Category Archives: Unification

The Political Economy of Debt

In 1706 and 1707 Acts of Union joined the Kingdom of Scotland to the Kingdom of England. The two countries had in fact shared the same person as monarch since 1603, and there had been previous attempts to fully unite the two kingdoms. It was indebtedness that provided the final impulse: Scotland was virtually bankrupt, and its economic salvation lay in the Union. Adam Smith was safely at Balliol in Oxford when in 1745 the final Jacobite rebellion flared, and was then crushed. But the emergent Scottish Enlightenment of which he became a member had been firmly anti-Jacobite, and the Scottish intelligentsia of the later eighteenth century was broadly united in recognising that the Union had enabled the Scotland in which they lived to flourish.

German Unification has been rather similar; with the difference that the current German President and Chancellor were both born and grew up in the former GDR, a state eventually more bankrupt than Scotland had ever been. For most of the eighteenth century Britain’s monarchs were Hanoverian; its Prime Ministers were all English (not Scottish, Welsh or Irish). It would be hard to imagine an early eighteenth-century Britain ruled by a Scottish king and a Scottish Prime Minister. But that is where Germany is today.

German Unification was enormously costly for Germany – as I remarked in a previous post, winding up the economic restructuring alone cost the equivalent of half the contemporary British national debt.  While the GDR was to all intents and purposes a foreign country by the 1980s, West Germany was committed to integration, and was prepared to pay its price.  Twenty-five years later this has all but been forgotten – but in the context of the relationship of Greece to the EU and the euro, it bears remembering.

Especially in the light of the kind of argument advanced by Thomas Piketty (Die Zeit 8 July 2015) that Germany benefited from debt writeoffs during the interwar years and in 1953, suggesting that Germany is today in no position to refuse Greece similar debt writedowns.  Although Piketty shows in this interview a very sketchy understanding of the postwar political, monetary and economic order, he does at least recognise that Marshall Aid and debt relief occurred because it was in the general European interest; without it, economic recovery could not continue.  German recovery was central to the recovery of the European economy.

The international economic significance of Germany is commonly misunderstood.  Students I taught in the 1990s presumed that Japan, whose population was about half the size of Germany’s again, was also a more significant exporter.  This was not true: while Germany was a smaller economy than Japan, it exported far more – including very large quantities of machine tools, chemicals and pharmaceuticals that the consumer never sees.  The World Bank’s Development Report for 1998/99 shows that Portugal and Greece had a similar population and roughly similar GDPs; but that Portugal exported 35% of its GDP, and Greece 13%.  Germany exported 29% of a GDP nearly eighteen times larger than that of Greece, with a population less than eight times as big.

Today the common European interest turns not on the problem of restarting international flows of goods and services, since in any case the Greek economy never has been a significant contributor to this.  The common interest is linked to the problems of a flawed currency union to which Greece should not have been admitted, even if it had not massaged its national statistics.  This flawed currency union exists because of the political ramifications of German Unification.

Plans for a common European currency date back at least to the early 1950s, became in 1969 an explicit objective of the European Community, but were then stalled by the collapse of the international postwar monetary order in 1973.  The idea was revived in the wake of German Unification by the French President, François Mitterand, as a means of chaining down Germany and the leading European currency, the Deutschmark.  Margaret Thatcher, poorly advised and preoccupied by some very strange ideas about modern Germany, lent her support to Mitterand before her fall in November 1990.  It could therefore be said that the Euro originated as a French plot, aided and abetted by a truly “perfidious Albion” which gave a helpful push to a project which it then refused to join.

The institutional weaknesses of the euro were exposed in the wake of the 2008 financial crisis, and the ship, now launched, began the process of being rebuilt at sea – not that unusual in the eighteenth century, but technologies were very different then.  Having developed procedures and institutions that lent the union a degree of coherence, it has been derailed once more by the need to bail out an economy that has some modern features, but which is in essence as bankrupt as the GDR.  While Greece is smaller than the GDR was, it cannot simply be annexed by the European Commission, since its population has in any case expressed its will in a referendum that rejected the only real plans anyone had for Greece’s future.  That these are the only existing viable plans was then immediately confirmed by the Greek government, which adopted them as the basis for its “new plan” at a time when a bad situation had become even worse.

And so the dilemma faced by eurozone states is that Grexit has an economic logic but dreadful political ramifications, for the Greeks as much as anyone else.  A monetary system that had begun to emancipate itself from the problems of its flawed political origins is now being asked to pursue ends that are essentially political, contaminating decision-making in the Eurozone.  Politics and economics are always interwoven in complex ways, but they are not the same thing.

