Professor Karl-Heinz Paqué

How did German Unification Change the World?

3 Points after 25 Years

Summary of Speech to be held at the 60th Liberal International Congress
in Mexico City to be held on Saturday, October 31st 2015

I. Germany as its stands ‐ anno 2015:
Less homogenous, more competitive

The fall of the Berlin Wall on November 9th 1989 was a great victory for freedom, maybe the greatest in all post‐World War II European history. However, it was also the starting signal for a speedy process of economic and political unification of Germany that started in earnest in 1990. To kick off this process was, by all means, a major national task, by far the most challenging since early post‐war reconstruction in the late 1940s. Note that the process had to be fast in the sense of a shock therapy because the high mobility of the labor force between eastern and western Germany prevented any slowly moving evolutionary approach. In particular, highly skilled young people had to be given an incentive to stay in the East, and this could only be achieved by adopting an irreversible and credible policy stance that essentially consisted of three major elements:

the establishment of an economic, monetary and social union,
the rapid privatization of the eastern industrial capital stock, and
the fast and complete modernization of eastern physical and social infrastructure.

By and large, this policy stance proved successful though fiscally very expensive – its fiscal costs being estimated in the range of 2000 billion Euros. On the positive side, eastern Germany today, after going through a deep crisis, is again a region with a highly competitive industry that is fully integrated into world markets, with a respectably high export quota. However, it does still have structural characteristics that are inferior to its western German counterpart. This is true for labor productivity and the wage level, which are still today up to 30 percent lower. More importantly for the future, eastern industry is systematically less research & development‐oriented than the western one, which shows up in less innovative product ranges than in the West. It is highly unlikely that these structural handicaps will disappear soon; and they may well remain a drag on future growth of the East relative to the West. Hence, in terms of internal regional disparities, united Germany will remain less homogenous western Germany ever was during the period of German division.

Over the last 25 years, the process of German unification not only changed the East, but also the country as whole, though much more gradually. By the early 2000s, it had become obvious that, within the bounds of the traditional (“western German style”) welfare state and corporatist labor market structures, a return to high employment levels and decent economic growth completely unrealistic. For good reason, some external observers called Germany at that time “the sick man of Europe”. As a consequence, some major reforms of liberalization of labor and product markets as well as some trimming of the welfare state were carried out and accompanied by very moderate wage settlements that, together with a new wave if successful product and process innovations by industry, massively improved the competitive edge of the German economy, notably of its world‐market‐oriented manufacturing. This is the main reason why, when the world financial crisis struck Europe from 2008/9 on, Germa‐
ny was best equipped in Europe to avoid long‐term scars in the labor market. The epicenter of the crisis had shifted elsewhere. Today, the German economy appears as a model, although the current government – i. a. by extending retirement schemes and introducing a legal minimum wage – has to some extent turned the clock back to the conditions of earlier times.

II. Germany’s Role in Europe ‐ anno 2015:
A big central player on a re‐uniting continent

With German unification, the European Union (in 1990 still called the European Community) had for the first time a major member country that, with a population of roughly 80 million people, surpassed all other “big” EU‐nations of each less than 60 million people by a margin of roughly one third. That alone to some extent reset the balance of economic and political clout in favor of Germany although, for the first 15 years after unification, this became barely visible as German politics was very much submerged in the national task of adjusting to the many internal challenges that stemmed from unification. Since roughly ten years, however, this has massively changed for essentially three reasons:

the European Union has been enlarged, and all the new waves of EU‐enlargement entailed – other than in the 1980s – countries that are located either in the North, East or Southeast of the continent, all with traditionally strong ties to Germany;
the introduction of the Euro and the recent crisis of the Euro zone has given its largest member nation with the most healthy economy an enormously strong voice in the political negotiations; and
the new tensions in Eastern Europe – notably the Russian/Ukrainian crisis – has further enhanced German influence as the country has traditionally strong political ties to those states that once formed the Soviet Union including Russia.

