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

Box 3: Economic policies in the new Länder
19
B3.1 The size of fiscal transfers
There is a major gap between production income and disposable income in East Germany which
is financed by transfers from the West. These transfers mean that there is a significant difference
between regional demand (measured in terms of the aggregate absorption of households, firms
and the government) and regional production (measured in terms of GDP). This disparity
between demand and production gives rise to an important deficit (equal to public transfers and
capital flows), estimated at 46% of regional GDP in 1999 (which compares to an estimated 12%
of regional GDP in southern Italy)
20
. As can be seen in Table B3.1, West German (and EU) net
transfers of about 4% of the West German GDP accounted for roughly half of East Germany’s
GDP in the early 1990s and about a third towards the end of the 1990s. Out of the total gross
transfers of about DEM 180 billion per year in the second half of the 1990s, DEM 80 billion
were social security benefits while only about DEM 30 billion were investment and about DEM
15 million were subsidies.
21
While this imbalance has often been criticised, it was hardly to be
avoided since it was the consequence of fully adopting the West German institutional and legal
framework, including the welfare system.
Table B3.1: Fiscal transfers to the New Länder in DEM billion, 1991-1999
1991
1992
1993
1994
1995
1996
1997
1998
1999
(Plan)
Gross transfers to the new
Länder
Federal government budget 
1)
75
88
114
114
135
138
131
134
145
German Unity Fund
2)
31
24
15
5
Statutory pension insurance funds
3)
5
9
12
17
19
18
19
18
Federal Labour Office 
4)
25
38
38
28
23
26
26
27
27
West Länder/ municipalities
5)
5
5
10
14
10
11
11
11
12