Hello, and welcome to The Sound of Economics, the podcast from Bruegel, the Brussels-based economic think tank.Today, we're going to talk about German reunification.It's been 35 years since the fall of the Berlin Wall,
And since East Germany and West Germany became once again one country, we are fortunate here at Bruegel to have scholars who were there in various ways when it happened and who also are continuing to think about the European economy and how it all fits together.
So I hope you'll stay with us today for this mix of personal, political and analytical reflections on what it means to have Germany as one country and to have had that for 35 years now.I'm your host Rebecca Christy, Senior Fellow here at Bruegel.
I'm joined today by Marek Dabrowski, Gunter Wolff, and Georg Sachmann, all part of the Bruegel core research team, and also people with real personal experience of those years and what happened then.
We're going to start with Georg Sachmann, because you grew up in what was then East Germany.Can you help people who don't have a memory of that just know like, why was it there?Why did they draw the border there?And what happened?
I think when Germany was in the Second World War, it became clear to the Allies that Germany will be relatively soon occupied.
There were important conferences, especially in Yalta, where the Allies essentially decided that they will create four zones in Germany for each of the four Allied parties, the British, the French, the Americans, and the Soviet.
When they then ultimately occupied Germany, they had to do some exchange of territory according to the lines that they initially agreed, and then the three western zones together created the Federal Republic of Germany in 1949.
was still under a sort of occupation statehood, so it was not a fully sovereign country.And a few weeks later, the Soviets essentially allowed East Germany to create the German Democratic Republic.
In the German Democratic Republic, there were about 350,000 Soviet soldiers stationed until the end, together with all the ancillary people.Some people say there was about one million.
Soviet people essentially that were living in the GDR that had about 16, 17 million of inhabitants.So you see it was a country that was not at all sovereign.
It was largely determined, its fate was determined by what was happening in the Soviet Union. And then 1989 came.1989 was the celebration of the 40th anniversary of the creation of the GDR.
And Erich Honecker, the head of state of the GDR, was very happy that the head of the Soviet Union, Mikhail Gorbachev, was coming, that he can run a big show and celebrate the success of his country.
But at that moment already, the cracks in the system were very apparent.And I guess we are going to talk about that today.
Thank you so much for that.
It's interesting for me because growing up in the United States in 1989, I remember very much when the wall came down, but we mostly talked about it in terms of the Soviet Union and what that meant for the Cold War and much less for what it meant for Germany, for the people who lived there.
Guntram, your family had experience on both sides of the Iron Curtain and you grew up in the West, as I understand.Can you tell us about some of your family history here and how you remember it?
Yeah, sure.So, I mean, perhaps, let me just say one or two more words on the introductory part that Georg already introduced.I think what's important to understand is really that Germany was the epicenter of the East-West conflict.
And so he mentioned the 350,000 Soviet soldiers in East Germany.And of course, there were lots of American and British soldiers in West Germany, more thousand GIs spread over the country.
And they, contrary to, I think, the Soviet soldiers in the GDI in East Germany, they were very much seen by, I would say, the largest part of the population as grantors of
freedom and stability and following the important decisions in 1949 to found West Germany and the years after, there was a very clear Westward orientation of Western Germany and anchoring of Germany into the
transatlantic alliance of West Germany into the transatlantic alliance.And so we really had a system conflict, two completely different systems that were armed to their teeth and standing next to each other.
And the point where it, I guess, crystallized the most is of course the city of Berlin itself, where we have a wall.We've had a wall that was built in 1961 and came down on 9 November 1989.And so it is really that wall that symbolizes the East-West
conflict in that period.And I would say what is interesting about this wall is that once it was there, it really became impossible or almost impossible to leave Eastern Germany and in fact leave the whole Eastern.
The Warsaw Pact was becoming really, really controlled.It was very difficult to get to the West.And my family's story in a sense is interesting because My mother grew up in East Germany, and so all her family were in East Germany.
And she left together with her parents just before the wall was built.So she left in 1960.At the time, it was already not allowed to leave, but what was possible is it was possible to go to East Berlin.
So she lived somewhere on the countryside in the northeast of Germany. And so she could go to Berlin, to East Berlin by car.She drove to East Berlin.And what you could then do is you could jump on basically the subway without anything in your hands.
So you shouldn't look suspicious at all. So meaning don't take a big bag or don't even take your passport with you because there were random controls on the subway.
