An Analysis of Governmental and Economic Trends after the Wall Matthew Peirsel Legal Environment for Global Organizations National American University Dr. Richard Gayer In November of 1989, the German Democratic Republic, also known as East Germany, began to crumble. As the citizens of Germany demolished the Berlin wall, the final chapter of World War II finally came to an end for the German people. The next chapter in German history, reunification, would determine how Germany as a whole would progress into the future as a global player.
This paper will examine the political and economic challenges that post Cold War Germany had to overcome, and the accomplishments that it has achieved along the way to progress from a war torn country, into one of the biggest economies in the modern world. On October third of 1990, the reunification of West and East Germany into a single united country became official. The unification of the two countries essentially consisted of an incorporation of the socialist German Democratic Republic (East Germany) into the Federal Republic of Germany (West Germany).
As a result of this process of incorporation into the existing political system of West Germany, much of the legal, governmental and economic systems that existed in West Germany were continued in East Germany (Gordeeva, 2009a). The government that has existed in Germany since its unification in 1990 is a federal republic with its capital in Berlin. The Federal Republic of Germany has as its constitution a legal doctrine known as the Basic Law (Germany, 2009).
First Ratified on May twenty third of 1949, after Allied occupation of West Germany ended; the Basic Law became the constitution of unified Germany on October 3, 1990 with the ratification of Article 23 of the West German Basic Law (Gordeeva, 2009a). This day is now celebrated as a national holiday in Germany known as Unity Day (Germany, 2009). Article 23 of the Basic Law outlines how “political structures and policies of West Germany would be extended to the east, how other institutions – such as the educational system – would be coordinated, and which issues would be resolved later” (Gordeeva, 2009a).
This was the preferred method of unification of Germany, by the West German chancellor Helmut Kohl, due to how quickly it could be adopted in contrast to an alternate plan laid out in Article 146 of the Basic Law that would have called for the abandonment of the Basic Law in favor of a “constitution developed specifically for a unified Germany” (Gordeeva, 2009a). The current system of government in Germany, which is an extension of the legal system in place in post World War II West Germany, is what many political analysts in the United States would consider in the middle of the political spectrum.
This is reflective of Germany’s past, which prior to WWII was a fascist state, and after WWII was divided, with a large portion under the control of a socialist government (Gordeeva, 2009a). This unique past that Germany alone possesses has created a political climate where parties embrace a very moderate stance and avoid extremely conservative or liberal positions due to their obvious links to the past; legislators work hard to promote political stability of their nation. This tendency has established Germany as a party state where “all government policies emanate from the organizational structure of the political parties” (Gordeeva, 2009a).
Due to the forethought of Chancellor Kohl, reunification of Germany, from a governmental standpoint, was a relatively simple task. The challenge of unifying two economies, one capitalist and the other socialist into a single growing capitalist economy would be a far greater task. Immediately after the unification of the East and West German economies, the unified German economy took a serious downturn. During this time, gross domestic product declined by nearly thirty percent, value added industry dropped by more than sixty percent and employment was reduced by thirty five percent (Spitz-Oener, 2007).
Fortunately the immense task of privatizing East Germany was met with little resistance. This may have been in part to the DM100 Begrussungsgeld – welcome money – given to each East Berliner upon their arrival in the former West Germany (Mackenzie, 2004). In order to unify the economies of West and East Germany, the German government formed the German Federal Privatization Agency, which was tasked with selling nationalized companies to private interests (Thomas, 1997).
Additionally, the West German government took over the Treuhandanstalt, a trust agency, for the purpose of taking over East German firms to “turn them over to new management through privatization” (Gordeeva, 2009b). When the Treuhandanstalt was dissolved in 1994, it had successfully privatized 14,000 East German companies (Gordeeva, 2009b). Several factors contributed to a relatively smooth initiation of this historically unprecedented task; the unification of a capitalist economy and a socialist economy into one.
The adoption of a stable constitution and legal system which the parliaments of both East and West agreed upon helped to pave the way for economic rebuilding and growth early on in reunified Germany. Additionally, government programs which subsidized environmental cleanup and restoration of depleted pension funds, as well as tax breaks, made Western investment much more appealing. By the time privatization was complete, more than $700 billion had been invested in Eastern German companies by private interests (Thomas, 1997). At first, investor interest in the East was lacking.
