When asked what I think of European reconciliation, I typically respond that I believe it is a good idea and that we should pursue it. This is, of course, a prank, as Germany is today united with no formal inside edges.
However, 35 , years after the fall of the Berlin Wall, the division between West and East Germany remains clearly visible, with the victory of the far-right Alternative for Germany ( AfD ) in the state of Thuringia in Sunday’s state parliamentary elections a case in point. These schisms show no sign of fading in the near future, according to a quick look at economic and social records.
Now, compared with the East, West Germany has higher income degrees, lower unemployment rates, more firms, fewer hours worked, more millionaires, higher vehicle equity, higher voter membership, less inclination for serious political parties, higher share of younger citizens, higher proportion of immigrants, higher number of religious affiliations and more spend produced.
Historical significance
The former border between West and East Germany, now known as the Former Federal Republic’s and the New Länder, respectively, is where the differences clearly intersect. After World War II, Germany’s historical division caused two nations with opposing economic and social systems that diverged for more than 40 years.
The reasons behind the current differences are more complicated than just this shocking shock, though. In fact, a trio of authors has demonstrated that the same regional disparities existed prior to the founding of the German Democratic Republic ( GDR). For example, in 1925, the” West” already had a lower share of working-class workers, more self-employment, lower voting shares in extreme parties, higher church attendance and lower female labor participation. Additionally, World War II had a larger destructive impact in the East, and there was a limited migration from the East to the West just before the wall was raised.
Approximation but no lasting convergence
Reunification’s claim that it would lead to long-term convergence was probably overstated.
It is accurate to say that West Germany inherited well-functioning institutions. Additionally, it underwent a better than initially anticipated privatization process and received significant financial transfers from the West to finance social expenditure and investment.
However, after an initial improvement in living standards in the East, economic conditions quickly deteriorated, and the population shrank. Although fiscal transfers may have reduced the divergence between the two regions, they failed to produce sustained convergence.
This is hardly surprising, given that disintegration was a much more significant shock than reunification. After more than four decades of separation, the production infrastructure did not revert to its original spatial arrangement following reunification. Furthermore, the manner in which reunification was conducted likely exacerbated these disparities.
Unanticipated psychological impacts
Convergence is not just about money; it also involves psychology, which is a crucial and challenging task in economic affairs, and some measures that may have seemed justified from a strictly economic perspective have had unexpected effects.
For example, job losses related to the privatization of state-owned enterprises in the East decreased individual trust, reduced political engagement and increased support for radical parties, as Kellermann’s work has shown. These fears of distrust have now become deeply ingrained.
Support for extreme parties is not diminishing, and many of these voters oppose the European project. On September 1, the AfD won the state election in Thuringia, marking its first-ever victory in a state election, and came a close second in Saxony. A recently formed populist left-wing party, BSW, came third in these elections.
Thirty-five years after reunification, there is no clear path back to convergence for the former East German states. On the contrary, we are currently experiencing political and policy paralysis. This has been made worse by significant geoeconomic shocks that have affected Germany in recent years, including the Russian invasion of Ukraine, which boosted inflation, and the Fortress China strategy, which slammed German exports to China.
Political, economic and social fragmentation is back.
European inequalities
Even worse, German reunification occurred in a context of more general divergence between European regions. The German situation is not a singular case within the European Union, which is worrying as it may be.
Around the same time, another unification took place in Europe. The Maastricht Treaty, which went into effect on November , 1, 1993, marked the foundation of the European Union ( EU). It paved the way for the development of a common currency, the euro, and a stronger cooperation between member states and the development of European institutions. However, much like German reunification, it did not lead to regional convergence within the European Union, as one might have expected.
Similar divides to those between West and East Germany exist in other European countries, such as the urban-rural divide in France, but also within the European Union, where peripheral regions have struggled, with a few exceptions. These peripheries ‘ paths to a sustainable recovery are unsure.
Instead, as the recent Brexit-related experience shows, several factors make us worry that we are moving in the direction of political and economic disintegration within European countries and Europe.
Better allocation of funds
I would like to suggest two options for further investigation, despite the fact that these issues cannot be resolved quickly. The effectiveness of EU funds is a promising area. Beyond just setting future climate change goals, there is a pressing need to significantly alter the level and use of EU funds, as discussed in my joint article with Jérôme Creel” ThisGenEU.”
We now have much more information about how to use EU funds effectively. Some local governments may be persuaded to reduce public spending in response to these funds, which could undermine their intended effects. Therefore, it is crucial to target funds that foster medium-term growth and to combine them with policies that enable peripheral regions to use them more productively, in order to avoid a” Dutch disease” type of situation.
Dutch disease
This phrase describes a situation where financial inflows cause economic distortions, such as rising wage costs, overheating the real estate market, or excessive concentration of investments in low-productivity sectors, which ultimately result in a country’s economy being negatively impacted over the long run. Politically, it can also lead to an institutional” Dutch disease”, where excessive reliance on external funds weakens incentives to reform local institutions, creating institutional blockages and ineffective governance.
For example, European funds should be supervised by Europeans and not by local authorities. It is crucial to disengage their management and use from local political authorities. In order to balance competition and coordination among various regions, industrial policy should be put in place at the European level. Regional governments could also be given more authority over the supply of public goods to promote healthy regional competition.
More free trade?
Second, the European Union is still far from being fully integrated. There are too many trade restrictions, despite the EU’s commitment to free trade and a single market. Even in terms of trade in goods, the reality is far from a real single European market. Services are a much bigger untapped market. From the current EU version of “free trade,” it is essential to free trade.
For example, reducing regulatory differences, labor market restrictions, infrastructure asymmetries and improving cross-border connections, as well as strengthening capital market integration, would allow EU economies and regions to specialize more in the production of goods and services for which they have a genuine comparative advantage.
This would lead to a more efficient allocation of resources within the EU and a greater convergence of prices across Europe, according to the factor price equalization ( FPE ) theorem found in many economics textbooks. Wages and other sources of income are likely to be a part of the convergence.
Of course, more research and discussion are required to explore these and other options for resolving the current problems of economic divergence. These are existential concerns for both Germany and the EU, particularly in the current state of heightened geopolitical uncertainty.
The answer to the problem of German reunification may not be in Germany, but rather within the European Union. Effective European funding and greater European integration have the potential to bring about economic convergence and strengthen both Germany and the EU’s political and social fabric. We all stand to gain from the fact that Germany’s reunification is still a good idea.
Gonçalo Pina is a visiting associate professor for global economics at the ESCP Business School.
This article was republished from The Conversation under a Creative Commons license. Read the original article.