And if you went on the subway and nobody controlled you, you could basically, the subway was still going also from East to West and you could just basically get off on a West station in West Berlin.
But you had to make sure not to be captured or in a random control to be controlled.And so she landed up in West Berlin and then had to register.
And, you know, then they were flown out to West Germany and in a sense started a new life in West Germany, leaving behind everything they had in the East.From your papers, your diplomas, to your house, to your car, everything was just left.
You had to start anew, which for my mother was, let's say, probably okay because she was very young.But for her parents, you think about it, they basically went together with her adult daughter.
And so they left to West Germany and had to start everything from zero.So quite a story.
Who did they register with?
Well, it's the West German, I guess it's probably authorities of the Berlin city, but I don't know exactly which authority were registering them.
But you had to take, for the diploma, I know the story for the diploma, which was interesting, because when she wanted to study, you have to have, as you know, you have to have a high school diploma and she didn't have it.
And so she would go to the office and say under oath that she had it in East Germany and that she had these and these grades.And since she said it on oath, it was recognized and she could study.And perhaps one last story on this, which is funny.
So she studied and then got her diploma in mathematics, but now as a pensioner, much later,
She wanted to go study again in a university in West Germany, and they were asking her to present the diploma, the high school diploma, and she didn't have it, right?And she said, well, but wait a minute, I even have my master's from my studies.
And they were making a big fuss out of it, and it took quite some time to convince them.
that she actually had the right to study because she had the high school qualification was getting more complicated, actually, than it used to be in the early 60s.
That's amazing.I have one other question, which is, did the West German authorities of that time, did they have some sort of apparatus for receiving people like your mother's family?
You say that her family was flown, so they had a plan for what to do with folks, or how did that work?
Oh, yeah.I mean, there were lots of people leaving.I don't have the precise numbers now in my head, but the reason why the wall was built was exactly because the outflow was actually very big.
And that meant there was a whole infrastructure in place to distribute people across the country, give them some initial starting capital, help them with their first job and all of that.
So this was all there and I think it reflects on the differences in the political regime and the East German regime was just seen as very, very unattractive at the time and they had to face major repercussions.
She, for example, that's perhaps difficult to understand now, but she had studied.And so because she had studied, she couldn't go on in East Germany to study.
I mean, she had done a high school diploma and so she couldn't go on to study at a university directly because she sort of didn't come from a worker's family.So the requirement was
do spend two years working as a simple worker, because only then you have proven your credentials as a good worker, and only then you have the right to go to university.
And so that was, I think, the last sort of point where they decided, okay, now it's time to move.
Shortly before the wall came down, there were about 1,000 people coming every day from East to West Berlin.They created even a huge refugee transit camp in Marienfelde.
I think there are still some installations in Berlin that you can visit to see how big the installations were.Over the course of a year, several hundred thousand people were essentially channelled through these installations.
That's an incredible piece of history that happened during our generation's lifetimes, essentially.Marek, you grew up in the country of the Warsaw Pact.Your country was very much in the middle of the Second World War.
How did all of this look from Poland and what are your memories of the time during sort of the height of the communist era and then the transition out of it?
Maybe I will start from continuation of what Georg thought that a division, physical division of Germany was the fragment of the broader division of Europe, which popularly was called the Iron Curtain.
And this was a result of the same Yalta Conference in February 1945 and Potsdam Conference in
uh june august 1945 and basically it it sanctioned geopolitical realities of that time sometimes east europeans people and european dissidents blame united states united kingdom for leaving eastern europe and the mercy of stalin and soviet union but probably
Given the role of the Soviet army in fighting the Nazi Germany, it could not happen in a different way.And in practical terms, this Iron Curtain means a huge restriction on travel.
Practically only Yugoslavia was an exception from this because Yugoslavia split with the Soviet Union in 1948 and then developed its own communist socialist system of employee self-management.
It was more open to the West, Western Europe in any respect.But every country had on its Western borders barbed wires, fences, dead zones, border guards, which were authorized to shoot people who try illegally cross the border.
And East Berlin was actually the last window of opportunity until 13 August 1961 to leave the Eastern Bloc with minimal risk, as Donald Trump described how it worked.
So this was not only closing the opportunity for the East Germans, which of course used this on a massive scale, but also for people from other communist countries.
Then in 1970s, there was possibility of relatively freely travel between communist countries, except Soviet Union, where it was more difficult.
