East Germany Was and Is Greece

The Wall Street Jouunal

By Matthew Dalton

European government officials are worried about a region struggling to recover from an economic shock that caused unemployment to soar. The region wants to become a more competitive manufacturer, but it uses the same currency as world-beating German exporters clustered around the Rhine and in Bavaria. So devaluing its currency to regain competitiveness is out of the question.
This could be a description of Greece, Portugal, Ireland or Spain in 2011. But it’s also a description of East Germany in the years after reunification. It’s a parallel that should worry euro-zone policymakers:  More than 20 years later, the former East Germany is still an economic backwater, with unemployment rates double what they are in the west of the country.
Consider the similarities. When Germany reunified in 1990, wages soared throughout the East on the back of new labor union agreements that sought to equalize wages between West and East. Unit labor costs rose an astonishing 88% from 1990 to 1992, according to a paper from economists at the Centre for European Economic Research.
East German firms, their productivity stifled by years of Communism, could not handle these increases. Soaring labor costs left manufacturers in the East totally uncompetitive, causing the region’s manufacturing base to collapse and unemployment to shoot up over 20%.
Greece too saw labor costs rise sharply in the decade after adopting the euro: a 39%  rise in unit labor costs and 36% rise in wages from 2001 through the first quarter of 2010. This despite stagnating economic productivity. Unemployment is now around 16%, a record high for the country.
Worryingly (for Greece), the German adjustment has taken a very long time. Despite billions of euros invested by the German government and a decade of labor-market reforms, unemployment in the East is still much higher than it is in the West — though the difference is smaller. In 2009,  the unemployment rate in the five East German states and Berlin ranged from 10.6% to 13.9%, compared to Germany’s national rate of 7.7%.
And key to the adjustment that has happened in Germany is emigration from East to West: East Germany’s population in 1990 (including Berlin) was 18.6 million. It is now 16.4 million.
EU policymakers are trying to bring export-sector jobs to Greece through a painful austerity plan. That, unfortunately, will require a significant drop in wages, which can rise quickly but often take years and years to fall to levels needed to arouse a dormant export sector.
In East Germany, emigration was part of the answer. EU officials often preach the virtues of labor-market mobility, but are they really hoping to see large-scale emigration from Greece to other parts of the euro zone?



the article from "Wall Street Journal"