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Costly Reunification

March 11, 1993



NEGOTIATIONS in Germany over a "solidarity pact" to finance reunification with the former East Germany are set to resume next week. Their importance was underscored by the recent elections in the state of Hesse, in which an increasing number of voters fled the political centers for the left-wing and right-wing extremes.

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The vote was driven largely by a lack of confidence in the main political parties, especially the Christian Democratic Union and the Social Democratic Party, to deal with reunification costs, immigration, and recession.

The country's gross domestic product (GDP) grew last year by 2 percent after inflation, compared with 3.7 percent for 1991. In the western part of the nation, however, GDP in the fourth quarter of 1992 fell by 1 percent. Unemployment is running at 7.5 percent in western Germany and 15 percent in the east. The country's 4.2 percent inflation rate remains uncomfortably high by German reckoning; hence the Bundesbank's reluctance to lower interest rates.

Against this backdrop, the sacrifices a solidarity package would entail are significant: wage concessions from unions, tax increases, reduced aid to states for infrastructure projects, and a freeze on government salaries. Reunification is expected to cost some $66 billion a year through the end of the decade.

A fair and credible, if difficult, economic plan to deal with reunification is necessary. But a broad restoration of faith in the country's political leadership may await the arrival of a new generation of leaders.