In these times much use is made of the word “democracy”, without however much regard for how modern democratic orders actually function.  The recent Greek referendum was a travesty of democratic decision-making in the very country that invented the idea of democracy.  What can be said is that Germany is the model of a modern federal parliamentary democracy.  Its constitution was largely shaped by the Western allies: in fact, largely shaped by Britain, since Germany has a President who functions as an elected constitutional monarch, whereas the French have a President who functions more like an elected monarch of the more traditional kind.  The current divisions between the French and the German governments over the proper approach to Greece as a member of the eurozone are as much an effect of the differing political dynamics of the two countries as anything else.

German Unification

The last time I was in Berlin was for a conference,  scheduled for 8-10 November 1989.  I had lived and worked there from 1968 to 1972, and it was then “West Berlin”.  My parents lived off the Heerstraße, near the Corbusierhaus and the Olympic Stadium; I worked during vacations at Smuts Barracks, an old Horse Transport barracks used by the British Army for its squadron of Centurion tanks (they didn’t bother to station any Chieftains in Berlin) and as the maintenance centre for all the civilian and military buildings it occupied in the British Sector.  In the summers there would be the odd sonic boom, as the Soviets maintained their low level harassment; and of course the East Germans ran the S-Bahn throughout Berlin, a cheap but very rackety urban railway.  We lived on the fringe of the Grünewald, a vast wood in the centre of Berlin between us and the Wannsee, on which I rowed during the summer vacation.  Of course, you could only go into East Berlin with a military car and driver, because the Wall separated West from East; so you never ran across anyone who lived outside West Berlin.

My beautiful picture

Bernauerstraße, Winter 1970

In November 1989 I was attending a conference at the Wissenschaftszentrum, and staying with friends (the Meilings, with whom I had rowed on the Wannsee) down in Dahlem.  Early on the morning of 10 November I got the U Bahn to Kurfürstendamm, walking the rest of the way to the Landwehr Canal and the Wissenschaftszentrum.  There was hardly anyone around, but then a man asked me where the Kurfürstendamm was.  A strange question, since it was just behind me.  But he looked a bit out of place, dressed rather differently to the average West Berliner; he was German, but not knowing where the Kudamm was?  So I pointed the way.  Then someone asked me where he might change some money; I suggested a bank.  And then what I immediately recognised as an East Berlin radio taxi came around the corner, and I knew that something very strange indeed had happened.

During the morning a constant stream of people followed the Landwehr Canal to the Kudamm, a place they knew about but which was not on any of their maps of the city.  At lunchtime we took a break and walked across the Tiergarten to see the Wall, a very busy place with people sitting on it, film crews interviewing them; I saw Willy Brandt at the Brandenburg Gate.  I had left my Nikon in Dahlem.  By the evening joy riders in Trabants had penetrated to the suburbs, doing a tour of a city they had heard of, but never visited.

I was in Mannheim during December 1990 for the first post-Unification election, and a depressing affair it was.  Helmut Kohl was riding a wave of popularity; Unification, he said, “would not cost a single pfennig”.

Well it did.  When they wound up the Treuhand a figure roughly equivalent of the GDP of Austria was added to German public debt in one go.  Looked at another way, this sum was roughly half contemporary British public debt.  The only bright spot was that the infrastructure of the former GDR was in such a poor state that it had to be replaced wholesale, a one-off upgrade at an important point in the development of new technologies of communication and environmental safeguards.  The former FRG economy swallowed all this without blinking much, along with a major influx of “ethnic Germans” from the former Soviet Union whose numbers dwarfed those bandied about today in UK immigration debate.  This was nothing new: in 1950 some 20% of the population living in the territory of the FRG were refugees and stateless persons of one sort or another.  Every few years some pundit or other writes about the impending “slowdown” of the German locomotive.  Some locomotive.

Kohl was never a great strategic thinker.  François Mitterand on the other hand did have a plan: to maintain French influence and bind Germany into the new Europe by creating a single currency, in which Germany would have to surrender the Deutschmark, a currency that had retained and increased its value more or less continuously from 1950 to 1990.  Critically, Mitterand had the support of his friend Margaret Thatcher on this.  1992 was the year in which the Single Market Programme terminated; at Maastricht in February 1992 Kohl agreed to move directly on to the creation of the euro.

Unification laid waste to the economy of the former GDR, the “Wild East” as it became known.  In August 1991, driving cross-country from Erfurt to Marburg, you could still tell where the border had been by the state of the roads and of the villages you passed through.  But that is all long gone.  At the time it was less certain how quickly and thoroughly this would happen, and in early 1992 I drafted a paper on all of this, commissioned for a collection on the politics and economics of Unification that never materialised.  It is a period piece, but all the same, one that makes a serious attempt to assess the impact of Unification on the economy of the former GDR: Unification