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BPEA Article

East Germany in from the Cold: The Economic Aftermath of Currency Union

Andrew K. Rose, George A. Akerlof, Helga Hessenius, and Janet L. Yellen


AT MIDNIGHT on June 30, 1990, German economic, monetary, and social
union occurred: the mark of the German Democratic Republic was
replaced by the deutsche mark; trade barriers were lifted; legal, tax, and
social insurance systems were harmonized; and all existing barriers to
capital and labor movements were removed. Within days a severe pricecost
squeeze was apparent. East German producers could not profitably
sell their goods at prices that buyers-East German, West German, or
foreign-were willing to pay. Moreover, demand for domestically produced
output fell as consumers diverted their spending toward Western
products. As a result, there was a severe decline in output; unemployment
and short-time hours rose rapidly. One of the worst and sharpest
depressions in European history had begun. It continues unabated.