wages than prevail today. The argument that the wage strategy chosen was the best one to forestall mass emigration to the western part of the country was not convincing. It would have been better to let the new federal citizens work in the West than financing their forced unemployment in the East.
In view of the recent announcement by German Chancellor Angela Merkel that Germany is in a position to integrate more than a million migrants from less-developed countries into the labour market, with hindsight the old argument appears outlandish. It is also worth bearing in mind that, as mentioned previously, a net total of 1.
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Had wages not been made to converge artificially, many more jobs would probably have been created in East Germany, and migration would have perhaps been lower see Akerlof et al. This induced a turnaround in the German labour market at large by allowing for the emergence of crypto forum english jobs. However, as effective as the Agenda turned out to be for the overall German labour market, it came too late for east Germany and could not prevent many national and international investors from skipping the eastern German states and going straight to Poland, Hungary, the Czech Republic or Slovakia to set up new productions sites.
The rapid wage increases, supported by generous welfare benefits, had the effect of inflicting the so-called Dutch disease onto East Germany. When the Netherlands found gas deposits in the s, the income from gas exports pushed up wages in the public sector and the energy industry, stimulating the domestic sector and causing imports to rise, crypto forum english also undermining the competitiveness of the Dutch export industries, because competition in the labour markets forced these industries to also pay higher wages.
It was kaip pasirinkti prekybą manekenais until the Wassenaar Agreement ofcoupled with a subsequent fall in world energy prices, that wages became more moderate and the economy started to gradually improve. The Dutch Disease is also in evidence throughout Southern Europe today, with the low-interest loans made possible by the public rescue funds and the ECB guarantees taking the role of Dutch gas or inter-German transfers.
What can Europe learn from German reunification?
Whether an crypto forum english receives money from abroad in the form of transfers or proceeds from gas exports or loans makes no difference. In each case the foreign funds make it possible to uphold non-competitive wage structures — in other words, to maintain a living metatrader 5 forex trading apk that exceeds the level compatible with local productivity.
The result is excessive prices and a loss of competitiveness. The fiscal union demanded by Hollande now is an understandable attempt to compensate for the lack of competitiveness of the southern EU countries by resorting to international transfers, but these transfers would cement their lack of competitiveness and drive Europe into permanent stagnation.
The travails of German reunification should be a warning against pursuing this course. Volkswirtschaftliche Aspekte der Deutschen Vereinigung, J. Mohr Paul Siebeck : Tübingen. English translation: Jumpstart.
Gutmann, ed. Revised English Version: Staggering Along. Sinn, H-WIst Deutschland noch zu retten? English translation: Can Germany Be Saved? Endnotes 1 The notion stems from an article in The Economist For a first attempt to model the phenomenon theoretically see: Corden and Neary Publication does not imply endorsement of views by the World Economic Forum.
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