A critical retrospective: German monetary union

Twenty-five years ago, East Germany adopted the deutschmark as its currency. In terms of East German economic development, monetary union proved to be a disaster. With virtually no warning, East Germany's few productive factories and businesses were exposed to free market competition; industrial production collapsed in a way unparalleled in history. Nevertheless, for political reasons, introducing monetary union at the start of the process of system transformation was almost unavoidable. Given the insecure foreign policy situation, the aim was to seize the chance of reunification and push through monetary union to create an irreversible fait accompli. Moreover, this move was intended to put a brake on the massive exodus of people from East Germany. Admittedly, it also buttressed the widespread illusion among the East German population that a strong currency would facilitate fast-track income parity on West German levels. This illusion, however, also encouraged excessive wage hikes which only served to intensify the shock of alignment in summer 1990, complicate economic renewal in eastern Germany, and increase the financial costs.