The economic integration of Germany

Horst Siebert

No 160, Kiel Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: In the integration of the two Germanies two countries will be united which differ widely in their institutional and constitutional arrangements as well as in their monetary systems and real economic conditions. Integration therefore means - harmonization of the institutional systems, - introduction of a common currency and a unified monetary policy, and - adjustment in the real economies. In the process of integration, these three aspects of institutional harmonization, establishing a single monetary policy and bringing the real economic conditions closer to each other will overlap. The final state of the integration process is a fully integrated economic union. In the commodity markets, the law of one price will govern for tradeables. The prices for non-tradeables such as housing and some services will differ among regions. In the factor markets, one price will prevail for any given factor that is completely mobile. Interest rates and the marginal productivity of capital will be identical everywhere. However, prices of immobile factors of production such as land and the environment will differ from region to region. Labor will be in an intermediate position. Insofar as labor is completely mobile, real wages tend to equalize; they can, however, be different when the costs of living vary over space. When labor is only partly mobile and when preferences for specific locations exist, real wages may be more differentiated. On the monetary side, there will be only one currency whose value is determined by the money supply of one central bank. The social security systems will be harmonized. The state, including the provision of public goods and the tax system, will be homogeneous, notwithstanding federal elements. Finally, the firms and the sectorial structure in the economic union will have adjusted to the new conditions, and the German Democratic Republic (GDR) will have caught up in income per head.

Date: 1990
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