It is very likely that the European role of Germany will remain very strong in the decades to come. In fact, deep structural facts and changes in Europe, notably in terms of its economics, point in this direction. Three stand out in importance:

Besides industrial strength, the central location of Germany with excellent infrastructural links in all European directions is a virtual guarantee for an enormously strong degree of long‐term integration. After all, for almost all EU‐countries, Germany is the most important provider of national imports; and the number of immediate neighboring nations is a staggering number of ten. In addition, German‐speaking Austria with its similar industrial tradition and development is very strongly integrated with Germany so that the 12‐nations neighborhood of the two centrally‐located countries reaches from northern Denmark to southern Italy and from western France to eastern Hungary.
The re‐unification of Europe under conditions of free trade and free capital movements has by now created a very stable and promising division of labor on the continent. In particular, through massive foreign direct investment in Central and Eastern Europe, the production of German – and, for that matter, Austrian – firms has become a significant part of the technologically advanced segments of the central and eastern European economies. In most recent times, this trend is strongly complemented by the remarkably robust growth of the two eastern most metropolitan areas of the German‐speaking world, Vienna and Berlin, which grow back into their traditional role as hubs to the East that they used to hold before World War I and still in interwar times.
Germany will remain – and become ever more so – a strong magnet for inner-European migration. While the ethnic German population will shrink due to the prevailing demographic trends, the sheer extent of the remaining gap of living standards and employment conditions between the European West and North vis‐à‐vis the continent’s South and East will feed a continues flow of mostly highly skilled labor to the innovative industrial centers in and around Germany. In economic terms, this will be a welcome boost to German growth that compensates for the demographic shrinkage of the skilled ethnic German workforce. However, on a European scale, it may become highly problematic if eastern and southern countries experience a dramatic brain drain at a time when their own demographics point towards shrinkage due to low birth rates.

In view of all these trends, the economic outlook of united Germany (and, for that matter, of Austria) in an ever more integrating European Union is reasonably bright. However, with growing relative economic weight, there will also be a growing political responsibility for the EU and the Euro zone as whole, which may at times suffer from the centripetal trends that growth and structural change are likely to entail. As a consequence, Germany must take over a major leading role in commonly solving major adjustment problems that emerge in the EU. So far, Germany’s record in this respect is mixed as the recent European debt crises have shown: while, by and large, the German government stood ready to support the countries in crisis and to feed newly established rescue funds, it did so in a very hesitant manner
that was far from what could be expected in terms of a strong benevolent leadership. In particular, the bitter and divisive quarrels between Germany and Greece were not only the consequence of Greek obstinacy, but also of the poor German handling of crisis diplomacy. Also, the at least temporary rise of a populist anti‐Euro political movement in the form of a new political party (the “Alternative für Deutschland”) clearly showed that the population at large was far from ready for a new benevolent leadership role of the country.

III. Germany’s Role in the World ‐ anno 2015:
A medium‐sized European power in a globalized setting

Of course, viewed globally, Germany is dramatically smaller than in the European context. In a way, its unification in 1990 meant no more than the beginning of a gradual re‐emergence of another medium‐sized power in the world. Most importantly, it is a power, which is strongly embedded in EU‐ and NATO‐decision‐making structures that prevent it from just going its own way, at least in matters of foreign policy and defense as well as in economic issues of global importance. By and large, the last 25 years of united German history can be interpreted as a gradual filling of this role in a rather reasonable and cautious way. This is most obvious in military matters of troop deployment in crisis regions where Germany struck a delicate diplomatic balance between restraint on historical grounds and active involvement on grounds of today’s international responsibilities. Clearly, the balance is gradually shifting towards the latter, but the period of transition reaching up to stage of “medium power normality” will last decades, not years.

For the time being, however, there are at least two major challenges with a global dimension where Germany cannot possibly hide its responsibility in a wider collective setting: free trade and cross‐continental migration. Both are cornerstones of a liberal agenda and essential policy issues for the near future, maybe even for a very long time. In both, by historical coincidence, Germany’s position is of pivotal importance to whether reasonable progress can be made in a multilateral setting.

