September 6, 2011
Many economists argue that the euro zone needs to become a transfer union, where payments flow from richer to poorer states, if the single currency is going to survive. But a look at existing systems in different countries shows that the design of such a union is crucial -- otherwise some countries will become permanently dependent on handouts.
In the summer of 1990, the deutschmark was declared the official currency of the German Democratic Republic, as communist East Germany was known. Three months later, the five East German states joined the Federal Republic of Germany.
All at once, the newly enlarged "deutschmark zone" had what economists and politicians want for the euro zone today: a common economic and financial policy, largely uniform fiscal and social systems and an extensive redistribution of income among the regions. The agreements were an "expression of solidarity among the Germans," then-Chancellor Helmut Kohl said approvingly. He famously promised that there would soon be "blossoming landscapes" in the east.
His promise proved to be wishful thinking. Since then, more than €1.4 trillion ($1.98 trillion) in financial assistance and transfers have flowed from the former states of West Germany to the former East Germany. But Kohl's blossoming landscapes have yet to materialize.
To this day, incomes, exports and productivity rates in the eastern German states are only a fraction of what they are in the west. The eastern states have the highest rates of unemployment and the fastest-growing public debt. Statisticians characterize the situation as a "stagnating catch-up process."
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