East Germany, West Germany, and Their Mezzogiorno Problem: A Parable for European Economic Integration

Andrew Hughes Hallett and Yue Ma

Economic Journal, 1993, vol. 103, issue 417, 416-28

Abstract: Economic and monetary reunification in Germany has proved to be more expensive than previously thought--and not jus t for the Germans. If a "Mezzogiorno problem" of continuing fiscal transfers to the East, and possible migration flows westwards, are t o be avoided, then there has to be convergence in productivity levels. This paper analyzes possible convergence paths, and the policy regim es which accelerate convergence. The intention is to illustrate the (albeit less extreme) problems facing a European monetary union of asymmetric and incompletely converged economies. Working from first principles, or with the aid of an econometric model, shows that convergence sufficient to avoid a Mezzogiorno problem is likely to b e slow: perhaps 30-40 years in the German case, despite very fast grow th in the East. Second, it is not clear that the process is incentive compatible: a very substantial part of the servicing and subsidizing costs have to be paid by other (non-German) economies in the union, without any obvious compensating benefits. Third, to reduce the need for continuing transfers actually requires a policy which promotes price and wage flexibility in the depressed region. That appears to run counter to the current market integration within Europe. Such "unpleasant arithmetic" is an important contribution to the monetary union debate because without it, the smooth running of a union of incompletely converged economies will certainly be compromised. Copyright 1993 by Royal Economic Society.

Date: 1993
References: Add references at CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://links.jstor.org/sici?sici=0013-0133%2819930 ... 0.CO%3B2-S&origin=bc full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecj:econjl:v:103:y:1993:i:417:p:416-28

Ordering information: This journal article can be ordered from
http://www.blackwell ... al.asp?ref=0013-0133

Access Statistics for this article

Economic Journal is currently edited by Martin Cripps, Steve Machin, Woulter den Haan, Andrea Galeotti, Rachel Griffith and Frederic Vermeulen

More articles in Economic Journal from Royal Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().