Trade: Currently, the United States and the European Union are negotiating about the Transatlantic Trade and Investment Partnership (TTIP). In no other country of European Union (except, remarkably, Austria and Luxembourg), there is such a strong public majority opinion against the trade agreement as in Germany where recently more than 150.000 people gathered in Berlin in a huge anti‐TTIP demonstration. Economically, the resistance is hard to understand because, by all estimates of growth and employment gains from TTIP, Germany stands at the top of the winners – not surprisingly because it has a strong innovative industrial export base that is likely to profit from cost savings due to common standards and less red tape in transatlantic trade. In fact, the resistance has mostly non‐economic motives: apart from a fresh dose of anti‐Americanism, it is above all a widespread feeling that globalization has gone far enough in terms of tilting the balance between the power of nation states and huge multinational firms to the advantage of the latter. In particular, the fear is that (mostly American) multinationals bend legal rules to their advantage – either in private arbitration courts (by‐passing the rule of national legislation) or in setting environmental and social standards so low as to undermine tough European (or for that matter German) rules. At this point, some observers rightly diagnose a new Germanstyle retreat into a non‐political protected “Biedermeier-world” of German romanticism that completely overlooks that, covering a large chunk of world trade, TTIP might – and should – figure as a liberal blueprint for further trade deals in the world so as to become an “open club” arrangement to be joined by others. In the long run, this may be the only way to regain the desired (and now lacking) dynamism into the liberal path to free trade. Unfortunately, the German government – unlike the liberals in non‐parliamentary opposition – refrain from taking a strong pro‐stand on the issue for obvious politically opportunistic reasons. Once again, an enlightened liberal leadership is lacking and old‐style German romantic attitudes are surfacing up again.
Migration: Currently, the war in Syria leads to an unprecedented inflow of refugees into Europe. For most of them, the final destination aimed at is Germany. This is so for basically three reasons: Germany’s big country size, its positive economic outlook and the good outside reputation of its asylum laws that are deemed to be relatively liberal. So far, the reactions of German politics and the public are mixed. To be sure, the long‐term prospects of absorbing a large number of migrants are considered to be reasonably good, not least in view of the prospects of German demography. In addition, Germany has a long‐standing experience with waves of refugees from the 1950s and 1990s, which finally led to a relatively frictionless integration. However, the short‐term problems of administrative handling as well as providing housing, language education, vocational training and in the end suitable jobs for the arriving masses of people are regarded much more pessimistically. On top of that, there is
currently a widespread feeling among ordinary citizens that the government is unable to reasonably regulate matters as ever more people cross the southeastern EU borders in a more or less uncontrolled fashion and make their way through the Balkan states and Austria to finally arrive in Germany. By now, the originally positive mood is gradually turning sour, with right‐wing populists beginning to take advantage to steer up anti‐immigrant‐emotions. From a liberal standpoint (as represented by the German Free Democrats), a timely shift to the legislation and practice of an orderly immigration practice is desperately needed. Politically, this shift should encompass three major elements: (i) the passing of an immigration law that allows a reasonably large number of people to apply for immigration and to enter the country every year on whatever grounds, (ii) a common European effort to control the external borders of the EU, notably in the Southeast of the continent, and (iii) a vast effort to at least temporarily integrate all those refugees that have already arrived by lowering labor market barriers and minimizing the time lag of administrative proceedings. Unfortunately, this package requires first and foremost the recognition that, after all, Germany is and will remain an immigration country for people outside Europe, in line with the tradition that is long existent in the United States, Canada and/or Australia. Unfortunately, it is far from clear whether this change of mindset will be possible in Germany with its past of relative ethnic homogeneity, which will not be tenable anymore in the modern world.

To sum up, Germany since unification has changed a lot. But, to remain a prosperous country with benevolent clout in Europe and a reasonable voice in the world, it will have to change even further. In particular, it will have to become an ever more cosmopolitan place: ever more open to trade and, though in a well‐organized way, ever more open to migrants from Europe and from elsewhere in the world. Whether this evolution succeeds or not will very much depend on whether a liberal spirit will take ever stronger roots in the country, at any rate stronger than in the past. To support this evolutionary change, German Free Democrats are currently working hard to become again a major political force in the country. After having lost their parliamentary representation in the German Bundestag in the federal election in September 2013, their return to the German Bundestag is set to be scheduled for the next federal election in September 2017.

Professor Karl-Heinz Paqué

Vice Chairman of the Friedrich Naumann Foundation for Freedom and Dean of the Faculty of Economics & Management at Otto-von-Guericke-University Magdeburg, Germany; contact: paque@ovgu.de.