Germany's postwar "economic miracle" began in June 1948, when the government dramatically converted the nation's money into new Deutschemarks (DM) from old Reichsmarks, used during the war, at a rate of 6.5 to 100. Goods suddenly appeared in barren stores. In six months, industrial production rose almost 50 percent. The question now is whether a similar money reform for East Germany -- changing East German marks into DM -- will trigger a second economic miracle. The answer is almost certainly yes.
Reunification won't come cheap. East Germany's roads and railroads are run-down. Industrial pollution is staggering. "There's no pollution control whatsoever," says Miegel Meinhard, director of the Institute for Economic and Social Research in Bonn. Sulphur dioxide emissions are four times higher than in the European Community. But West Germany's rich economy can absorb the extra costs. Its labor force (28 million) is three times East Germany's, and its gross national product ($1.3 trillion in 1989) is about six times bigger.
West German business is also eager to invest in the East. Daimler-Benz, the country's biggest industrial company, has announced plans to build a major office building in East Berlin. Lufthansa wants to construct a large new airport on Berlin's outskirts. The Deutsche Bank, Germany's largest commercial bank, has opened six offices in East Germany to talk to potential borrowers, although it's still legally barred from making loans.
"The response has been incredible," says Hellmut Hartmann, a bank spokesman. "Farmers and people from economic enterprises want to know how they borrow money." Once laws change -- creating private property rights is crucial -- Hartmann predicts "there will be tremendous growth generated by capital from the West and labor and entrepreneurial skills that are still in the East."
Reforming East Germany's money is supposed to start this process. The situation isn't the same as in 1948. The trouble then was that people had more Reichsmarks than they could use. The Nazis had printed gobs of money, but goods were rationed and prices were fixed at low levels. Because money wouldn't buy much, there was little reason for workers to work or companies to produce. Goods vanished from stores, while hoarding and bartering were common. Coal miners received some wages in coal, which could then be bartered for food or clothes.
Converting worthless Reichsmarks into a smaller amount of stable DM -- coupled with the end of rationing and price controls -- changed matters quickly. Money once again had value, and the incentives to work and produce were restored.
The problem today is to stop the flood of East Germans to the West. More than 400,000 (out of a population estimated at 16.5 million in 1989) have already migrated, and the outflow continues at an average rate of almost 2,000 a day. West German Chancellor Helmut Kohl fears that West Germany will be overwhelmed with refugees and that the East German economy will collapse. Converting East German marks (Ostmarks) into DM is supposed to demonstrate the reality of unification and convince East Germans that they can do best by staying put.
In theory, the conversion should be easy. Productivity -- output per worker -- in East Germany is estimated to be about half West Germany's level or slightly less. So the conversion rate should give East German workers nearly half the purchasing power of West German workers. The average West German industrial worker earns about 3,700 DM per month. A similar East German worker earns about 1,300 Ostmarks, but his true income is higher because rent, health care and food are heavily subsidized. This arithmetic implies that a one-to-one exchange between DM and Ostmarks would be about right.
Of course, there's a twist. What actually will be converted are cash holdings and bank deposits. One fear in West Germany is that giving East Germans bundles of DM to spend will worsen inflation. But solving this problem with a low conversion rate would impoverish East Germans and make them want to leave for the West. The best solution may be to be both generous and stingy: set a one-to-one conversion rate, but -- to inhibit a buying binge -- don't convert all Ostmarks immediately. Some could be converted in six months or a year.
The real significance of the talks to create a single currency is that they allow the West Germans to demand quick legal changes of the East Germans. These would include private property rights and rules for foreign investment. Final decisions will probably have to await East Germany's March 18 elections. Even under favorable circumstances, though, the transformation of the East German economy won't be painless. Competition will intensify. Companies that produce shoddy goods may go bust. Other firms may have to lay off workers to become more efficient. West German voters may have to pay higher taxes to underwrite unemployment benefits and adequate old-age pensions for East Germany's 2.2 million elderly.
These problems look manageable. West Germany's trade surplus has recently exceeded 6 percent of its GNP. Extra spending and investment for East Germany can be supported by diverting production from exports. (The shift would occur through a higher exchange rate for the DM, lowering exports and permitting Germans to buy cheaper imports.) Meanwhile, East Germany should benefit from new technology, machinery, management and competition. Economist Axel Siedenberg of the Deutsche Bank thinks East Germany's economic growth could hit 8 percent to 10 percent annual rates. This would equal Japan's growth in the 1960s. The growth rate for all of Germany could rise from 3 percent (pre-unification) to 4 percent.
As East Germany's productivity increases, so should wages and living standards. East Germany could begin paying for its own improvements. "You can compare it to having found a big piece of gold, but we have to work hard to bring it out of the ground," says Siedenberg. The question is whether the Germans have the patience to do that. The answer matters for all the ex-Soviet satellites. If East Germany -- with its huge advantages -- can't prosper, the outlook for everyone else will be bleak.