Peter Bofinger
Peter Bofinger, an economist at the Landeszentralbank in Baden-WQrttemberg, Germany, was a visiting scholar at the Federal Reserve Bank of St Louis. Scott Leitz provided research assistance.
The German Monetary Unification (Gmu): Converting Marks to DaMarksl
I JIHE MONETARY and economic unification of parliaments on June 21, 1990, which took effect the East and West German economy is a task on July 1, 1990. The agreement outlines the without precedent in peacetime economic histo- principles for monetary union, the economic ry. It not only merges two countries with strong- and social community of the two states and the ly divergent income and productivity levels, but fiscal reform of East Germany. also unifies two economies with radically dif- The arrangements for monetary union, which ferent economic structures—the German Demo- involved the replacement of the East German cratic Republic’s (GDR) centrally planned econo- “Mark” (M) by the West German “Deutsche my and the Federal Republic of Germany’s (FRG) Mark” (DM), established the rates at which East <‘social market economy.” Although conventional German financial stocks and flows would be wisdom calls for gradualism in the process of converted from their Mark values to D-Mark monetary and economic unification of capitalist values. A 1M:1DM rate was applied to East Ger- economies and in the transition process from man wages, salaries, rents, leases and pensions. socialism to a market economy, in the German Savings accounts of GDR citizens were con- case, these tasks will be accomplished virtually verted at a IM:1DM rate up to a limit of M overnight.~ 4,000 (approximately $2,425 at the current The legal basis for the unification process is DM/$ exchange rate) for persons between 15 the treaty ratified by the East and West German and 59 years of age. The corresponding limit
2 lAt the present time, discussion and analysis of the Gmu For the standard arguments, see Committee for the Study has appeared primarily in German newspapers. I do not of Economic and Monetary Union (1989), (“Delors Commit- quote these articles explicitly in the paper. Publications of tee”). In the debate on economic transformation of the Deutsche Institut fuer Wirtschaftsforschung, Berlin, of socialist countries see, for instance, Daviddi and Espa Norbert Kloten, Karl Otto Poehi, Helmut Schlesinger and (1989). There seems to be, however, a growing awareness Horst Siebert provided valuable insights and analysis. I that partial reforms generate only limited success; see Roe have profited from many discussions with Norbert Kloten and Roy (1989). and members of the Research Department of the Federal Reserve Bank of St. Louis and of the Volkswirtschaftliche Abteilung der Landeszentralbank in Baden-Wuerttemberg. 18
.1 .,, ~ was M 6,000 for older persons and M 2,000 for ~ .~&j.I: ,~.fl.t . Oti.eL.,~LI tJ
3 See the detailed report of the Institute for International Finance (1990). 4 oata for the GNP are not available. “The lower figure is an estimate of the Kid Institute for World Economics; the higher figure was estimated by the five leading economic research institutes of the Federal Republic in their report of April 12, 1990. “At the present DM/Dollar exchange rate of about 1.65 DM per Dol~ar,this equals $9,000 to $13,000. For comparison, 1989 per capita income in the United States was $21,000. Table I Basic Data for East and West Germany (1988) Unit East Germany West Germany
Area thousands of sq. miles 41,768 96,094
Population thousands 1667$ 61,715
Employment thousands 8,594 27 306 Agriculture’ % of total 11 5 1 Manufacturing % of total 47 40 Services’ % of total 25 36 Trade and transport’ % of total 18 19
GNP Mark/D-Mark billion (1989) 280-350 2,260
GNP per capita MarklD-Mark (1989) 17 000-21,000 38,600
Gross monthly salary Mark/D-Mark 1 250 3 192
Net monthly salary MarklD-Mark 1,050 2,153
Monthly social security retirement benefits MarklD-Mark 450 1,597
Labor productivity as a percent of West German labor product*vity 49 100
‘Data are for 1987. SOURCES Official statistics of the GDR compiled by the Deutsche Bundesbanic and Deutsches lnstitutfuer Wirtschaftsforschung the FRG (DM 36,600) in 1989 (table 1). Thus, of the disparity between the two Germanvs is despite East Germany’s good educational system, shown by the relatively high proportion of total its per capita income and, by proxy, its labor employment devoted to agriculture and productivity, is estimated to be, at best, only manufacturing in the GDR (58 percent) com- half that of West Germany.7 Of course, these pared to that in the FRG (45 percent); indeed, comparative productivity figures are likely to the GDR’s cuirent proportion of employment in prove misleading if used to predict what might agriculture and manufacturing is roughly iden- occur after unification takes place; for example, tical to that which prevailed in the Federal GDR products previously produced and sold Republic over 20 years ago.” under a central plan designed to achieve autarkv ------In the past, the large difference in living stan- may not be able to compete effectively with - dards between the two German states could be goods that can now be imported from the West. maintained--only by the GDR’s actions - to close The economic disparity between the FRG and its borders with the West and prohibit virtually the GDR is further demonstrated by the cx- all unauthorized movement of labor, capital, tremely high environmental pollution in East goods and services between East and West Ger- Germany, its obsolete infrastructure, outdated many. Since the border became permeable in manufacturing planis and the generally poor autumn 1989, more than 2000 East German quality of its housing stock. Another indication citizens have moved into West Germany daily;
‘The 50 percent estimate for the GDR’s relative labor pro- Kirner (1990)). However, the Kiel Institute for World ductivity was made by the Deutsches Institut fuer Wirt- Economics estimates that GDR labor productivity is only schaftsforschung, Berlin, in 1987 for the year 1983. It is about 35 percent of West German levels. nearly identical to Collier’s (1985) estimate of 54 percent “See Gerstenberger (1990). and to cross-country comparisons (see Cornelsen and as a result, between then and the first several immediate and complete integration with the months of 1990, the GDR’s population decreased Federal Republic of Germany even though they by about 500,000 persons. knew that it would require total restructuring of the East German economic and political This massive exodus was possible only systems. because the West German constitution grants citizenship status to all East Germans. Among The extreme political uncertainty in the GDR other things, this allowed East Germans who after the Wall fell, the obvious desire of the moved to West Germany to obtain immediate East German population to unify both countries social benefits (unemployment benefits, retire- and the massive outflow of East Germans into ment insurance and aid to the disadvantaged) West Germany, which aggravated housing pro- that are tied to West German income levels. blems in the FRG, left little room for political FRG unemployment payments, for example, are maneuvering in West Germany and little time to about 68 percent of West German net incomes; find a solution that would satisfy both East and in comparison, net incomes in the GDR are only West Germans. Legally, of course, West Ger- about one-third of that in the FRG.°The many could not oppose rapid unification; the substantial difference between West German West German constitution (Article 23 of the unemployment benefits and East German in- “Basic Law”) explicitly permits the East German come levels explains, in part, the massive migra- states to join the Federal Repubhc without re- tion of East German workers. However, these quiring the consent of either the West German specific incentives were eliminated on July 1, Government or its Parliament. This excluded a 1990, when the social community between both variety of possible partial solutions and gradual states was established. From that date, all social approaches.b0 benefit payments to East Germans will be based Therefore, the main task facing West Ger- on East German income levels, not on those in many was to design a unification strategy that West Germany. would restore the confidence of East Germans The migration of many skilled workers to the in the future prospects of East Germany and, at FRG caused the economic situation in the GDR the same time, be compatible with the chief in- to substantially deteriorate. Since November terests of West Germans. Consequently, the 1989, GDR industrial production and employ- debate in West Germany focused on the possi- ment has decreased and most East German ble costs of the unification process. Among the enterprises have been unable to fulfill their pro- costs mentioned were: duction plans. By the end of April 1990, in- dustrial production was 4.5 percent below its 1. The possible increase in the West German level one year before, and the number of inflation rate, employed persons had fallen by 4.6 percent. 2. The prospects of either higher taxes or Shortages of goods and services produced grow- higher interest rates (due to increased FRG ing social unrest in East Germany. borrowing) resulting from increased FRG expenditures for East Germany, and 3. The wealth transfer from West Germans to East Germans associated with the replace- Given the circumstances described above, the ment of Mark-denominated savings and cur- goals of the GDR population are quite evident: rency in the GDR by DM-denominated mon- They want to improve their relatively low stan- etary assets. dard of living as quickly as possible. Given the disappointing economic results associated with Once the actual conversion rates are chosen, socialism, they were generally unwilling to ex- it is possible, albeit tentatively, to assess the im- periment with a system part-way between pact of monetary unification on matters that socialism and capitalism. They chose, instead, concern the East and West Germans. The ten-
