Europe Foreign Trade and International Economic Relations

Helmut Kohl Was Right

Economists criticize his decisions on German reunification and the euro, but he understood better the relationship between politics and economics.

Helmut Kohl’s death earlier this month has revived a contentious debate over his legacy. Although the former chancellor of Germany is widely considered to be a political genius, conventional wisdom holds that his economic policy was a failure. It’s time to reassess that view. Kohl was smarter on economics than many professional economists are willing to admit.

The arguments that Kohl was a brilliant statesman and a bad economist are closely intertwined. His overarching political goal was to quickly reunify Germany after the collapse of communism in the East and then unite much of Europe under a new single currency.

Kohl’s center-left opponent in the 1990 elections, Oskar Lafontaine, and many German academics argued against immediate reunification. They believed the East German economy was too different from the West and needed time to adjust. East German companies had outdated products that had no chance of competing in Western markets and market regulations were mostly absent.

Kohl ignored his critics. His central economic insight was that reunification would be the cause, not the result, of economic alignment. East Germany’s best hope was to quickly adopt the strong institutions of the West.

He has been proved right by history. This is true even of perhaps the most controversial aspect of his reunification policy—the one-to-one conversion of East German marks to deutschemarks. Most German economists argued that this would distort relative prices and destroy the East’s competitiveness. The president of the Bundesbank at the time, Karl Otto Pöhl, resigned in protest over Kohl’s decision.

But the truth is that East Germany’s economy was obsolete and couldn’t be competitive at any price. No one would have bought a car from the East German auto maker Trabant, or “Trabi,” even at a 10-to-one exchange rate.

So Kohl took a different approach. His one-to-one conversion amounted to a large stimulus that helped East Germans survive several years of high unemployment and low incomes as their economy reconfigured along market principles.

Kohl wasn’t infallible. He was too optimistic when he promised “blossoming landscapes within a few years.” And he was wrong on labor-market and competition policies during his chancellorship. He raised taxes and expanded the welfare state, which inhibited investment and deteriorated the economy’s international competitiveness.

But the economic convergence of the East is a remarkable success. Today the average productivity per capita in what used to be East Germany is around 80% of the West. That compares well to massive regional differences elsewhere in Europe. The north-south economic divide in Italy and Spain today, for instance, is much greater than the east-west divide in Germany.

Even the financial transfers to the East of around 30% to 40% of gross domestic product over 25 years seem modest.

Central to the economic success of German reunification was the immediate adoption of the West’s institutions—its governance, including both its democracy and its administrative agencies, and also its currency—which forced economic structures and actors to adjust. This gradually and endogenously created an optimal currency area. Kohl intuited that if instead East Germany waited until it was ready to adopt Western institutions, it might never adopt them at all.

There is an important lesson here for Europe today. Institutions are more important than relative prices. The eurozone’s problem isn’t that relative prices are wrong, but that it lacks credible institutions and adjustment mechanisms.

Just as for East Germany in 1990, the problem of Greece or Italy today isn’t a lack of price competitiveness but one of poor or missing national and European institutions. A weak currency isn’t a durable strategy to ensure competitiveness and prosperity.

Eurozone countries have benefited from adopting a strong and credible euro, which has created more favorable financing conditions and more stable prices than most members enjoyed before. And it has deepened trade and competition, benefitting particularly open economies, including Germany’s.

Member states should take the lesson from German reunification and focus on reforming domestic institutions as well as completing the monetary union. That requires finally completing Europe’s capital-market and banking unions under a single regulatory structure and creating a fiscal union with both more risk sharing and a stricter adherence to joint rules. Just as in Germany in 1990, sharing sovereignty in Europe today will ultimately make it stronger and more resilient and everyone better off.

Helmut Kohl was a visionary, not just about the politics of German reunification and European integration but also on its economics. He didn’t consider the euro the price for German reunification, but as an essential prerequisite for his vision of a strong and united Europe. He lived to see his dream come true for Germany, but not for Europe. It can still come true now.

The op-ed was first published in the Wallstreet Journal on June 28, 2017.

One comment

  1. It were useful and honest, Mr. Fratzscher, if you explained to the audience what nice and innocuous terms such as “completing the monetary union” or “creating a fiscal union with more risk sharing” would mean in practice – namely the indispensable transfer of trillions of Euro of taxpayer’s money from Northern Euro Zone countries to Southern Euro Zone countries.

    This had to happen in a situation where most of the workers and employees e.g. in Germany did almost have no benefits from the increase of GDP and corporate profits in course of the last 26 years (see: https://www.linkedin.com/pulse/unternehmensgewinne-vs-reall%C3%B6hne-deutschland-zwischen-kurt-brand) and where Germany is amongst the OECD countries with the highest taxes and social security contributions.

    Do you believe it is candid, if you criticize on the one hand in your books and public statements the inequality of income and wealth in Germany as well as the unequal opportunities for social advancement within Germany, and on the other hand request and support political decisions, which even intensify this inequality?

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