Economics of German Reunification

29/09/2009

To mark the 20th anniversary of the fall of the Berlin Wall, the Darden School of Business welcomed Helmut Kaiser, managing director and global chief investment strategist of Private Wealth Management at Deutsche Bank. Kaiser’s presentation was part of Darden’s Leadership Speaker Series.

“There was hope that the process of re-unification would be simple,” said Kaiser. “Although East Germany has caught up significantly with West Germany, some meaningful gaps do persist.”

Kaiser took the audience back to 1989, when Germany faced the serious challenge of mending itself. In East Germany, capital stock was largely useless, infrastructure was insufficient, pollution was as a serious problem, and East Germans—though well-educated—suffered from low standards of living.

Under great pressure, Germany kick-started its eastern part on July 1, 1990 by transferring its legal, political and social and tax system, introducing a common currency, the Deutschmark, and making significant financial transfers and investments. Solidarity packages called “Solidarpakt” —which are still in place today—meant that West Germany pays 4 to 5 percent of its GDP to East Germany.

So, has it worked? While Kaiser admits that there have been “policy mistakes and economic headwinds,” East Germany is catching up.

“There has been a massive increase in living standards between ’89 and now,” he said, citing advancements such as the modernization of infrastructure and new innovation clusters in the fields of wind energy, medical technology and microelectronics, among other fields.

Yet, despite its resilience, East Germany remains heavily dependent on monetary transfers from the West, a situation which has stretched both public finances and social solidarity.

“It’s still a problem,” he said. “There are some resentments, but that’s OK in a country.”

Kaiser speculates that East Germany could eventually become a “pensioners’ paradise” due to the lower cost of living, and he hopes that the nation will eventually “get rid of this thinking that we will have 100 percent convergence.”

As for how Germany is faring through the current financial crisis, Kaiser said, “So far, we have come quite reasonably through.”

Kaiser’s visit was sponsored by the University of Virginia’s Center of German Studies and the German Embassy’s Freedom Without Walls Program, whose goal is to reach out to a new generation of leaders at universities across the United States to preserve the memory and inspiration of the fall of the wall.

To watch Mr. Kaiser's presentation, please visit our Darden MBA YouTube Channel.

Founded in 1955, the University of Virginia’s Darden School of Business improves society by developing principled leaders in the world of practical affairs.

For additional information, contact communication@darden.virginia.edu.

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