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and the creation of an isolated, low-wage economic area. In turn, the cen-
tripetal nature of political institutions (both the Parliament and the Senate),
renders the East a pivotal electoral region, further motivating the incor-
poration effort. These two factors limited the political disintegrating effect
that the new economic geography could have caused on preexisting fiscal
arrangements.
Market Integration and Redistribution: Early Steps on Interpersonal
and Interregional Redistribution
Two measures characterize the so called “Big Bang” approach to German unity
(OECD 1991 ; Schmidt 1992 ): the creation of a monetary union overnight
(Wiesenthal 1995 , 1996 ) and the subsequent push toward equalization of
wages throughout the new Germany (Czada 1995 , 1999, 2004 ;Sinn 2002 ).
The effects associated with these two measures are well known to students of
Germany's political economy. The monetary union increased dramatically the
consumption capacity of Eastern Germans overnight, thus contributing a great
deal to ease the transition to a market economy, but at the same time created
regional labor markets in which the gap between labor costs (real wages) and
labor productivity became insurmountable. With Eastern productivity levels at
about 30% of those in the West, the East was de facto deindustrialized (Witte
and Wagner 1995 ; Uhlig 2006 ) and, as a result, at risk of depopulation. The
prospect that the thin layer of young, high-skill labor would flee the East in
search of better opportunities in the West led to an agreement among employ-
ers, the restructuring agency (Treuhandanstalt), and western trade unions to
progressively equate Eastern wage rates to Western level. Full harmonization
was to be reached by 1996.
Of questionable success in retaining younger and better educated workers in
Germany, 13 this measure added to the gap between labor costs and productivity
in the East, thus worsening the unemployment problem, and more generally,
the prospects of activating the labor markets of the new members of the union.
In sum, the urge to equalize wages and consumption capacity between East
and West fired back in the form of a reinforced process of deindustrialization.
This reality check shifted the focus in the political agenda from the launching
of a market economy in the East to the extension of the social insurance and
redistributive system as well. The incorporation of the East was not limited to
currency. It applied as well to the labor relations system and the systems of
interpersonal and interregional redistribution. As markets failed to launch, the
demand for social protection increased, and so did the size of the effort toward
the East.
In terms of interpersonal redistribution, the deindustrialization of the East
triggered a massive social policy effort, primarily concentrated in four areas:
13 According to Mathias ( 2003 ); and Sahner ( 1999 ), the average population loss among East
German districts between 1991 and 1997 was 4.6%, with an overrepresentation of young and
well-educated people.
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