German Reunification (1989)

A timeline to understand German reunification. 

November 9-10, 1989: Fall of the Berlin wall.

March 10, 1990: First free elections in East Germany and new government.

April 28, 1990: The Dublin European Council welcomed German reunification.

May 18, 1990: State Treaty for Monetary, Economic and Social Union.

June 25 and 26, 1990: Second Dublin summit calling on a parallel intergovernmental conference (IGC) on political union across members of the EEC.

August 31, 1990: German Unification Treaty.

Description of the crisis. 

German reunification is a process that started at the fall of the Berlin wall on the night between the 9th and the 10th of October 1989 and roughly ended on the 3rd of October 1990 when the BRD (Budesrepublik Deutschland, known as West Germany) officially absorbed the DDR (Deutsches Demokratisches Republic, known as East Germany).

German reunification constituted both a political and economic crisis for the European institutions of the time, resulting in important turning points for European integration. It indeed raised both economic concerns through its significant macroeconomic impact - accelerating discussions toward a monetary union - and political concerns - fueling reflection on political integration.

Implications for the European economy and European institutions.

Political concerns arose from the need to “assuage” the power of a re-unified Germany. The answer to such concerns was found in the acceleration of the integration of the European integration: “Germany could reunite so long as it pooled much of its new power in the institutions of a strengthened European Union”^[1]. On the 8th and 9th of  December 1989, the Strasbourg European council decided to set up the European Bank of Reconstruction and Development (EBRD) to provide loans for the countries of Eastern Europe. On the 28th of April 1990, the Dublin European Council welcomed German reunification . A second Dublin summit on the 25th and 26th of June decided to call a parallel intergovernmental conference (IGC) on political union.

This second council also “argued that the "macroeconomic implications" of German unity were broadly benign. Absorption of East Germany would not lead either to increased transfers of resources or to higher inflation”^[2]. This assumption was wrong.

German reunification had important macroeconomic impacts both on the country and on Europe. Nationally, the unemployment rate nearly doubled and GDP growth decreased from 3.6% in 1991 to 0.9% in 1992^[3]. Moreover, the country went through high inflation : consumer price inflation rose to 4.0% in 1992, the highest level since the early 1980s^[4]. This led the German interest rates to increase^[5], impacting interest rates of the other EEC member states - and ultimately their own growth rates^[6],[7].

Such a course of events fueled the discussion aiming at reflecting on a monetary union, and had an influence on the architecture of the 1992 Maastricht Treaty. More precisely, the deficit and debt thresholds imposed by the treaty, as well as European Central Bank (ECB) independence and the “no bail out” rule (the proscription for the Union or any member state to assume liability for another member country’s debt), reflect the lessons learned from transmission mechanisms between inflation and fiscal imbalance of a given nation, and the costs imposed on their partner countries via the monetary policy. Maastricht criteria were designed to ensure that entering members had relatively sound public finances in order to avoid one member’s indebtedness affecting the other member countries^[8],[9].

References

Abildgren, K., & Malthe-Thagaard, S. (2012). A Comparison of the ERM Crisis in the Early 1990s with Recent Years’ Financial and Sovereign Debt Crisis in Europe. Monetary Review. Denmarks Nationalbank. 

Beuer, C. (2022). A Three Percent Structural Deficit Rule. Intereconomics, 57(1), 2-3

Bundesbank annual report (1992)

Gilbert, Mark. (2020). European integration : A political history (Second edition.). Rowman & Littlefield.

Eichengreen, B. and Wysplosz, C. (1998). The Stability Pact: More Than a Minor Nuisance?. Economic Policy, (26), 67-113

Suggested readings on the topic. 

Marsh, D. (1992). The Bundesbank: The Bank that Rules Europe. London: Heinemann.

Poast, P. D. (2004). The Wall and Maastricht: exogenous shocks and the initiation of the EMU and EPU IGCs. Journal of European Integration, 26(3), 281–307.

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[1] Gilbert, 2020, p. 222

[2] Ibid, p. 223

[3] Bundesbank annual report, 1992, p. 19 and p. 20

[4] Bundesbank annual report, 1992, p. 19 and p. 26

[4] The Bundesbank’s response to raising inflation was a tightening monetary policy: the maximum imposed rate (known as the Lombard state) was raised to 9.75% in december 1991, an unseen level since the early 1980s (Bundesbank annual report, 1992, p. 53-54).

[5] Bundesbank annual report, 1992, p. 81 - eventhough the Bundesbank also argues that “in reality, in the initial stage the surge in demand emanating from eastern Germany buttressed economic activity in Germany's partner countries in Europe - as well as in third countries - and thus more or less offset the dampening effect of the rise in interest rates in Germany that was triggered by changes in market ex-pectations” and that “putting strong emphasis on German unification as the cause of the crisis in the EMS is unjustified, if only because the continuation of the development that had been observed beforehand and occasionally deplored (not only within the Community) - namely comparatively low rates of inflation, exceptionally small budget deficits and large external surpluses on the part of western Germany - would have signalled a need to adjust exchange rates sooner or later” (p. 81)

[6] Abidlgren & Malthe-Thagaard (2012), pp. 85-87

[7] Beuer (2022), p. 2

[8] Eichengreen & Wysplosz (1998), p. 71