“Pensioners moving to West Germany received an average either flexible or fixed exchange rates between the two pension of DM 1,121 (1988), more than twice the average currencies as an intermediate stage during the period of East German pension in Marks. economic transformation in the GDR. 10 1n fact, almost all West German economists as well as the Bundesbank preferred a more gradual approach involving tative nature of the assessment is chiefly due to Second, the central planning approach to pric- the absence of reliable data on the East German ing and production must be replaced by the economy and to the simultaneity of the usual market mechanisms that determine these monetary and political integration with the decisions in free-market economies. Not only transformation of the East German economy. must prices be set by market conditions rather The short-term focus of the analysis should not than by government bureaucrats, but also the lead to the impression that the risks and pro- extensive system of state-owned enterprises blems associated with unification of the two must be privatized as well. In order for market Germanys are either substantial or pervasive. prices and wages to successfully provide the The strong overall consensus in both German signals for reallocating resources, the traditional states is that the long-term prospects of unifica- “soft budget constraint” of state-owned enter- tion are positive and that East Germany has the prises has to be replaced by the “hard budget potential to repeat the “economic miracle” constraint” of profits, losses and, if necessary, achieved by West Germany from the 1950s to strict bankruptcy laws.”’ the present.” Third, the “Kombinate,” which are con- glomerates of GDR firms that produce similar products, have created an extremely high degree of horizontal concentration in the GDR Although this paper focuses primarily on economy; this has contributed to the GDR price monetary unification, a brief discussion of the inflexibility discussed previously. Consequently, economic reforms necessary in the real sector price reform requires that these “Kombinate” be of the GDR economy is needed. The Gmu itself dismantled as soon as possible. However, even if will not improve the economic situation in East this is not immediately forthcoming, the in- Germany substantially; it can provide, however, troduction of the freely convertible D-Mark will a sound monetary framework for an overall create a more competitive environment because restructuring of the GDR’s economic and legal it will significantly open up the GDR’s economic system. relations with West Germany and the rest of A cornerstone of real sector reform in the the world. GDR will be the introduction of free-market Thus, while there are many open questions pricing and production. Previously, most pro- concerning specific details of how the divergent duction and prices had been set by government legal systems will be reconciled and how agencies in accordance with their central plans. privatization will be achieved, there is wide ac- One consequence of this system—as in many ceptance that these are the central elements of other socialist countries—was that these prices real sector reform and that they will take had been held essentially unchanged for years place.14 despite changes in demand and cost condi- tions.’~For example, the GDR’s official index for consumer prices has shown virtually no move- ment over the entire post-World War II era. Moving to a market-based economy will re- quire a number of changes. First, the current pricing structure is distorted by large subsidies for some industries, especially food and energy As noted previously, the major controversy (their subsidies totaled M50 billion in 1988, over unification focused on monetary about one-third of total private expenditures in unification—that is, how to determine the rates the GDR) and heavy taxes on other industries, at which GDR financial stocks and flows primarily consumer durable goods (the tax total- denominated in Marks would be converted into ed M 43 billion in 1988). These distorting in- their appropriate D-Mark values. The main fluences on prices will have to be reduced. reason for the intensive debate was that none
11 See lnstitut der deutschen Wirtschaft (1990). “See Sokil and King (1989). “’See the survey conducted by Commander and Coricelli “See e.g. “Reform’ (1990). (1990). of the existing exchange rates between the many. Third, the arbitrage (flow) of subsidized Mark and the D-Mark seemed relevant for East German products to the West has remained determining the n-Mark value of GDR financial relatively weak due to transaction costs and stocks and flows after unification. In this trade restrictions. respect, the Gmu is quite different from the for- mation of a monetary union between two or Another possible candidate for the “true ex- more market economies. For instance, the ap- change rate” to use for conversion purposes propriate conversion rate was easily determined might have been the so-called “nevisenren- when Saarland, which had become independent tabilitaet” (foreign exchange profitability) of GDR from Germany after the World War II, was exports in terms of their nM equivalent. This rate is calculated by dividing the Mark value of unified with the FRG in 1959. In this instance, Saarland’s financial flows and stocks, which had the aggregate GDR exports by their nM revenue been denominated in French Francs prior to when they are sold to West Germany. In 1989, unification, were simply converted to their DM this ratio, which was used by the GDR govern- values at the prevailing market exchange rate ment for all internal conversion calculations, between the Franc and the n-Mark. was 4.4 Marks per UM, Again, however, this ratio does not indicate what the market ex- In the case of Gmu, however, all existing ex- change rate would be. First, the domestic prices change rates were either highly distorted or of many G]JR export products were artificially essentially devoid of economic significance. The high due to taxes imposed by the GIJR; conse- same criticism applies to the macroeconomic quently, the numerator of the ratio is heavily data that might otherwise have been used to influenced by tax policy, not economic values. calculate an “equilibrium exchange rate” on the Second, export decisions were made by the GDR basis of the traditional exchange rate models.” government primarily to obtain foreign ex- change to finance its imports. It is evident that this non-market allocation process, which is typical of centrally planned economies,” is not representative of market-based trade; among After the fall of the Wall, the one market ex- other consequences, it can lead to exports with change rate between Mark and n-Mark was the very low profitability.” DM price for Mark bank notes that had been il- legally “exported” from the GDR to West Ger- A third alternative is the official 1M:1DM ex- many. However, this rate, which is shown in change rate set in the past by the East German 9 figure 1, is not representative of the underlying Government.’ Like all such official exchange fundamental relative price of Marks in terms of rates established in socialist countries, this was nMs for several reasons. First, it was subject to an arbitrary rate used primarily as an accoun- speculative influences which made it very ting unit which embodies no useful economic volatile,” Second, it reflected demands by East information relevant to determining the rate to Germans for certain goods (e.g., consumer elec- use for Gmu conversion purposes.’° All foreign tronics and coffee) that were highly taxed in the exchange transactions were conducted at flexi- GnR; table 2 shows that the Mark prices of these ble (implicit) exchange rates which were the products in the GDR were about five times ratios of the internal Mark price to the world higher than their n-Mark prices in West Ger- market nM price of each product.”
