Deutschemark remains a linchpin of German stability

In July 1990, the deutschemark was made the new currency in eastern Germany. When the wall dividing the country fell, the dire state of the economy, in what used to be the German Democratic Republic, became increasingly obvious.

After 40 years of socialism, it was essential to introduce the social market economy and the deutschemark, in order to spark eastern Germany's economic recovery. Although hardly eight months had passed since the wall came down, there was no alternative to the currency conversion. Germany wanted the people to enjoy the opportunities afforded by a free economy in a free society with social safeguards.

The treaty establishing a Monetary, Economic and Social Union created a single economic area in Germany, making the deutschemark the official currency in eastern Germany. This was crucial for a political union. Today, six years later, the transformation of eastern Germany's economy has been, for the most part, completed despite the many problems of adjustment.

The inflationary spurt which many people feared did not materialize. The inflation rate in eastern Germany gradually fell into line with the western part. Even following the introduction of a single currency in Germany, the deutschemark has remained one of the most stable currencies in the world.

Economic growth in the new states, too, is picking up speed. In the last two years, the gross national product increased to 8.5 percent in real terms. This makes the new German states the most dynamic region in Europe, comparable only with the fast- growing nations of Southeast Asia.

The financial transition part of reunification has also been completed in the six years since the inauguration of the monetary, economic and social union. The final step in this difficult phase was taken at the beginning of 1995, when the new states were completely incorporated into the country's financial equalization regime, which gives them the same rights and responsibilities as all the others. Moreover, eastern Germany's old debts were taken over by a fund set up to amortize the debts in the course of the one generation.

The Treuhand privatization agency, too, wound up its activities on schedule, at the end of 1994. Its strategy of quickly selling off as many state-owned enterprises as possible, while making a determined effort to rehabilitate those that could be saved but closing down the rest, proved to be the right way to ensure the speedy development of a market infrastructure in the new states.

Between 1990 and 1995, more than 1 trillion deutschemarks flowed to the new states. The money came from the federal government, the western states, social insurance institutions, the German Unity fund, the postal and railway administrations, as well as from investment promotion programs such as those sponsored by the Kreditanstalt fur Wiederaufbau, a public corporation which provides loans for redevelopment. This was an average equal roughly to 7 percent of western Germany's annual Gross Domestic Product.

More than 50 percent of this money came from the federal budget. Just under a quarter of federal government expenditure was directly attributable to the country's unification. This unprecedented financial challenge could only be matured by making equable use of the available financing instruments. Thus, about a third of the federal funds spent on unification was covered by revenue from the new states and another 15 percent was raised by fiscal measures.

Roughly three-quarters of the federal government's remaining net burden was offset by making cuts and reallocating funds; the other 25 percent took the form of new loans. Despite the huge investment in Germany's unification it has been possible to keep the public debt within reasonable bonds.

Six years after monetary, economic and social union, Germany's financial situation is comparatively healthy. Her public deficits and debt ratios are considerably less than those of many other industrial countries.