Economic Transition in Eastern Germany

ONLY A FEW months after the Berlin Wall came down in the fall of 1989, the West German government decided that it should establish a currency union with East Germany. I Shortly thereafter, the West and East German governments agreed to economic, monetary, and social union. By July 1991, the State Treaty, which formalized the union, came into force; by October, the German Democratic Republic ceased to exist. Left on the agenda is the task of rebuilding the eastern German economy. But by now, the initial enthusiasm accompanying the fall of the wall has all but vanished. Today, western Germans balk at the vast cost of reconstructing the East and even doubt that the task can be done. In eastern Germany, which functions as a welfare colony of its richer, western neighbor, the initial support for the market economy has been replaced by cynicism, if not outright hostility. Calls for an even more active role of the state in sustaining eastern German industry increasingly gain adherents. The progress and the obstacles that lie ahead are the subject of this paper. George Akerlof and others opened the subject with a diagnosis of the transition problem (they called it a Keynesian depression) and advanced a bold policy proposal: an across-the-board, substantial labor