“’See Frenkel and Goldstein (1986), Williamson and Miller 2cThe same criticism applies to the exchange rates agreed (1987). to by the East and West German governments in December 1989 when they established a fund to exchange “’II varied from 16:1 (November 17, 1989) to 3:1 after the definitive conversion rate for non-GDR residents had bank notes for travel: Each East German citizen was entitl- become public. ed to purchase up to 100 DM at a 1DM:1M rate and an additional 50DM at a 1DM:5M rate. 1 “See Wolf (1985b, pp. 215). “ See Wolf (1985b). “’See Cornelsen and Kirner (1990). “’Until 1989, this rate was also used for the “forced ex- change” (“Zwangsumtausch”) of DM 25 for West Ger- mans who wanted to visit East Germany. From the begin- ning of 1990, West German travelers could exchange D- Marks at a 1:3 rate against Marks. ~0~ .AA 0 -~ a,Co C 0 UI 0 U Ci ~ a c’ a CD ~- 0 o n ci ;~ ~‘ ‘a C c it 0 — °° —- r Ci ;~,,,i~ a, 0 F -‘ - CD a 00) g —. C, ° El.9~%8 E-El CD— <0 p m ~gco ‘0 ‘A B, 0 Eut “A fl~m Or CO
0) ‘A,I ~ CD 2 0 CD 0 a — ° ~ ~D C -.0 D) ~~.~“ zac, <~ C) ~~ ~ ci ‘A 0 cc, ~ Ef~. n a a ~‘On 0~ ~ Co Oct Ci C, —~ 0000 CD 0 -‘ ~- o c ‘A,a~ 0, “A at Co B .: ~ ~ a cc ii CD a CO -, ‘1 C, ‘~ ;i’. ~ CD ~ t p 0) — 0 ~—— .9 0 a a. C - 03 0, p 0) p p ~~J~~c<> O~B 8 ~0 8 ~ 0C~ ~~—23. ~ 0 11 0 Oct 0~ CD to, t,. m “A (p p —I. p ~0 I CD us C a El —‘~oc’,~~o —ftc’ ~0 p m ~0’uI at p LU I a B, a -C —I 1’ -o us CD I c-b C, it CD 0~ -S -S N, l~3~ ft—-~ C C (31 0 Cii-’- it Table 2 Consumer Prices of Selected Goods and Services in the GDR and the Federal Republic of Germany (1985) Price in Price in M price as a percent Goad/Service (M) GDR (DM) FRG of the DM price Potatoes (5 kg) M4.05 DM5 32 76 Tomatoes (1 kg) 4.40 2.10 210 Rye Bread (1.5 kg) 0.93 4.54 21 Beef (1kg) 980 19.45 50 Chocolate (100 g) 385 0.89 433 Coffee (250 g) 25.00 5.25 476 Jeans (men’s) 135.00 59.90 225 Brown Coal (50 kg) 3.51 19.40 18 Radio/Cassette Recorder 1.16000 199.95 550 Color TV 5,650.00 119900 471 Rent (1 bedroom) 75.00 390.00 19 Electricity (75 kwh) 750 29.30 26 Haircut (man) 1.90 1125 17 Railway Ticket (50 km) 4.00 920 43
SOURCE: Materialien zum Bericht zur Lage der Nation, 1987, pp. 513. 516. 732-735
for example, rely on the “law of one price” Mark price.”” If we assume that the GDR price holding in integrated and competitive markets.”” level has remained unchanged while the market The relative version of PH’, developed by basket’s nM equivalent value has risen at the in- Gustav Cassel to determine equilibrium ex- flation rate in West Germany since 1985, the change rates after World War 1,24 relates the re- price differential would be about 15 percent in quired exchange rate adjustment between the 1989. Thus, an absolute PPP exchange rate based currencies of two countries with different infla- on consumer prices (for a given market basket tion rates. However, this procedure requires the of goods and services) would be 1.1SDM:1M or existence of an unbiased base period in the a lnM:O.9M conversion rate. However, due to past, a condition which clearly is not met in the high subsidies and the existence of a “monetary GDR setting. overhang” (explained later in the paper), in- The absolute version of PPP avoids the base dicative of an excess demand for goods in the GnR, the economic relevance of such calcula- period problem by defining an equilibrium ex- change rate as the ratio of the price of a stan- tions is severely limited.”” dard market basket of goods in one currency to Because most structural exchange rate models the price of the same basket in another curren- (e.g., those based either on the monetary ap- cy. Thus, the consumption basket of an average proach with fixed or flexible prices or on the GDR household could provide one basis for ab- portfolio balance approach) require either short- solute PPP calculations of an appropriate term or long-term PH’ to hold, they are beset Mark/n-Mark exchange rate. In 1985, for exam- with the same conceptual drawbacks as the sim- ple, the goods and services which made up this ple PPP calculations already discussed. In addi- basket (excluding rents) had a DM equivalent tion, they presume that people are able to value which was 10 percent higher than their engage in unlimited arbitrage between financial
““See Cassel (1918, p. 413): “As long as anything like free “Including rents the difference was 25 percent. movement of merchandise and a somewhat comprehen- ““An alternative PPP measure, the ‘Devisenrentabilitaet,” sive trade between the two countries takes piace, the ac- yields an equilibrium exchange rate of 1 DM:4.4M. tual rate of exchange cannot deviate very much from this However, the problems of this specific measure have purchasing power parity.” already been discussed. 4 “ See Dornbusch (1987). markets in the respective countries; this condi- foreign liabilities. However, the bulk of these 7 tion did not exist in the GDR prior to the Gmu.” foreign liabilities (M 96 billion) was simply an accounting item e’Bichtungskoeffhdent’i arising from the GDIVs practice of valuing its foreign A assets and liabilities at a 1DM:4.4M exchange ~/ A’A’A~’A rate rather than at its “official” IDM:1M ex- .o,)~A’A .