Volume 18 Number 1
AN ANALYSIS OF GERMANY’S ECONOMY AND ITS
IMPACT ON EUROZONE’S ECONOMY
Tarrant County College/U. of Phoenix/Intercollege Larnaca, Cyprus
UGSM – Monarch Business School &
Intercollege Larnaca/University of Nicosia, Cyprus
Tarrant County College
One of the most important events in the World after World War II was the reuniting of Germany, during the late 1980’s and early 1990’s. The goal of the authors in this paper is to discuss the general economic conditions in Germany, before and after the reunification. In attempting to do that, we will in the introductory section present data and analysis for both East and West Germany for the years from World War II up until the time of reunification. The second section will present an evaluation of the economy of Germany since the reunification. In the third section a statistical model will be developed to show the general impact of the union on the German economy. In the fourth section, the authors will try to derive a conclusion as to whether the reunification has thus far been handled well. Finally in the Appendix we will run several regression models to measure the impact of W. Germany or E. Germany and the United Germany on the Eurozone of sixteen nations. I. Introduction
Germany was broken down into East and West by the allies right after World War II. The East remained under Soviet control for a number of years, and then under Soviet influence until 1989, whereas the West was under western control and financial support until 1948, and since then under western influence. A lot of developments took place in both Germanies during those 40 years, but probably the most important one took place during 1961, when the East German government built a wall to separate East and West Berlin. In 1989, this wall opened as a result of a mass exodus of East Germans to the West, as well as a lot demonstrations in a number of East German cities. Finally, by October of 1990, the two German States were reunited, and in June of 1991, the German seat of government was moved to Berlin.
Because of the different political and economic influence in the two countries since the split, their respective economies headed in different directions. In this section of the paper, the authors would like to evaluate the economic performance of both East and West Germany from the end of World War II until 1989, the year of the unification. We will begin with West Germany first.
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Volume 18 Number 1
1948 - 1960 During this period the West German economy was very robust. It experienced very fast growth, low price inflation, declining unemployment and a good external trade balance. One of the most important factors driving this success was a strong improvement in labor productivity which was in turn due primarily to three things:
a. a rapid reconstruction of the capital stock
b. a powerful structural adjustment of employment
c. German wages were lower only than the US and the UK
As a result of these things, wages rose by 15% between 1947-1950, while the consumer price index rose by 14.3%, and labor productivity rose by 17.7%. All these contributed to strong profit margins for firms. This success continued between 1950-60, during which time the GDP doubled, worker productivity rose by 75%, and there was virtual price stability. This growth was accompanied by only one significant recession, which was in 1957-58. What were the factors contributing to this unbelievable success? Demand for German goods was very strong, and that pushed exports up by 17.5%. The strong demand for goods was fueled by a relatively loose monetary policy (made possible by the lack of inflation). On the fiscal side, policy between 1952-56 created a budget surplus of more than 3% of GNP. In short, during the years...