Thirty-five years ago, after 40 years as separate entities, the fall of the Berlin Wall in November 1989 was followed by the formal reunification of the two Germanies in October 1990. This allowed very little time to plan the transition.
The decision to set a 1:1 exchange rate between the Deutschmark and the Ostmark drove up eastern prices and wages. With a single currency and a unified distribution system for consumer goods, the eastern price level, which had been 30 per cent lower in 1990, rapidly rose to western levels. Eastern wages had to follow suit, making many businesses in the former GDR uneconomic.
Because unification happened so rapidly and unexpectedly, the process was not very well managed.
The effects of the loss of competitiveness, as wages adjusted, were compounded by the very rapid sale of previously government-owned enterprises in the East before they could be reformed and put on a better financial footing. The result was wholesale closures in the East.
If more time had been given to reforming some of these large enterprises, they might have survived in the new unified German economy.
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