25 years of German unity “A completely different world”

Ifo researcher Joachim Ragnitz
Ifo researcher Joachim Ragnitz | Photo (detail): © private

Joachim Ragnitz works at the Ifo Institute in Dresden where he is researching structural change in eastern Germany after reunification. In an interview he explains what German reunification has cost and what has changed in the last 25 years from 1990 to 2015.

Mr Ragnitz, in 1994, the fourth year after German reunification, as the new head of department at the Institute for Economic Research, you came to Halle, a city in eastern Germany. Do you remember your first impression of the social and economic situation in your new place of work?

Oh yes! On the one hand, it was an exciting time because we had to set up the institute completely from scratch. On the other, it was as if I had stumbled into a completely different world. The housing conditions, the shopping opportunities and leisure facilities were very limited compared to the situation in Mainz, where I came from at that time. And over everything lay a kind of fog arising from the desperate labour market situation, the widespread hopelessness and a deep-seated mistrust of all the people from western Germany who were working there at the time. In fact, I just wanted to get away as soon as possible. In the meantime, however, I’m glad I didn’t immediately take flight.

A far-reaching economic transformation has been completed in eastern Germany over the past years since 1990. How exactly was it realised and to what extent have you experienced these changes?

The first phase after reunification was primarily characterised by the collapse of surviving GDR structures: the existing “industrial centres” largely disappeared and very large numbers of people lost their jobs, some of them for ever. Since that time, however, everything has actually changed for the better. New businesses have been founded, although not all of them have been successful. Towns and roads have been modernised and enormous environmental burdens eliminated. From roughly 2005 now, employment has been increasing, and the exodus has even been stopped in many regions of eastern Germany. We can regret the fact that an “equalisation of living conditions” has not yet been achieved, but that was actually an illusion from the very start. In western Germany, too, there are permanent differences in income and economic output between individual regions. The Mezzogiorno in Italy is a structurally weak region dependent on transfer payments 150 years after the unification of northern and southern Italy.

In your work at the Ifo Institute in Dresden you also study the costs associated with German reunification. On the basis of your research what amount did you get? And what has this money been spent on?

If you calculate how much money has flowed from western to eastern Germany since reunification, you arrive at a total of approximately 1.6 trillion euros. But this sum has been spread over 25 years, which puts the payments in a slightly different perspective. In any event, we shouldn’t make the mistake of interpreting these high transfer payments as the “costs of unification”, because they include the social benefits to which people in eastern Germany are just as entitled as the citizens of the Saarland or Bavaria. In eastern Germany these payments are seen as “transfers”, while in western Germany no one would think of counting them. The east’s problem is its low level of taxation revenue, which only amounts to half that in western Germany; equal entitlements and needs naturally lead to high equalisation payments from the west. If you add up only the costs of development in the east – in other words, the money spent on infrastructure investments and subsidies – you arrive at very much lower figures, just ten percent of the total.

Where do these funds come from? What is the role of the solidarity surcharge paid by all taxpayers in eastern and western Germany?

These funds largely come from general taxation or – in the case of payments for retirement pensions and unemployment benefits – from the contributions received by the social insurance schemes. In Germany tax revenues are not earmarked for specific purposes: all funds flow into a big pot and are then spent according to acknowledged needs. Although the solidarity surcharge you mentioned is always associated with the Reconstruction East programme and was also politically justified in those terms when it was introduced, ultimately it is nothing more than a separate form of income tax which is not earmarked for any specific purpose.

Recently, various political and civil society actors in Germany have proposed transforming the solidarity surcharge into a levy for refugees. What do you think of that idea?

That is not possible under constitutional law: since the solidarity surcharge cannot be earmarked for a specific purpose, the relevant revenues cannot be used for refugees. Apart from that, future revenues from the solidarity surcharge were already allocated a long time ago for use in infrastructure modernisation, for coping with demographic change, for the repayment of existing public debts and other similar purposes. It is illusory to believe that there are additional funds available here that could be used to deal with the influx of refugees. The debate that really must be conducted here is therefore: Which expenditures can we forego to meet the necessary costs of refugees? However, no one is really prepared to confront this question.

Now, after 25 years, could the way German reunification was financed still be a model for other countries that face comparable major social challenges?

There are not many countries where a form of unification based on the German model could be applied. Time pressures in 1990 and 1991 led to a series of decisions being taken in Germany that people in other countries should avoid, if possible: for example, the speedy creation of a currency union with an excessively high exchange rate or the hasty harmonisation of the legal and economic system. The large flows of funds to eastern Germany were ultimately a result of mistakes made at the beginning of the unification process. As a rich economy, Germany was perhaps able to afford this. In other countries, such as Cyprus or Korea, this would be far more difficult. That is why people there are carefully examining where they can follow the  German unification and where they can not.

Prof Dr Joachim Ragnitz has been deputy director of the Dresden Branch of the Ifo Institute since 2007. Before that he spent 13 years working as head of department at the Leibniz Institute for Economic Research in Halle. The Ifo Institute is one of the largest economic research institutions in Germany and a member of the Leibniz Association. The Ifo Institute is especially well-known because it compiles the monthly Ifo Business Climate Index, which analyses the latest economic trends in Germany.