Tuesday, 19 February 2013

Do it my way

Angela Merkel thinks that the European periphery can learn from east German experience. By that she does not mean that Greeks should drive around in funny cars and stop eating bananas. Rather she means that European crisis countries should look to the economic overhaul of east Germany after unification as an example.

The analogy is well chosen. It is hard to tell with any precision what east German productivity was in 1990, but reasonable estimates put it at one third of West German productivity. So we have a small less developed economy that was put into a currency union and free trade zone with a large more developed economy. The predictable outcome was (1) many companies in East Germany closed down (2) unemployment increased dramatically (3) many east Germans, in particular skilled workers, moved to the west (4) some west German companies moved to the east or opened factories there (often in exchange for substantial subsidies).

Can the German experience serve as a blueprint for the European crisis countries?

Probably not. There are important difference that may make it impossible to emulate this development. Perhaps the main difference is that east Germans and west Germans were both Germans. This made possible two things: (1) mass migration from east to west helped to mitigate the extent of unemployment and connected social problem. This is not possible to the same extent in the Eurozone because of the language barriers. Immigration from the south of Europe to Germany has dramatically increased, but remains far too limited to have any significant effect on unemployment in the countries of origin. Also, in the German case, migration was facilitated by the fact that many east Germans were skilled workers and that integration into west German communities posed hardly any problems. (2) Very substantial transfer payments were made from west Germany to east Germany. The so called 'Soli' is a surtax of 7.5-5.5% on income tax and some other taxes paid in west Germany to subsidize east Germany and make the transition socially more acceptable. In addition to this, transfers occurred also via unemployment insurance and in other ways. All of this was--reluctantly--accepted by west Germans based on a sentiment of national unity and solidarity. But similar bonds do not exist between European nations. The EU has done much to promote a feeling of European unity, but feelings of solidarity are simply not as strong between people in Rotterdam and Athens as there are between Hamburg and Dresden. There is nothing natural or immutable about this and, indeed, now would be the time to take European unity to a new level, but not many in Europe seem to be fond of the idea and certainly Merkel is not promoting it aggressively.

Should the German experience serve as a blueprint for the European crisis countries?

Merkel seems to believe that German unification was a success story. But if you take a look at the regional distribution of unemployment in Germany today (see below) you can still pretty well see the boundaries of the former GDR. That's more than 20 years after unification. Turning the south of Europe permanently into a de-industrialised, low output, high unemployment zone does not seem like an enticing prospect. In particular, if one considers the severe social and political problems, including the rise of right wing terrorism, that have developed in east Germany despite very substantial transfer payments which would not be available to the European periphery.

Map by Michael Sander [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

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