~A A’A; A :0. A’A, A o’A: ~ ,~. change rate. After Gmu, of course, the DM In order to clarify the issues associated with the Gmu, this section presents a brief discussion denominated foreign debt of the Grill will be valued at its face value. The revaluation of of the main items whose values were converted from Marks to DMs in the process of monetary foreign assets and liabilities also reduced the unification. Throughout the paper, a distinction amount of external claims (from M45 billion to will be made between financial stocks and DM 36 billion) and the debt of the government (from M 61 billion to DM 12 billion). financial flows. After revaluation of foreign assets and liabili- ties and the overall 1DM:2M conversion of all ~ sit flue ‘A domestic items, except for the limited 1DM:1M ~ A:,? A:’,,r A’AAA conversion of savings, the liabilities of the GDR banking system (1DM 246 billion) exceeded its assets (1DM 220 billion) by DM 26 billion. This The stock of financial assets in the GDR is difference was created by the asymmetric con- represented by the consolidated balance sheet version of the left and the right side of the con- of its banking system presented in table 3. In solidated balance sheet produced by an effective contrast to how these accounts would be drawn 1DM:t4M conversion rate of total savings. To up in the United States, the loans and liabilities equilibrate their balance sheets, East German of the central bank (“Staatsbank”) must be add- banks were given interest-bearing government ed to the state-owned commercial banks on a assets from an equalization fund established by consolidated basis. As is typical in most central- the GIJR for this purpose. Except for this fund, ly planned economies, the GDR did not permit the post-Gmu balance sheet shows that the net direct financial transactions between enterprises bank debt of the actual GDR government sector and households e’dichotomized money sup- is relatively small (DM 7 billion). ply”)-”8 Therefore, this consolidated balance sheet presents a comprehensive picture of the stock of all financial assets and liabilities in East Germany. The 1DM:1M conversion rate for financial The principal items on the asset side of the flows determined the n-Mark equivalent for banking system were loans to state-owned Mark-denominated wage and rent contracts in enterprises, housing (chiefly state-owned), direct existence prior to July 2, 1990. Although these credits to the government, and claims on for- contracts can (and undoubtedly, will) be renego- eigners. Loans to households were negligible, tiated after this date, a legal transformation of making up less than 1 percent of all bank assets. existing contractual obligations from their pre- In contrast, such loans represent about 23 per- vious Mark payments into 1DM payments (“re- cent of bank assets in the Federal Republic. kurrenter Anschluss”) was required”” For all Savings of private households are the most new contracts and those old contracts for which important liability of the GUR’s banking system. payments could be adjusted immediately or on The consolidated balance sheet prioo to the short notice, the conversion rate was irrelevant. Gmu also shows a considerable amount of GUR pensions were treated somewhat differ-
2OThis also excludes the application of the “underlying try is pursuing ‘internal balance’ as best as it can and not balance approach to exchange rate assessment,” which restricting trade fcr balance of payments reasons.” was developed by the lnternationai Monetary Fund. Accor- ding to Williamson and Mifler (1987, p. iO~,who have ““See Wolf (1985a). elaborated this method, the “fundamental equilibrium ex- “Poole (1990) emphasizes, on purely economic grounds. change rate” is defined as the rate “which is expected to that “any attempt to convert prices of goods and services generate a current account surplus or deficit equal to the from CM (Ostmarit to DM through central direction can underlying capital flow over the cycle, given that the coun- only cause great difficulty.” Table 3 consoudated Ba~anceSheet of the Banking System Gf the GOR as of May 31, 1990 M Conver- DM Wi ~enver- DM Assets blilien sion rate billion Liabilities billion sion rate biii~on 1 1. Lending to domestic 1. Oepc~~tsrom domestic borrowers non-banks lotal 3.974 -- 18D 7 rota: 249.9 ..~ Go’,errrnent 603 2’ 123 Government 108 21 4 o wh’cn Lenc.~g:n oar neston wi9-:hc- ‘e’,’aiLat on o’ e~teri’.alliah~tios 3! 2 -— — clams on tr,e1 governmart from ihe in’t al proision of notes ano coins ii 1948 4.9 —— Enterprises 231 7 21 115 8 Enterprises 57.0 2.051 27.8 Hous’ng sector 102.6 21 51.3 lid viduats excluding housobuild ng loans) 25 2:1 1.3 lndviduals 182.1 --- 123.4 Giro anc savings balances of indv:duals Res,oents 165.6 1 44:1’ 115.2 Non-’esidents 23 2 05-1’ 11 Life :nswance 142 2:1 7.1
2. External claims 450 —- 363 2. External liabilities 152.5 — 556 ~a)cMEA countries 174 -— 87 (a) ~MEA countries 1.1 -—- 0.6 lo) Western ;ndustrial and ~ Western indust’ial and deveiopir.g countries 275 - 27.6 developing countries 55.0 550 ~clProvisons for external liabilities ç’Ricntungskoef. fizenten”j 96.4 ‘ — 3. Participations I 1 1.1 1.1 3. Currency in circLilation ~excIudingthe banks’ casn holdings~ 13.6 2:1 6.8 4. Accumulated profits/ reserve funds/guarantee funds 234 1.1 23.4 4. Other assets 31 2’1 15 5. Other liabilities 7.2 21 3.6
Total 4466 — 219.6 Tcta 4466 -- 2460
Balancing item ——26.4 Balancing item - -- -— Tctai 4466 1.81:1 246.0 Total 4466 1 81 1 2460
hose at actually l.ab,l~Iiesor ‘he ban-cing sector to tne governrr-enl. whch migrt cisc be snown in ‘.ao.iitres .tem 1. In this taoio hey are shown .1 con,-oct.on w’tn the external ltab~Iiriesof the GOP. because the tem ‘may also be regarded as a k’nd of value aojusment” for the c-xte-na, l,ab:itttcs, wntcn arc otne’w’se put at too b,. a value in GDR \Iark convers.on of a balance of M 245 h~Uon which results after offsetting ‘he lencir’g ‘rom the re\.aiuatior. o exte’nai rabilities (M 31.2 b,:lio’i) and c!arns arsir-.g from tne ‘nitial p.ovision o~nc-tea and co:ns ri 1943 (M 4.; ‘oiU’oni aga rst prov-sions f r exte’ra l’ab,ities “ R’chtungskceff~z.an’sn) to the sane amount 0 ‘External c~aims(assets tern 2 ib~lano external ‘,abir,.es t.,aoirnes item 2cofl are here st’l: ,aiuoc a:the accounting rates of the end of 1989. The market rates c! June 30. 1990 Gre tO be used ‘or the ~‘r-aiconversion Trio arrourils snown ~s’iiltr.en presumably be somewhat bower ti.abh:ties item 2(o) a’so incluocs fore’gn cur’eroy cePosits from res’dems). tonversion ra:~for ba’ances c ron ‘es’donts arsing on and after January t. 1990 3:1. otherwise 2.’. 0 1 conversion rate ci 11 ‘or M 2.0cm x 32 rni’ron = OM 54 bilion. M 4 000 x ‘0 1 mtii on = OM 40’ bi’ .on arid M 1 6000 x 30 rr’iiiion =OM 18 S or- yi&cs a tota of DM 5~8b lion: to roma’,r-oer f-’v. 100.8 brlb’onl was con~.ertedat a rate cf 2 1 Baiances as at mr. end o’ ~959arrc’~rt’nnmc. V 21 oif.ori were convo-tec at 2:1. i~crar~crear a’ 31