But then in 1980s, many restrictions came back as a result of Solidarity Movement, at least for Polish people, because Solidarity
a movement of 1980, 1981, and Poland was seen as the source of potential disease, especially for such oppressive regimes like East German or Romanian, or Soviet under Brezhnev and Andropov.So these were realities which we live in.
Of course, countries differ between themselves, Hungary, after the old tragedy of 1956 of the Hungarian revolution and violent crackdown by the Soviet army, then 1960s and 1970s, the Hungarian communist leader, Janos Kádár, the law of certain
degree of economic liberalization, also more free traveling to the West.In Poland it varied, it was periods of more freedom like end of 1950s, early 1960s, early 1970s, but then usually the repression increased.
Some countries were very oppressive, like Romania under Ceausescu.So this was basically we live in closed world with limited flow of information, with limited opportunities to travel outside the Iron Curtain.And it was the condition of life.
And of course, economic malaise, almost everywhere, according to my own experience, traveling experience, and also economic research experience, because due to my age, I already started my research career in 1974.
And from the very beginning, I was involved with some comparative research.GDR in 1970s, for example, was in better economic shape than Poland, for example, or Romania, partly because of some forms of economics apart from West Germany.
But basically, the living standard was much lower than in West of Iron Curtain.
Erik, what can you tell us about the difference in living standards and what that meant for the reality that you grew up with compared to what other people in your same generation might have grown up with somewhere else?
I was only 10 years old when the wall came down and I had actually just received my red necktie for the Communist Yaoism in autumn of 1989, like all of my classmates.
We didn't compare that much with the West because we were not able to really see it that much.Because in the region where I grew up, it was called the Valley of the Ignorant.We didn't have any television reception from the West.
It's the area close to Dresden, which is probably the furthest away and it's a bit mountainous.So it was not easily possible to watch West German television.
But still, I mean, we were getting typically packages from relatives and family in West Germany, and there you could easily see what products were available to West Germans easily and not to us.
I unfortunately didn't happen to have any relatives in the West, so only friends of my parents and many friends of my grandparents, essentially, that they had from before the war.
and that moved to the West were kind enough to send us for Christmas or for some birthdays, sometimes things. What we also got, and it's maybe a very, very odd thing, was we had these West German catalogs from the mail order retailers.
And so that was kind of looking into what was all available in the big world of West German consumer society.And as a child, I obviously looked through all the toys and stuff and thought how great it would be to have these nice things.
But sometimes it was possible to articulate a wish.There was one element that allowed some access to that, that was that East Germany, in order to generate the hard currency income, installed a set of hard currency shops inside East Germany.
I think it was the same in Poland and other East Bloc countries. where you had to exchange hard currency that you for some reason were able to acquire into so-called Forumschecks in East Germany.
It was a special currency and these you were allowed to use in these hard currency shops where you then were allowed to buy whatever, little matchbox cars or other West German products.
obviously overpriced and in a way to absorb the hard currency that was circulating in the East. The whole difference in economic performance and living standards only became clear when the wall came down.
The first thing that all these Germans did was essentially to drive to West Germany in order to collect so-called welcome money.So the West German government said we wanted to somehow wanted to accommodate the new
the new freedom and they gave, I don't know, 100 Deutschmarks to every person that came.You got a stamp in your passport that you received it so that you don't collect it twice.
So all the families with their children went and get that and then we saw for the first time West Germany. And then it became also quite clear.I mean, we had the housing of my grandparents.
I mean, they still had the toilet, the stairs down half and without water, not water toilets.The heating was largely based on coal, even in the apartment.So you had to move up the coal into your apartment.All the cities were horribly smelling.
Well, you all know the pictures of queues for all sorts of products that were not easily accessible.
The classic or the iconic product in East Germany was bananas, which were hard to get by because for fruits from exotic countries, they cost hard currency.
party decided that East Germans don't need them, or they get oranges from Cuba, which were super sour and nobody liked to have.That is a few of the anecdotes on that, but I mean, we didn't have a telephone until 1994, so there was no telephones.
We are very scarce, maybe a million connections were available in East Germany and the disconnect has been increasing probably every year since the 1960s and led to a massive gap in standards of living.
It's funny you say everybody remembers, but we're entering an era now where people don't remember or they don't have the lived experience of seeing these even in countries where they were available on the media.
