Monetary Union
A united Germany?

In Discussion Paper No. 449, Research Fellow Michael Burda considers some of the consequences of German economic and monetary union (GEMU), focusing in particular on the real implications for the supply side of the former German Democratic Republic and for resource flows between the two regions. Burda argues that the monetary effects of GEMU have been exaggerated, while the real implications of converting all transactions at the 1:1 rate subjects Eastern Germany the risks of structural unemployment, large-scale emigration, low foreign investment and the `Mezzogiorno syndrome'.

Renewed migration of labour from the East seems likely, which could be forestalled by the movement of physical capital in the opposite direction could forestall this development, if the private sector perceives the investment opportunities to be good enough and the remaining doubts over property rights to be resolved. Non-traded goods may serve as a `safety-valve' if a relative price divide between the two regions is used to keep product wages low in the East in the near term, in order to promote investment and discourage migration. An aggressive public investment campaign in the East would also enhance total factor productivity, enabling both wages and profitability to rise. The resource flows implied by GEMU are enormous, but not unmanageable. Equipping Eastern German workers with half the public and private capital stock of their Western German counterparts would require an annual resource flow of roughly DM 200 billion for ten years.

This paper will be the presented at a November lunchtime meeting, reported more fully in issue no. 42 of the Bulletin.

The Consequences of German Economic and Monetary Union
Michael C Burda

Discussion Paper No. 449, August 1990 (IM)