European Economy. Economic Papers. Germany's growth performance in the 1990's

…but most of these effects have run their course since the late 1990s.
Although wage moderation since the mid 1990s and a fall in the exchange rate of the euro in
the late 1990 have helped recapture most of the initial losses, vis-à-vis the Euro-area countries
various indicators of cost-competitiveness are still somewhat worse than the levels observed
before re-unification. This may continue to exert a certain drag on growth, but the overall
impact of this is likely to be very small. According to econometric simulations the negative
growth impact of the appreciation of the real effective exchange rate in the first half of the
1990s reached its maximum around the middle of the decade, but since then its effects have
gradually dissipated. However, given that available indicators might not fully capture the
impact of the re-unification shock on the overall level of competitiveness of Germany it
cannot be excluded that quantitative evaluations underestimate these effects. More
specifically, while, thanks to wage restraint and the weak euro, external competitiveness in
the West seems to have been largely restored, this can hardly be claimed for the New Länder
which continue to be hampered by high unit labour cost.
Macro-economic policies can hardly explain the remaining growth gap …
Adding up, a significant part – up to two thirds - of the growth gap between Germany and its
European partners since the mid-1990s must be ascribed to direct or indirect effects of re-
unification in combination with developments of the West-German construction sector. Can
the remainder be explained by macro-economic policies that were tighter in Germany than in
other European countries?
…as monetary conditions have been broadly supportive since the mid-1990s …
On the other monetary side, with the DM being the anchor currency in the EMS, Germany
could not benefit to the same extent as other countries from falling interest rates after 1994.
The monetary relaxation was therefore less marked for Germany than for its partners.
However, most of this differential impact of monetary policy occurred in the run-up to EMU,
while in later years a divergence in real interest rates was due to different inflation rates. As a
consequence, in light of generally supportive monetary conditions during the second half of
the 1990s, monetary policy can hardly be blamed as a main factor behind sluggish output
growth. Quite evidently, the German economy had made a strong showing during phases of
clearly tighter monetary conditions, such as the late 1980s.
… while budgetary consolidation proceeded in step with Germany’s European partners.
On the fiscal side, Germany had to follow a rather restrictive budgetary stance in order to
qualify for EMU and comply with the provisions of the Stability and Growth Pact. According
to DG ECFIN estimates, the cyclically adjusted general government balance excluding
interest payments improved by somewhat less than 2% of GDP between 1995 and 2000. This
improvement is smaller than that registered for the average of its EMU/EU partners. Hence,
differences in the overall budgetary stance cannot account for the difference in output growth.
However, the budgetary strategy chosen in Germany might have been more harmful to
growth than in other Member States as, in order to make up for the sharp rise in social
transfers, expenditure was drastically cut at the level of government employment and
investment. In conclusion, in the second half of the 1990s the German policy-mix followed a
path similar to the one followed by its European partners. If macro-economic policies were to
be held responsible for a differential impact on growth, it was probably through the specific
composition of the budgetary consolidation process rather than the overall macro-economic
policy stance.

---

4