There were many hurdles to East German investment, which included high production costs, badly maintained transportation infrastructure, power shortages and telephone infrastructure problems (Gordeeva, 2009b). These shortcomings made expanding production facilities into the East an unappealing option for many companies, who instead, expanded their enterprises in the West which did little to improve economic health and growth in the East (Gordeeva, 2009b). When investors did begin to turn their eyes toward Eastern investment, they did so very unwisely.
Between 1990 and 1996, the tax incentives were so favorable that a company could write off 50% of their investment in East Germany against tax in the first year of that investment (Mackenzie, 2004). This incentive resulted in ridiculous projects being undertaken, such as a 375,000 square foot furniture store in downtown Magdeburg, a town with a population of only 30,000 (Mackenzie, 2004). When investment took off, there was a feeling of exuberance toward the unification of Germany and the possibilities that a unified Germany could offer.
During the building boom of the 1990’s, companies overinvested massively in infrastructure projects, which were driven by government tax breaks, but the money seemingly disappeared shortly after and many unfinished projects were abandoned. The result is empty shopping centers, empty highways, under utilized utilities and unfinished construction projects that the people of former East Germany simply do not have the income to support. Eventually, the German government realized that many companies were investing in the East simply to avoid tax.
In response, the German government created a law that stated that if an investment is uneconomic, the investing company must pay the exempted tax back to the government. Companies, who were already failing due to offices and stores sitting empty in the East, now found themselves with a hefty tax bill (Mackenzie, 2004). This economic boom and subsequent decline is not unlike the housing bubble, which formed in the United States in the late 1990’s and early 2000’s and began to burst in 2006.
Driven by optimism, risky investments and predictions, which proved wrong, developers and construction companies built thousands of homes, resulting in a large surplus of housing. However, when the bill came due, they found the buyers they were counting on either had bad mortgages or were not buying at all. In the case of East German development, private investors dumped large sums into building projects, many of which now lay unoccupied. “Hardest hit is Frankfurt, the banking capital of Germany, where around 15% of the office stock is vacant” (Mackenzie, 2004).
Adding to the confusion throughout Germany during unification was the issue of property rights. Over the last fifty or so years from 1933 to 1989, private property in Germany had been expropriated multiple times, first by the NAZI party, then by the Soviets and finally the GDR (Gordeeva, 2009b). Determining who actually had a valid claim to ownership of property was often difficult, if not impossible. By December of 1992, more than two million property claims had been filed in East Germany.
The restructuring of the German economy and privatization of East German firms is, however, not a story of failure. Many companies managed to undergo the privatization process and emerge as a successful business. One such company is Kabelwerk Oberspree, which manufactures industrial electrical cables (Thomas, 1997). The privatization efforts of the German government proved to be a success due to the setting and accomplishment of several key goals that it had put in place for all privatization efforts.
In privatizing Kabelwerk Oberspree, the German government set out to maintain as many employment positions as was practical at the factory; in addition, Kabelwerk Oberspree’s aging thirty-year-old equipment was modernized (Thomas, 1997). An indirect but intentional result of the privatization of this cable manufacturing company was the breaking of a near monopoly that was held over the cable manufacturing industry by cable companies in the West (Thomas, 1997).
Many West German companies saw the reunification as a great opportunity and managed to successfully take advantage of the opportunities presented by East Germany and its available work force. The circumstances under which reunification was conducted proved quite beneficial for Goldpfeil, a $60 million leather goods company operating out of former West Germany, that opened a 1000 foot store in 1990 in the Waikiki Business Center in Honolulu, Hawaii.
Ingo Kaiser, president of Goldpfeil said that one of the reasons that expanding into former East Germany is appealing and convenient for Goldpfeil is that “German companies don’t want a shift in the labor market, and neither does the government, so reunification was executed quite quickly” (Thompson, 1990). Additionally, the available work force presented a significant benefit to Western companies looking to invest in the East during the 1990’s. At the time Goldpfeil was in negotiations with several factories in former East Germany “for production of its leather goods, high end purses, wallets and luggage” (Thompson, 1990).
Goldpfeil, which primarily targets its products toward international markets, with a strong presence in Japan and Honk Kong, China, viewed the newly available work force in former East Germany as an opportunity to bolster production and thus, expand its presence in the Pacific, which it views as the future of its business (Thompson, 1990). In addition to unifying itself, Germany played a very active role in the unification of Europe into what is known today as the European Union, or EU.
