The Macroeconomic and Social Consequences of the German Unification

Abstract

In order to handle the restructuring of the East, the government has created the Treuhandanstalt agency. The goal of this agency is to dismantle and privatize the uncompetitive industries of the East. In the process, many workers become unemployed and the Treuhandanstalt has come under harsh criticism lately. The goals of the agency may be plausible, but how the government is carrying them out is taking too much time. Very few companies are willing to invest in such a risky venture. In the meantime, the German government continues to pay generous amounts of welfare compensation in the hopes of artificially pumping up the sagging economy. Back in the East though, compensation does little to start the heavy manufacturing the East so desperately needs. Therefore, this paper examines an alternative reconstruction plan being suggested by a number of economists. The plan is based on a wage-subsidy idea where the workers actually get payed to work by the government. The authors argue that the increase in production will more than offset the high costs the unemployed person would have received in compensation. With unemployment reaching double-digits in the East, coupled with an increase in the West, it is obvious that the speed of the restructuring needs to be increased. Social tensions are running too high on both sides for the current economic conditions to continue