Paitty oflse’ agQins~ londing i-, ~or’r’cctton~v:1,1Inc re~aiuat:or.c.’ externa: ahi.cies ~M3~.2 o ldon~an’: cla:ms ar.sing from tne ist:al o’o’jis.rjn of no:es an~coinsn 1948 M ~ g :~ton).:~‘.eartnrtez cal tr.’.a,r.de: (M 8c.i h’ lc.n) ,vasLsec :0 r~u~q :i.;’ bait rc’r~- ently. As already mentioned, the social union about 13 percent of West Germany’s GNP, or adjusted the GDR pension system to make it some measure of potential output determined consistent with West German standards; among by relative labor productivity estimates. This lat- other things, this meant that the DM value of ter method32 uses the proportion of the East GDR pensions was not less than their previous Germany population to West German population Mark value. (about 26 percent) and the estimated average GULl labor productivity relative to that in West Germany (about 50 percent) to obtain a relative GULl potential production of about 13 percent, which is identical to the relative GNP differen tial noted above. Use of a lower estimate of the For West Germans, who traditionally have GUR productivity differential, for instance, the placed a very high social value on price stabili- 30 percent estimate of the Kid Institute for ty, concern over the imphcations of the Gmu on World Economics, reduces the GDR’s potential the inflation rate played a predominant role in production to only about 10 percent of that in the choice of the conversion rate. The existence the FRG. of an excess supply of money, which, by Walras’ Law, reflects rationing on goods and This approach can be used to determine the labor markets,~°is a widely acknowledged oc- “non-inflationary” conversion rates for different currence for centrally planned economies, in- monetary aggregates; various estimates are 33 cluding the GDR. Many observers expected shown in table 4. Applying the West German that a flat IM:1DM conversion of the East Ger- ratio between potential output to the stock of man money stock would produce a rise in the currency yields a conversion rate of about price level and, hence, a transitory increase in 1M:IDM for East German currency holdings. To the measured rate of inflation for the integrated calculate a non-inflationary Mi money measure German currency area after the Gmu. for the GULl requires determining the ‘mo- neyness” of the various GUR deposit categories. The expected impact of monetary unification If the “Spargiro” (M 69.0 billion) and deposits of on the German inflation rate can be determined as follows: First, estimate a hypothetical G]JR enterprises are essentially demand deposits and money stock that would be compatible with the “Buchsparen” (M 90.7 billion) are essentially stable IJM prices in the Gflfl; second, compare the same as traditional savings deposits included this hypothetical money stock with the actual in M3, the pre-Gmu GUR Mi money stock was DM money stock of the GDR after conversion. about one-third of that in West Germany. Thus, If the actual money stock exceeds the hypotheti- the non-inflationary conversion rate for the cal one, the conversion could produce a tem- GUll’s Ml money stock would lie in the porary increase in inflation in both Germanys; 1UM:2.4M to 1UM:3.3M range. Using the M3 money stock, the non-inflationary conversion otherwise, the conversion does not have infla- 33 tionary implications. rate would he within 1UM:1.5M and 1DM:2M. To accomplish the first step requires Comparing East and West German money calculating the East German money demand stock measures is always problematical because after the Gmu. To do this, of course, one has to there is a much wider spectrum of financial op- estimate the velocity of money and potential portunities available to West German investors. nominal production of the GDH economy. The Their savings in long-term time and savings following estimates are based on the assumption deposits, bank savings bonds and other financial that both relative and absolute DM prices in the instruments issued by banks, which are called GDR as well as the GDR’s velocity of money will “monetary capital” and not included in M3, are be identical to their West German counterparts larger than the NI3 money stock. Adding these after unification. GULl potential production can financial assets to the West German M3 money be estimated either by using its GNP, which is stock yields a liquidity stock measure (L).
30 33 See Commander and Coricelti (1990), p. 3. ln West Germany, the money stock MS includes currency 31 See Sokil and King (1989). in circulation (excluding banks’ cash balances), sight ~lt which was suggested by the President of the Kiel In- deposits, time deposits with a maturity of less than four years and savings deposits at statutory notice. stitute for World Economics, Horst Siebert. Table 4 Conversion Rates on the Basis of a Non-Inflationary Money Stock for the GDR (1989) Non-inflationary Actual values values for the GDR Conversion rates
GDR’ FRG A2 AB (M billion) (OM billion) (DM billion) Currency 17.0 1469 19.1 14.7 1 09 11.2 Ml’ 146.6 450.6 599 45.1 1:2.4 4,33 M3~ 252.0 1255.5 1670 125.6 1 1.5 1’2.0 LB 2520 2738.3 3642 273.8 1:0.7 1 07
Vaiues for the GDA include deposits of enterprises and housenolds with the banking system. 2 Ass-urnng that GDR potential output is 133 percent of FAG potential output. 3 Assuming that GOP pot~ntiatoutput is 10 percent of FAG potential output. ~currencyin circulation and domestic non-banks’ sight deposits 5 M1 plus domestic non-banks’ t:me depostts and funds borrowed for less than 4 years pUs savings deposts at statutory notice ~M3 olus savrng deposits at agreed notice, long-tern, time deposits, bank savings bonds and other financial instruments held by private nouseholds and enterprises with banks. SOURCE: Oeutsche Bundesbank. Monatsberichte. Jahresbericht l989 der Staatsbank der OOR.