And I'm happy that you mentioned toys because they can be such a window on these other eras.For me, the germinating seeds of this podcast came up a couple years ago when I was back in the U.S.
playing a board game, a geography board game with my own children.And they wanted to know why it had two flags for Germany.And I realized that no one had ever mentioned
So I'm happy that we can talk about some of these things that are obvious to you, but that may not be obvious to people who grew up farther away or just in an era where these weren't the images that were the first ones on the news or that people wanted to see.
Guntram, can you share some of your memories from the other side?
Yeah, sure.So I'm a little bit older than Georg.So I was 15 when the wall came down.And so I have perhaps a little bit more the memories of that episode directly.
The first thing I wanted to mention is I remember very much how we were sending always for Christmas and for Easter packages to our relatives in East Germany.So that was also... always a ritual.
So chocolate and, you know, we put in Western stuff, also sometimes a toy or things like this.So that was a routine and we did it always. And that shows how important it was.
And it was one of the few channels how one could also keep the contact with the Eastern part of the family.We barely called each other.I think it was almost impossible.
There were a few calls that I seem to remember that we did, but it was not very frequent and not very common. But at some stage, one had the possibility to see each other in East Berlin.
And so I do remember that in 1988, so one year before the wall came down, we had the right to go to East Berlin.And so I remember how we went to
I don't remember which checkpoint it was, whether it was Checkpoint Charlie or one of the others, I don't remember.But we went through the checkpoint and went into East Berlin.
And the two sort of childhood memories that really stick to my mind from that visit, two or three, I mean, one was the border control itself, which, I mean, you really cannot imagine now when you grow up in Europe without borders.
This was not just a border, it was a border where you couldn't drive through, you had to move around two major concrete posts to basically get through and you had to pass several sort of big German shepherd dogs and the police officers were very strict in controlling your
your passports, and it took quite a long time to get through.So that's one sort of memory that I have.The second memory I have is, of course, to look, to see how worn down East Berlin looked.I mean, it was really not beautiful, on the contrary.
It was really, all the houses were worn down.You could even see in many houses still the bullets from the Second World War and, you know, the renovation was not very, very much advanced, so it looked very poor already.
And I do remember also the East German soldiers parading in front of the you know, the memorial that is close to Humboldt University.And I forgot which one it is now, Georg, you might remember exactly which one.
But, you know, and I remember how they moved up with the foot very high when they changed the parade.So these were sort of three childhood memories that I have.And then I guess one more memory from 89 and 90,
So when the wall then came down, then, ja, Neue Wache, Georg says it.So that's the German term, Neue Wache.But OK, so one more memory from early 1990.
So we went, then when it was possible, we wanted to see, of course, East Germany, the relatives, and so on.And we drove quite a bit to the east. And, you know, in the spring of 1990, I had then the opportunity to actually visit a family.
There was an exchange program done immediately, very quickly.I think the school somehow organized it, and I spent one or two weeks in a family in Leipzig around Easter.
The differences in the quality of living standards was absolutely shocking and amazing.The pollution was huge.I mean, the city were just gray from the coal ovens.And so that was really a very stark contrast to what I'd seen in West Germany.
And perhaps I can also say that in early 90s, I was then also in Berlin and 1990, I was in Berlin and as a 15 year old, I had my little hammer and I hammered a bit in the wall and
have a picture and some of the pieces of the wall still at home from that period.So that was quite an experience, I would say.
Doing your bit for democracy. In the second half of our podcast, I'd like to talk about the transition forward, what happened after the wall came down and how we're still feeling the echoes of that today.We've heard about the travel restrictions.
We've heard about the educational restrictions.We haven't talked yet, but there were some real differences in terms of women in the workforce.There were many more women working in the East than in the West because of
various cultural mores that people were leaning into.Georg, you said as we were preparing for this that everything changed, that before the wall came down, people had a lot of stability and a lot of view for what their life was going to look like.
And then suddenly all these possibilities opened up.Can you tell us about that and where we've been since?
Yes.The change was dramatic.I mean, if you were finishing your school in 1988, say, you essentially got your place at a company or at a university.
And from that on, you were essentially able to predict what you will do at age, until age 65, because there was little to know labor markets.People stayed in their jobs typically for a very, very long time.
The companies then, typically state-owned companies, organized your holidays. And you were together with the people from the companies that are also very often organized, the place where you, the apartment that you could get.
So for example, my father, when he started his job, he was extremely proud that he got a job that came with an apartment because apartments were relatively scarce in East Germany.
