East Germany in from the Cold: The Economic Aftermath of Currency Union

Adjustments in the East German economy resulting from the currency union with West Germany are a source of continuing problems. Recommendations for policies to assist in the adjustment process are developed. Two new data sets are used. The first data set adjusts previously unpublished expense data of GDR conglomerates to estimate the consequences of the price-cost squeeze in the goods market, and finds that firms employing only 8% of the labor force were viable after the currency union. The second data set is a survey of GDR workers to determine their propensity to migrate and the factors which are likely to influence their decision, and discovers that while a wage differential between East and West Germany will not induce migration, higher unemployment in East Germany will cause workers to migrate. Examination of the privatization process, and concludes that the negative value of many firms is causing this process to move slowly. Two policies are proposed to deal with these problems: a rapid infrastructure investment program and a program of employment bonuses.