In contrast, savings deposits and currency are in a range between 1UM:i.5M to 1UM:2M. the only financial stores of value available in While the latter value was recommended by the East Germany.34 Thus, for East Germany, L and Bundesbank, the political compromise reached M3 are identical. Using the L measure, the non- between the two governments led to an average inflationary conversion rate would be about conversion rate of about 1UM:l.7M. While the 1UM:1M. However, in order to make the con- estimated non-inflationary conversion rates verted East German L measure truly com- shown in table 4 are subject to considerable parable to the West German L, about 50 per- uncertainty, the final conversion program cent of East German savings would have to be chosen for the Gmu seems unlikely to produce “frozen” for about four years. any substantial inflationary impact on prices in the new DM currency area. As table 4 shows, an assessment of the infla- rry~ ~ VIfl(’jtr 4yrtvrz~ tionary impact associated with the Gmu depends —, on which monetary aggregate is regarded as the one linked most closely to inflation. Most econometric estimates for the Federal Republic The non-inflationary conversion calculations show a very stable relationship between the described above assumed that the velocity of money stock, M3, and inflation (and nominal the appropriate money stock in the GULl is iden- GNP); this is the reason why the Bundesbank tical to that in the FRG. Some observers in the uses M3 as its main inflation indicator and as its Federal Republic have argued that countries central intermediate monetary policy target.35 with higher per capita income levels have dif- Taking M3 as the benchmark money stock for ferent monetary velocities from those in less- non-inflationary purposes suggests that the con- developed countries. Figures 2 and 3 show the version rate for the GULl money stock shou.ld lie results of a cross-country analysis comparing
4 35 ~ Thisaspect was emphasized by the East German Central 5ee Deutsche Bundesbank (WS9a), Schlesinger and Bank (“Staatsbank”) in an official statement of April 3, Jahnke (1987). 1990 Figure 2 Velocity of Ml and GNP per Capita for OECD CountriesVelocity Velocity 8 8
7 7
6 6
5 5
4 4
3 3
2 2
‘1 1 0 5000 10000 15000 20000 25000 GNP per capita
per capita nominal incomes and velocities for portant determinant of the conversion rate. the Ml and M3 money stocks in OECU coun- While West Germans were concerned about the tries in 1987. The figures indicate that per capi- possible fiscal costs of unemployment payments ta income has no significant influence on the to East Germans, the East Germans, as noted velocity of money. However, the marked inter- earlier, were primarily interested in the pro- country differences in the velocity of money spects for employment and for raising their serves as yet another reminder that the non- standard of ilving as quickly as possible. These inflationary GULl money stock calculations are prospects depend fundamentally on how com- subject to considerable uncertainty. petitive the GUll firms will be after the central planning process is dismantled and the economy .ImvlinTtttknt& of me &trt.o of the GUll is opened up to world markets. orope.ntivertesw~ .tast t.:er~ ~t..:.oft While it is evident that the conversion of enter- prise debt has a direct impact on the financial structure and capital costs of firms in East Ger- The potential impacts of the Gmu on the many, the implications of the conversion rate unemployment rate in the GUR and its for wages in the GUR are more difficult to economic growth prospects were another im- evaluate.
ii f cv Figure 3 V&ocityVelocity of M3 and GNP per Capita for OECD Velocity Countries
25 2.5
20 2.0
1.5 L5
1.0 1.0
0-5 0.5
0.0 no 0 5000 10000 15000 20000 25000 GNP per capita
UM assets after conversion will play a key role in determining whether they can survive with a “hard budget constraint,” i.e. without subsidies The 1UM:ZM conversion rate for financial from the government. stocks determines the debt burden and interest payments of enterprises after the unification Because there is no data on the debt-equity 38 process. It has important consequences for the ratios of East German enterprises, it is difficult costs of capital and for the projected privatiza- to assess the implications of the llJM:2M con- tion of East German firms. The latter, an essen- version rate on their financial situation and on tial element of the process of economic their interest payments. To get a rough estimate transformation, requires that the firms to be of the sustainability of alternative debt burdens, privatized must have a positive net worth. For however, the proportion of GUR potential out- enterprises that will remain under state owner- put to ERG potential output can be used; as ship, the ratio of their UM equity to their total already mentioned, estimates vary between 10
38 Again, the conversion rates which were put forward in the economic research institutes in their report of April 12, debate varied widely, ranging from a 100 percent debt 1990, over the 1:2 rate, which was proposed by the relief which was recommended by the five leading German Bundesbank, to a full 1:1 conversion. and 13 percent. According to Bundesbank (1989) statistics, the net financial debt of West German enterprises (excluding housing and the financial The second determinant of East German sector) was UM 681.5 billion and the book value firms’ post-conversion competitiveness are the of their non-financial assets totaled UM 10965 UM wages they will have to pay. While neither billion in 1988. The ERG figures indicate that a the GULl nor the FRG government should deter- 1UM:IM conversion for the debt of GULl enter- mine wages after the transition to a market prises would have produced a relatively large economy, their treaty established a wage con- UM 175 bfflion net debt (see table 3), about 26 version rate to define the financial obligations percent of the West German leveL” If East Ger- of existing contracts for the time immediately man firms’ nonfinancial assets are worth about after July 2, 1990. However, the actual conver- 38 10 to 13 percent of that for West German sion rate chosen has implications for wage firms, the right side of their balance sheets levels and competitiveness only if nominal UM would have exceeded the left side (UM 110-140 wages in the GULl after conversion are inflexible biffion) by huge amounts, even if West German downward and if initial UM wages are set “too firms’ balance sheets contain extensive hidden high” compared with labor productivity. reserves. Without further debt reduction, These considerations would have called for a privatization of virtually all East German firms conversion rate that reduced average wages would have been impossible. According to West below the level indicated by the GDR’s average German bankruptcy law, which requires productivity. The advantage of this low starting bankruptcy proceedings if a firm has negative level for wages is that it would have allowed net worth, most East German firms would have workers and firms in East Germany to had to be declared bankrupt. renegotiate their contracts more easily after Of course, an outright cancellation of all GUll Gmu. This would have enabled them to enterprise debt would have avoided these pro- establish a wage structure more closely mat- blems. However, this “solution” was dismissed ching sectoral productivity differentials than the for two reasons: First, firms with permanent prior GUR wage structure, in which wages net debt levels are common in all industrialized were relatively uniform regardless of productivi- countries; second, it would have led to a huge ty differences. increase in the government debt as described To evaluate the competitiveness of East Ger- later in this paper. The debt reduction~°achiev- man firms after a 1UM:1M wage conversion, ed by the 1UM:2M conversion rate places the their labor productivity relative to that in com- average ratio of equity to assets for GUR enter- parable West German firms must be compared prises in a range between 20 and 37 percent, with their relative UM wages. These com- which should allow the privatization of at least parisons would require information on the pro- some firms. By comparison, the average equity ductivity of individual firms or, at least, in- to asset ratio is about 20 percent in West Ger- dividual sectors in the GULl after July 2, 1990. many and 50 percent in the United States.’° Unfortunately, such sectoral data are not Because the results are quite sensitive to the available at all; moreover, estimates of labor estimate of the value of real assets in the GULl, productivity in the GUR aftef- the transition to a it is difficult to assess whether the interest market economy are very difficult to determine burden of East German firms will be similar to ex ante. However, the experience following the the West German enterprise sector or whether West German currency reform in June 1948 it will be significantly higher. In addition, it is shows that large productivity gains can be not yet clear whether East German firms will achieved rather quickly; these gains arise from have to pay market-determined interest rates on better incentives associated with the market their debt after monetary unification. process and increased availability of inputs. In