And so we moved there and in principle, I would have grown up in this place and lived there and lived a very standard East German life.And when the war came down, all that changed.
I mean, the companies essentially had to massively scale down employment or were even closed because they were not competitive anymore.
It came out that there was a huge spy network of informal agents, so people found out that some of their good friends were part of the Stasi, so mistrust was generating.A lot of people went to West Germany.
Partnerships broke apart because of essentially new opportunities arising. some of the homes, so if you lived in an old building from before the war, sometimes old owners came back and said they want to have the buildings back.
And some of the state-owned apartments were privatized, so people were not sure of the place they were living in anymore. Everybody bought a new car.
So everything that kind of defines life for many people has instantaneously changed within only a few months.And that obviously left relatively deep scars with everybody that lived through this transition.
For me, with my 10 years old, it wasn't that big of a change, of course, because a school was comparatively stable.
I mean, some people, some teachers were replaced with rumors going around that they were a part of what was called the firm, so the Stasi.
And some few Western teachers were parachuted into especially sensitive areas like history courses or things like that.
We got one from, I don't know, Baden-Württemberg or so, and we were mocking her about her accent because everybody in our region spoke the Saxon accent, which everybody else in Germany would find funny because it's considered as not the most beautiful accent in any German language.
But for me, that was about it.And it was more about all these opportunities and the ability to travel.So that maybe is the last point for me on that.This opportunity to travel was taken up by many people. and really warmly embraced.
So we immediately, after the war came down, put ourselves into our old car and went to Austria for the first time, holidays in a Western country, and the year after to France.
And we tried to see the world that kind of was close to my parents and that they thought would be close to them for all their life. And they were extremely excited and curious and interested to benefit from that.
So if there's one thing that showcased this newborn freedom, it was certainly traveling.
Thank you for sharing those memories. Marek, you mentioned travel as one of the ways you remember this period.
You mentioned a trip you took to the East where it was very much an industrial landscape, very bleak, and then another one you took many years later where it had become green again and much more beautiful.
Can you tell us about those two eras and sort of the lessons you take away from those images?
Yeah, I traveled quite a lot to East Germany in 1970s after first secretaries of communist parties, Erich Honecker and Edvard Gehrig, they opened border in early 1972.
This was some spectacular move, which then was partly taken back because economically both countries were incompatible, also partly due to exchange rate, but also
East Germany were much better supplied in goods, so there were negative consequences for East German consumers. thousands of Polish people visiting.
I can just confirm that my grandparents were at the time pretty frustrated about all these Poles coming in with their cheaply exchanged Złoty and buying off all the meat in the butcheries.They were somewhat not unhappy about the increased
restrictions that came in later that reduced the competition for scarce products.
Yeah, this is exactly because also this was to remind everybody that all these communist economies suffer from so-called shortages, good shortages, due to price control, due to perverse system of microeconomic incentives.
It was excellently analyzed by the late Hungarian economist Janos Kornay, in his famous work, Economics of Shortage.And this was a reality to the very end of the system.
But as I mentioned earlier, the countries differ in the degree of the big standard, but also in the degree of economic equilibrium, internal economic equilibrium.
But nevertheless, we had opportunity to visit East Germany and as active tourist, cyclist tourist from my young years until now, I traveled quite a lot in Eastern Germany.
And I remember exactly this area which was mentioned by Guntram, Leipzig, and a bit to the west and northwest, Halle, Merseburg, Lojnawerke, Bunawerke, this was real lunar landscape.
I remember I went through this area, it was already evening and this looked really terrible, everything.This year, I repeat part of this road with my wife and with my friends, going on bikes from Munich to Berlin and then to Polish border.
and along the Saal River and this area changed enormously.So there is no longer this strip chemical factories.There is no coal mines more.This was closer to Polish border like Kotbus, this area northeast of Dresden.
but also Zara, where Gyor grew up, Sitau and Gerlitz.So basically this is gone now.So it's completely different place.Let's skip.Regarding the fall of the Berlin Wall, I have two memories.One is, I would say, more official.
At the time, transition in Poland already was underway.Since 12th September, of 1989, I was Secretary of State and Minister of Finance in the First Democratic Government of Poland of Prime Minister Tadeusz Mazowiecki.
And if I remember correctly, on 9 November morning, very important official visit of Chancellor Kohl to Poland started.But it had to be broken a few hours later due to events in Berlin, due to opening Berlin cross-border ports.
