German Reunification
In this essay, part of our Navigating Economic Change series, Kathrin Enenkel and Felix Rösel explore Germany’s sudden reunification in 1990, a large shock to which the German government responded with unprecedented scale, and the implications and lessons the German experience holds for the UK today.
Summary
Germany’s sudden reunification in 1990 was a large shock to which the German government responded with unprecedented scale. The Communist East was transformed into a decentralised and democratic market economy within less than a year. Trillions were spent with the aim of narrowing gaps between East and West Germany. In terms of scale and speed of response, modern Europe has seen nothing quite like it.
The dimension and disruption of reunification was certainly unique, but aspects of the German experience have implications for the UK, which is also challenged by deep social and economic spatial divides. Reunification policies in Germany, for instance, successfully harmonised infrastructure and took major strides in equalising living standards. This was only possible because the fiscal response was far-reaching, permanent, and based on an all-party ‘whatever-it-takes’ consensus.
But some areas were overlooked by policy makers. Unaddressed wage differentials have led to a major brain drain, with a net 1.7 million people moving from East to West Germany between 1989 and 2019, and a related pay gap between East and West for all skills levels. And reunification policies addressing the private and public sector were not always consistent. When it came to business support this focused on manufacturing while innovation and more knowledge-based service-focussed businesses were not significant policy priorities. This approach inadvertently led to a de-facto spatial strategy that prioritised industrialised smaller towns over larger cities, the consequences of which are still borne out in productivity figures today as Germany becomes a more service-orientated economy. At the same time, policy on public services and infrastructure, such as on schools and local administration, led to more centralisation in cities.
Meanwhile an absence of democracy-building and civil-society strengthening policies, and the wholescale import of Western institutions and elites without sufficient participation of East German stakeholders, has contributed to the high levels of political disfranchisement in today’s East Germany.
So what can policy makers in the UK learn from the German experience? First, that to make progress on large structural regional inequalities requires significant long-term commitment and funds – Germany has spent the equivalent of a furlough scheme every year on its reunification agenda over the last three decades. Second, the prioritisation of legacy jobs via subsidies and other interventions at the expense of initiatives to grow emerging parts of the economy that were set to become engines of growth, namely large service-orientated cities, was an error. UK policy makers shouldn’t make the same mistake. Places like Leeds and Manchester are underperforming but the right policy and investment mix could leverage the benefits of agglomeration and the UK’s services specialism to drive more regionally balanced economic growth.
Relatedly, reunification demonstrates how investment in public infrastructure, though crucial, is not enough on its own to drive prosperity gains. Infrastructure in East Germany may be on a par with that in the West, but productivity and pay are still one-fifth lower
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The Navigating Economic Change essays are written by a range of leading economists and national experts and reflect the views of the authors rather than those of the Resolution Foundation, the LSE or The Economy 2030 Inquiry.
They have been commissioned and edited by Gavin Kelly (Chair of the Resolution Foundation and member of the Economy 2030 steering group) and Richard Davies (Professor at University of Bristol and fellow at the LSE’s Centre for Economic Performance).