In December of 1991, just three months after Article 23 of the German Basic Law, which united East and West Germany in to the Federal Republic, German chancellor Kohl and other European Community leaders “met in Maastricht to reach agreement on the Draft Treaty on Political Union. As a consequence of the treaty, Europe was committed to the creation of a common currency, set to begin in 1999 at the latest. At Maastricht, EC heads of state, in addition to agreeing on a path to political union, also agreed to the goal of establishing a common foreign and defense policy.
The Maastricht Treaty provided the foundation for a federalized United States of Europe by creating the European Union, of which the EC is a part” (Germany: European Union, 1995). However, creation of the European union met many setbacks in the 1990’s. Political circumstances in the Soviet Union, war in Yugoslavia and the inability of the EC to agree upon a cogent and effective response halted the creation of a common defense policy (Germany: European Union, 1995).
Not allowing the political upheaval in Eastern Europe and the recent vote in Denmark and France against ratification of the Maastricht Treaty to dampen his optimism, German chancellor Kohl touted the main goals of creating a European Union. Kohl professed that a union of European nations would create common foreign and security policies, develop an economic and monetary union, develop a common policy on domestic security, intensify cooperation in environmental protection, and enhance the role of the European Parliament (Germany: European Union, 1995). There was significant resistance to creating the European Union at first.
Many countries in Europe, with memories of Nazi Germany relatively fresh in mind, feared that creation of a European Union would lead to a loss of sovereignty and possibly German control. Additionally, although the position of the German officials about the Maastricht Treaty was that it would reassure “European neighbors of Germany’s trustworthiness as international partner”, as much as seventy percent of the German public was resistive to the idea of giving up their Deutschmark, which had come to be a symbol of German economic strength, for an untested European currency unit (Germany: European Union, 1995).
Regardless, in December of 1992, German parliament ratified the Maastricht Treaty, effectively joining the European Union (Germany: European Union, 1995). As an influential member of the European Union, Germany has always favored rapid expansion of the Union. As a country with an economic foundation in high tech manufacturing and services, expansion of the European Union into countries along its eastern borders is beneficial. These countries have economies, which are largely grounded in agriculture. In Poland agriculture accounts for 28% of the economy, where in Germany only one percent of the economy is focused on agriculture.
These economies compliment each other and this fact serves as an explanation for Germany’s advocacy for Polish membership in the EU, prior to its inclusion in May of 2004 (Newnham, 2004). Additionally, Germany is one of the largest member states of the EU and is thus, unlikely to fear losing influence in the EU parliament as additional states are accepted into the EU (Newnham, 2004). Expansion of the EU, prior to the acceptance of Poland, and the Czech Republic, also made sense for Germany due to the fact that, at that time, it had borders along nations that were not EU members.
This presented a possible border security nightmare for Germany as well as economic burdens as it attempted to stabilize its eastern neighbors on its own (Newnham, 2004). Additionally, the inclusion of Poland, the Czech Republic, Slovakia, Romania, Bulgaria, Lithuania, Latvia and Estonia, established Germany as a state in a central position of the European union, which from a security standpoint, and an international trade standpoint has obvious advantages. Finally, and perhaps most importantly, Germany has unique cultural and historical links to the accession states, which further deepens its interest in pushing for rapid expansion. From the time of the Hanseatic League, Germans have led Europe in trading links with Eastern Europe” (Newnham, 2004). German language and culture have been influential in the accession states for generations. It would not be uncommon for a German diplomat to have a long lost ancestral estate in Estonia, or to have lived there as a child.
Equally as important to the positive cultural ties that Germany holds with many of its eastern neighbors are the atrocities that Germany committed against its neighbors during WWII. As a result of this heritage, Germany has a sense of historical guilt and thus feels responsible to protect the prosperity and stability of its neighbor states in Eastern and central Europe today (Newnham, 2004). No other nation in Europe has influenced the European Continent as profoundly as Germany has during the previous century.
Once a divided nation, the German people have overcome political segregation as well as governmental and economic reunification and restructuring, all the while positively redefining their place in the international scene. Emerging as a leader in the creation of a unified Europe, and embracing stability, acceptance and cooperation with their neighbors, Germany has become an example of what a nation can accomplish when the right people with the right ideas lead the way. This paper has examined the governmental, political and economic factors of unification of Germany after the collapse of the GDR.