Chancellor Kohl came back, I think three days later, back and there was the famous joint service in the Catholic Sanctuary in Krzyżowa, this is Lower Silesia. region not far from Wrocław.
This was a very important visit because this was the beginning of our approach to Poland with the Federal Republic of Germany.At that time, the situation was still quite complicated.
problems like, for example, final recognition of the interstate border on rice and other rivers.But with some break it happened.Second memory, this is my family memory.My wife was a biologist.
She had a very long cooperation with Humboldt Universität in East Berlin.And she visited East Berlin just few days after the fall of the Berlin wall.We tried recently to reconstruct when exactly it happened, but we couldn't.
But she remembers that all her university, Humboldt University friends, they say,
were in a hurry to visit West Berlin, among others, to get some form of welcome donation, which was given to citizens of East Germany who visited after opening borders, West Germany.
So this is what I personally came, visited West and East Berlin a bit later in April, 1990. The wall was still there but of course was several cross-bordering points.People walk quite freely to the west and to the east.
I had to go to East Berlin through checkpoint Charlie because other boarding posts were open only to German citizens.
Remarkable. We hear a lot about just today the welcome money and the importance of that.Guntram, can you help those of us who don't have the history understand how the countries merged their economies?I gather there were two different currencies.
They had to be put together.I presume this then played into the big adjustment of wages that happened in Germany sometime later, and that set the stage for a lot of political things since then.
Well, I can try to recollect some elements of it.But basically, it became relatively quickly clear in the year 1990, so in early 1990, that unification would have to happen.
And it was really Chancellor Helmut Kohl that said, look, we have to find a way of doing this and doing it quickly. And obviously it wasn't immediately obvious how it would be done.There were all the foreign policy implications.
There had to be an international agreement, the famous four plus two agreement.So the four allied forces, Soviet Union, the Americans, the Brits and the French, had to sign this agreement, had to agree to actually let Germany unify and become
become a sovereign country, because West Germany also wasn't a fully sovereign country, had limited abilities to do foreign policy and many other things.So that was a foreign policy, I would say, a difficult act that
Helmut Kohl, the West German chancellor, I would say skillfully managed.And he did so by relatively early setting on the agenda.He had a 10, I think it was called a 10-point plan, how to do it.
And well, there were some resistance, including from West European countries to that unification. But anyway, so that's the foreign policy dimension.And then there is the, of course, the dimension, how to do the reunification, right?
And there were two ideas floating around.One was that, you know, East and West should sit together and draw up a new constitution and
basically develop a new constitution suited for a new country that would have all kinds of better characteristics than the East one, but also better characteristics than the West German one.That was sort of one camp.
And the other camp, which is the one that prevailed, was saying, no, we have a very well-functioning West German democracy.Let's preserve it and let the East Germany accede to that Western European democracy.And that camp prevailed.
And one reason why I think it also prevailed is that West Germany had a relatively successful economic model and it was a prosperous country.And it had, of course, the Deutschmark, which was the strongest currency of Europe at the time.
It was a very attractive currency.And As some people were joking, people really wanted, didn't care so much about the democratic model, but really cared about getting the West German mark with which you could buy lots of nice things.
And so in the end, they agreed on on a reunification that was negotiated.And the negotiation then led to the accession of East Germany to West Germany and to all the institutions of West Germany.
And with it was one big important economic question was, at what exchange rate would that accession happen?
Because imagine, and this was, I mean, just to get the timeline clear, so the wall came down November 9, the German unification happened less than one year later on October 3, right?And so in this October 3, 1990.
And so in this very short period of time, If you think about the time it now takes when a country joins the Eurozone, for example, I mean, in this very, very short period of time, everything was organized so that as of October 3, 1990,
all the East German bank accounts were converted to West German currency and the salaries were converted and so on and so forth.All of that was done in a very, very short period of time.
And it was done in such a short period of time because Helmut Kohl, and many others were afraid that the window of opportunity would close.Because remember, there were 350,000 Soviet soldiers in East Germany.
And for anyone who looks now at Ukraine understands what it means, 350,000 Russian soldiers to be in a country, right?I mean, so this was, I mean, historically, if you think about it, it was a very fragile, a very fragile moment of opportunity.
By the way, including in this agreement was including the decision that the Soviet soldiers would leave in a few years.Yeah.And there was a plan how they would.But anyway, I want to come back to the economics.