37 A high debt burden is regarded as a typical concomitant of capital as in West Germany, Alexander and Gagnon (1990) the central planning mechanism, which gives enterprises estimate the level of the East German capital stock to be automatic bank credits inducing large hoardings of inven- 10,4 percent of the West German capital stock. tories or camouflaging cost overruns, waste and sales in ~ strategy of recapitalization is now also suggested for the black market (Grossman 1989, p. 31). other Eastern European countries, See Hinds (1990, p. 44). 45 ~On the basis of a Cobb-Douglas production function and See Bank for lnternational Settlements (1989, p. 86). assuming an identical elasticity of output with respect to the GULl, where such incentives are lacking, shortages of specific inputs are often reported to have led to significant decreases in output and productivity.’ Because the unification process has been On the other hand, the far-reaching restruc- driven primarily by the desire of East Germans turing of production processes will not be possi- to improve their standard of living, the effects ble without some temporary output disrup- of monetary unification on the FRG-GDR real in- tions.~~If these positive and negative effects come differential were intensively discussed in roughly cancel each other in the first few both East and West Germany. However, since months after conversion, the GUll’s productivity wages will be renegotiated after the Gmu, should reach about 50 percent of that in West monetary unification will have only a short-term Germany, which is consistent with past impact after July 2, 1990. estimates made by the Ueutsches lnstitut fuer Wirtschaftsforschung. An estimate of the change in East German real incomes resulting from the Gmu can be Before the conversion took place, the average calculated by assuming that nominal wages in monthly salary of a worker was M 1250 in the the GUll will remain constant after conversion GUR and UM 3192 in West Germany. With the and after the various subsidies are abolished. 1UM:1M conversion of the initial nominal The basis for comparing pre- and post-Gmu real wages, monthly wage costs (including incomes in the GUll is the consumption basket employers’ contributions to social security) for of an average GUR household that was discuss- East German firms would be about 37 percent ed earlier. 43 of West German wages. Thus, the average DM The abolition of trade restrictions and wage level in the GUR after the conversion is product-specific taxes and subsidies will produce not so high relative to the average productivity price structures and a price level in East Ger- differential between GUll and ERG workers that many similar to that in West Germany. Thus, it would preclude future wage negotiations. the Gmu will cause a “one-shot” consumer price increase of about 15 percent for the unchanged However, the initial wage differential cannot GUll consumer goods basket.” In addition, the be held constant by the government after the increase in social security contributions, due to Gmu. Therefore, the medium-term outlook for the introduction of the West German social employment as well as for foreign and West security system into East Germany, will reduce German investment in the GUR will depend the average net monthly income of an East Ger- mainly on the rate of subsequent wage in- man worker from M 1050 to UM 983 after creases in the GUll. If these exceed the growth unification. Together with the one-shot price ad- of productivity in the GUll, employment and in- justment in consumer goods, real incomes in vestment in GUll firms will fall. the GUR will be reduced by about 21 percent.45
41 According to a survey of the lnstitut der deutschen Wirt- would have been about 1DM:1.2M. Including the schaft, about one lhird of all GDR employees had to sus- employer’s contribution to social security, the initial labor pend their work for two or more hours per day because of costs in the GOP would have been about one third of the shortages and defective machines. West German level if the 1DM:2M conversion rate had ~ln the past, all decisions on investment, production and been used. sales were made by the central planning bureaucrats; UThis change from Mark prices to 0-Mark prices has no ef- managers of firms were mainly responsible for technical fect on the overall German inflation rate which is measured operationt on the basis of the DM equivalent of goods and services. 43 The 1DM:2M conversion rate proposed by the Deutsche ~These orders of magnitude show that conversion rates for Bundesbank differs less from the 1DM:IM rate chosen GOP incomes considerably above 1DM:1M, for instance, than one might assume at first glance. In its calculations, IDM:2M or IDM:3M, would have strongly increased the the Bundesbank assumed that all subsidies would be movement of workers from East to West Germany. Assum- removed before conversion, requiring an increase in Mark ing constant consumption patterns, a 1DM:2M (1DM:3M) wages of about 25 to 30 percent to compensate for this ef- rate would have reduced GDR real incomes by 57 percent fect. If these new Mark wages were then converted at a (70 percent) compared to their pre-Gmu levels. 1 DM:2M rate, the effective conversion rate between initial East German Markwages and DM wages after the Gmu The above calculations overstate somewhat To examine this issue, even if a definitive the negative welfare implications of unification. answer is not forthcoming, it is useful to start Households will adjust to the price changes by with an example of a hypothetical currency purchasing more of the goods with relatively unification between two market economies, e.g., cheaper UM prices and less of those whose between France and West Germany. Suppose prices rose more because they had been heavily that the UM is to be replaced by the Franc and subsidized in the past. The prospective adjust- that the current market exchange rate ment of the previous Mark price structure to (1UM = 3FF) will be used to convert all UM the UM price structure is indicated in table 2. financial and real stocks and flows in their As no detailed data on consumption patterns of Franc equivalent. In this case, there is no East Germans are available, the quantitative transfer of real wealth; simply multiplying all U- relevance of this substitution effect is difficult Mark prices by three does not reallocate wealth to evaluate.” The same comment applies to the within Germany nor between France and the positive welfare effects attributed to prospective Federal Republic.48 Redistribution of wealth bet- quality improvements in available consumer ween creditors and debtors in both countries goods; after the Gmu, East Germans will be able could occur only if that currency unification to buy West German products which, on leads to unexpected changes in inflation and if average, are of better quality than their East some debtors or creditors had been expecting a German counterparts. parity adjustment. In this case, the net transfer between the two countries would then be deter- On balance, the real income of East Germans mined by creditor/debtor relations between and the real income differential between East France and Germany and by the direction of and West Germany will remain essentially un- the change in expectations. changed immediately after the Gmu, with real net incomes in the East about 50 percent lower than in the West. This result reflects the fact In the Gmu case, there is no wealth transfer that monetary unification by itself can only between GUR residents and West Germans due create a framework for real sector reform. to unexpected exchange rate variations because Significant improvements in East German living there were virtually no financial linkages bet- standards will only be generated by better ween individuals or enterprises in both coun- allocation of their resources and increased in- tries prior to the Gmu. The asymmetric conver- vestment. Thus, the incentive for East German sion of assets and liabilities, however, transfers workers, especially skilled workers, to move to GUll debt to the FRG (see shaded insert). Before the Federal Republic of Germany remains at the Gmu, the aggregate wealth of the East Ger- least as strong as it was before the Gmu. man economy consisted of its aggregate real However, the prospect of a rapid and wide- assets and its aggregate net foreign claims ranging restructuring of the GUR economy has (debts); domestic financial claims and liabilities already improved the motivation of East Ger- simply cancel out in the aggregation process. mans to remain in the GUll and contribute to Because monetary unification has no implica- its economic recovery. The number of GUR tions for the GUll’s foreign claims and liabilities, citizens moving to the FRG, which reached a it can increase the wealth of the GUR only if its monthly peak of 133,000 in November 1989, fell domestic financial assets, which are mainly sav- to only 19,000 by May 1990. ings, are converted at a higher rate than its domestic liabilities. )~n.t .~VjtflThfl ~~ at Vatt tn.trina.nv In a closed economy, even this asymmetric The Gmu will result in a wealth transfer from conversion would have no aggregate effect on West Germany to East Germany.~~The the economy’s wealth; the gap between assets mechanisms and the quantitative effects of this and liabilities in the consolidated banking wealth transfer, however, remain uncertain. system would have to be filled by government
47 “An analysis of the Deutsches Institut fuer Wirtschaft- See, for instance, Poole (1990). sforschung comes to the result that private households “It is assumed that a procedure for an equitable distribution can compensate the price effect by reducing their con- of seignorage can be devised. sumption of foods by 10 percent. Mechanics of the Wealth Transfer Effected by (Imu
1 lie total wealth I\\’} ol each economic Canceling all ititra-CI )l-l financial claims and agent in the CDII is the suni of its real liabilities (H(.~’’~’= HI.,’ ~m yields total wealth 1 en) t h I l1\ ~ I plus it S Tiet 11101 ieta ry ;vea It h be fore Grnt (\\tj:
(4ffl fl\\,~ RIit\’ -,- uHF’ - 1St
(1) Vt: -- I~V + NM. The asvnimr’t nc con~-eisicniof ml ra-Gtill ~ nIoIIelarV u o,ilth i~,the si.:m 01 claims on financial liabilities and clainis flU C~:)R> HI .,‘‘‘~~l other (1)R residents (( ~ and on foreigners iitqiiire the creation of an eqiializatioii Ut’m K:?) minus liabilities against GliB residents lEA ~vlik-li leads to: (] ,,~‘9diul It)reigllcrs (I.?I:
(5) HG’’°’ = HI ~ ~- E T (21 .V\-1, -~ ~ -r C. — I, -- i,
Substituting (2) in (1) vield~: là. this equalization tern is regarded as a financial liability of \Vest Gt’rnianv. (5) can be
fat — 11W — (C: C.IYR — I ‘nh ± u’~ — substituted in (I): 1
In) RU- -- RR\V + H (( -- i.’t + i:.