So the economics was that the exchange rate would be one to one or one to two.So one to one.So one Eastmark was exchanged for one Westmark. up to a certain threshold, and I don't quite remember what number it was.Was it 500 or 1000 Mark?
I don't quite remember.Georg, you might remember.And above that threshold, it was 1 to 2.And the consequence was that the exchange rate of East Germany, compared to its productivity level, was actually overvalued, right?
And so that was quite convenient for the West Germans, right?Because for the West Germans, for the West German unions, it meant, for the West German employers, it meant that they could get, they could protect their West German production.
It wouldn't get cheap competition from the East German industry.And for the West German unions, it meant that East German workers wouldn't become a competition for the West German salaries.
So it meant as a consequence that the industry that was anyway having lots of trouble, the East German industry, was so overvalued that quite a bit of the economic activity disappeared relatively quickly.
And so that then led to, I would say, and Georg, you might want to add to that also, I mean, that led to a somewhat traumatic experience in East Germany, that the transition was, after all, destroying a lot of jobs in East Germany.
And I think historians will still debate, you know, whether or not the exchange rate and how one could have better handled this problem of the exchange rate.
I think politically it was almost impossible to go for a lower exchange rate because people were saying, look, I mean,
we are Germans, we want to come in the same country, we have a mark as well, and if you give us only a fourth or whatever in exchange rate, so much lower, then we really feel treated badly.
Maybe to complement a bit, one thing is that the exchange of the deposits, and as Guntram mentioned, the personal deposits were only exchanged to a very limited degree in one-to-one, while very quickly the wages and
and that was exchanged one-to-one.So essentially, the East Germans immediately got a very high wage that the companies were not able to pay, but they did not get all their deposits that they had exchanged into debt. with the state banks.
At the same time, all the liabilities in the system, and probably Mave can tell more about that, were exchanged, I think, one-to-one.
And the problem was that these liabilities in a socialist economy were not meaning the same thing as in a capitalist economy where companies are really having having normal economic relations with each other.
Here it was more like an accounting thing and it just didn't have the same meaning if companies had with each other certain types of liabilities and deposits.Those were more numbers that were less meaningful in an economic sense.
And that meant that there was a huge kind of chain of of exposure, especially of some of the large conglomerates towards some state institutions that they were never able to pay back.
So they should have started potentially with a much cleaner balance sheet when they started their operation into the West. rather than carrying a baggage that was not kind of based on any meaningful metrics.
So both the exchange rate as a means of kind of accounting the new wages towards the productivity as well as the baggage of the loans that those companies had was a bit tilted against a smooth transition of the East German economy.
Marek, do you want to briefly add to that?
If I can add something.If I remember, there was also issue of the minimum level of wages in East Germany, which, if I remember, was 70% of West German wages.Here again was the pressure of West German trade unions.
But on the other hand, there was fear that otherwise will be mass immigration from east to west.So basically, probably was not other solution possible.
And second, what Guntram thought about this feeling of perhaps very narrow window of opportunity and necessity to hurry.If we look back at history, I think that this strategy was absolutely right.
It's worth to remind that on 19 August 1991, so still before full unification of Germany, there was Yanaev Putsch in Moscow, which could reverse the entire policy of Gorbachev and Perestroika, And nobody could predict how this push can end.
It fortunately failed in a quite spectacular way, but it could happen in a different way.And in these circumstances, more than 300 Soviet troops in Germany could play a completely different role than they did.
So we're coming up to the end of our time, and I thank you listeners for sticking with us as we go a little long.There are so many interesting things that I'm learning, so many ways I'd like to go from here.
We have so much history that happened in the meantime, just four years after the fall of the wall, three years after reunification we had. the Maastricht Treaty and the beginning of the European Union.
Now, these decades later, we have a common currency.We have the Schengen Agreement for border-free travel within the EU.We have had so much societal change in this time.And yet Germany is still fractured.
We see a coalition government that can barely hold together.We see a lot of frustration from the East about the political circumstances.There are still so many echoes of this previous time in our present time.
As we finish, what one idea or one or two ideas would you like to leave our listeners with?What would you like them to know about how to connect these two periods of German history?And, Gunther, we'll start with you.
You're asking a very big question at the end.And, you know, I'm trying to get my head around how to best to answer it.
I think the best point I would make is that East Germany has seen a huge level of economic convergence, and I think it is doing extremely well when compared to the West, to the countries of the former Warsaw Pact.
So, it has one of the highest levels of GDP per capita compared to Poland and many other countries in the East.So, on many levels, you can say this is a success story.
And while it took more than three decades and a lot of transfers actually from West Germany to East Germany. On an economic level, it really led to a lot of convergence, even though the convergence is not perfect, right?
But of course, on the political level, there are differences.And one dimension certainly is the dimension of migration, where I think the resistance and the skepticism towards immigrants in East Germany is higher than in the West.
And, you know, we can speculate why that is the case.And, you know, I really don't want to speculate on this, but it's a very important question.And I think this stance towards immigration is certainly one of the issues why
We see in East Germany a different voting pattern and a much stronger support for the right-wing party Alternative für Deutschland than in the West.But I'm sure there's many other dimensions.
And frankly speaking, I don't think I can do justice to this important question now in the last two minutes.But perhaps Georg has an additional idea.
I can only concur with Guntram.It's a super challenging question first.
And second, it's a big success story that we have observed that really shows how this economic model and also this political model generates much more economic success and also freedom for people and in all measurable terms.
makes essentially almost everybody much better off.And still, we are kept wondering why this does not translate into a feeling of an invited population about this being kind of the best thing that ever happened.I mean, people are now
Sometimes looking back with nostalgia towards a time when one had to queue for all sorts of things, when one wasted massive amounts of time with state bureaucracy, when one had to fight to get some workers to fix something in the home.
where life was objectively much worse, and still people, maybe because they were young then, remember it as a good time that they want to go back to.
That is something that I find puzzling, and maybe economists are not the right persons to be asked for the reasons here, but other types of social scientists are more capable of answering that.
Last point would be that what I sometimes feel, and I think there has been also some discussion in literature about that, is the question of agency.
So it's maybe one of the problems that happened that in particular East Germans did feel less agency about what was happening in this period of time, that essentially the East bloc broke down, not because of the East German demonstrations, but because Gorbachev decided to kind of let loose on that.
Did the West take over and change the economic model without much East Germans being involved?
And then there has been a relatively popular book recently that counts the number of East Germans in key political positions in East Germany and also in Germany overall and finds that there are still
a large over-representation of West Germans simply because the proliferation of elites is of course there that elitists are inherited and therefore East Germany didn't have elites that were able to reproduce themselves.
they were sometimes put out of the system.But I think this is only a very partial explanation, and there has also been a lot of discussion about this being only lamenting and complaining in a very unproductive way.
So I don't have an answer to you, only a few elements, but hopefully Marek has the answer.
It's super interesting.Can you quickly tell listeners what the name of the book is, even in German?They might want to go find it.
So the name of the book is Der Osten from Dirk Oschmann, but I think it has not been translated to English yet.
All right.Marek, what would you like young people to know about this time?
Well, first is rather, I will say, pessimistic observations that people do not learn history.They do not remember even relatively recent history. and the time horizon of various judgment, various observation becomes extremely short.
This we experience in everyday life.It's a separate discussion why.Second, when I look for East German transformation and more broadly for post-communist transformation and countries of the former Soviet bloc on average.
It was very successful in Central and Eastern Europe, including East Germany, with all critical comments which we can have in various individual cases.It was less successful in former Soviet Union, especially in political sphere.And again, I would
wish the contemporary politicians to have the same determination and the same readiness to change situation, to conduct reform as it was at that time in almost every country.It was in Germany, we talk about the role of Chancellor Kohl,
It was in Poland, in Czechoslovakia, in Hungary, a bit in Baltic states, even more, probably less consequent reforms were in Romania, Bulgaria, some other countries, former Soviet Union.
But sometimes when we look for some policy, contemporary economic policy debates in Europe, but also outside Europe, there is evident lack of determination and readiness to take political risk to do things which should be done.
Thank you for that.Thank you to all of our Bruegel fellows for sharing your memories, as well as your analysis of the years of the fall of the Berlin Wall and the reunification of Germany.
Today, we have had Gunter Wolff, Georg Sachmann, Marek Dabrowski, I'm Rebecca Christie, our colleague Stephanie Walter.
We think of her, she was unable to join us at the last minute, but yet another perspective that I'd love to get out there at some point. Listeners, thank you all for sticking with us.
This is a somewhat unusual and more historical and emotional retelling of the political and economic landscape than usual.And I hope you enjoyed it.You can find all of our podcasts and related reports on our website, broogle.org.
And we hope you'll see you next time on the Sound of Economics.
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