total u-calft of thc ( l )B is the ‘,u mofin- iIi~idutl total wealth: (:ornpai-iTg 13 and G shows that the wealth t!’ansle’ t~Jiit’lii,, clirectlt- as~ociated ~viIh
I_i: RU ~. flRt\ + R((’”” — i. ‘‘~ Cmi’, cIepei~d~~0!i the amount of this
11K:? — it equalization item.
1’ (Ti ( 1n11 the 4np i. ~i hi’ PhliHtt’TTt. m’,sI C!Th tim’’ Ifl’ O’\ !-eO In 1 I: ic:h -:I( i—.~.’ I Ir’. ci” ,liI/.ci: 1)’) ,t’ ‘.lt’’’ I Ii ~li’iiiEi;it ti,’’se iis’-ct —
I ,i:Ii)i:,Iil—r~11:. !.,sT P mninl-\ “‘ ~ uI,1.i.!i’m~’~1TO a rwnwcmn !.eT U,~fl 1 La.,i_,i,,ti. “i:~1’ :‘ :b-i;t ot H- i ,e-t .:’r’uan he !v’t ~~i~,’th tri-nsic’ :~j,,i’p’ ‘‘~‘p We I (i~I•~‘i”!’.)lT ~ 1! he -~-cli,c-’’i. jji_I’
‘ill: 1:,. ~-t:i:— . ‘—al. ‘.‘ raId (‘T~L’” if lb’’, n’-m.,c~’_ —- ml.,:. ‘: •-.i~--,’ -.,. -j~i’•~ .• Ii~IEi.’’, ~m:m’ IT’I’ tic’ ~irOmrec- ::fl:flI-r.
‘,t,)flhlTt hi;it \\ ‘s. ‘~ . .~i.,.,: ~ II:’- J’~J’ ~ P’’!. ,fl,;~,Iljp’~’)!’ qj. I’t’r’: ‘‘‘I. -.. —f’P! -::.1 ~.:‘ j-,.,— :_.a- ;,:1.i,:_i__,, ‘.:.. I.
- .~~r’ .h”-’N. ‘.1 ‘.m’m:’- l~’ ~ k t it -. . .~l~’ ji .~ 1 ‘‘‘ ‘‘r~—,1,.e_,:,_r’ :
: -
- -- - :, ‘. - ~., :.:.. ~--.- - tor’s net debt and the limited 1LJM:1M conver- transfer from the West Germans to East Germans sion of savings (including currency) implies a has been widely overestimated. The ultimate out- UM 26 billion (5.3 percent) increase in the Ger- come of unification will be determined by the man central government debt. The impact of productivity of East German firms, the real in- this asymmetric conversion would have been come necessary to encourage East German even higher if it were not for the “Richtungs- workers to remain in the GUR and the actual koeffizient” discussed previously. wage and income levels that will be achieved in East Germany. Using an assumed 8 percent interest, this ad- ditional debt will increase the German govern- Monetary unification has only have a short-term ment’s interest payments by UM 2.1 billion, impact on the initial wages and incomes in the about 0.7 percent of its total expenditure. A GUR. Because the conversion rates are compatible uniform 1UM:1M conversion of enterprise debt, with the more pessimistic estimates of the pro- savings and currency would have produced a ductivity differential between East and West Ger- UM 76 billion increase in government debt. If many, they do not appear to have produced the this debt were borne mainly by West German problem of too-high initial GUll wage levels and tax payers, this would have been identical to a possible downward-stickiness of wages in the face wealth transfer of UM 1230 from each West of some initial unemployment pressures. Whether German—in the form of an interest-bearing and the prospects provided by the economic and non-repayable IOU—and would have provided each social community of the two states and the far- East German with an additional UM 4560. This reaching financial assistance offered to East Ger- example illustrates why the 1UM:IM conversion many by the West German government will suf- rate for savings was controversial in West Ger- fice to keep skilled workers in the GUR remains many after it had become evident that a iDM:IM open to question. rate for enterprise debt was impracticable.
Alexander, Lewis S., and Joseph E. Gagnon. ‘The Global Economic Implications of German Unification,” International The set of conversion rates chosen for the Gmu Finance Discussion Papers, No. 379 (Board of Governors of the Federal Reserve System, April 1990). has important implications for the debt burden of Bank for International Settlements. 59th Annual Report East Germany’s enterprise sector, for the wealth (Basle, Switzerland, 1989). transfer between both German states and for the Cassel, Gustav. Abnormal Deviations in International Ex- level of West German government debt. The changes,” Economic Journal (December 1918), pp. 413-15. IUM:2M conversion rate for enterprise debt may Collier, Irwin L. ‘The Estimation of Gross Domestic Product cause some financial difficulties for many GUll and its Growth Rate for the German Democratic Republic:’ firms, but it will also lay the groundwork for the World Bank Staff Working Papers, No. 773, Washington, D.C., 1985. privatization of the more profitable enterprises. Commander, Simon, and Fabrizio Coricelli. “Levels, Rates This result is a necessary precondition for the and Sources of Inflation in Socialist Economies: A Dynamic GDR’s transition to a market economy. The ceil- Frameworlç” paper prepared for a seminar in Laxenburg, ings for the 1UM:IM conversion of savings limit Austria, March 6-8, 1990. the wealth transfer from West Germany to East Committee for the Study of Economic and Monetary Union. Germany to a relatively small amount. 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