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

2.2.5 Conclusions
The strong rise in salaries following monetary union in Germany, the impact of the chosen
exchange rate on East German debt and the appalling state of infrastructure all combined in the
aftermath of re-unification to drive up social security contributions, the deficit and the debt
level.
What is worse, the tax allowances for housing construction in the East did not only induce a
shortfall in revenues, but provoked a boom in the early 1990s and a bust ever since.
Furthermore, with a million apartments now estimated to be empty in the East, these allowances
led to a clear misallocation of scarce resources.
With developments in deficit and debt threatening the sustainability of public finances, the
federal government slowly embarked on a policy of reducing expenditures, mostly in the public
service and in public investment. This policy not only limited the growth contribution of public
consumption, but also might already have started to constitute a burden on the growth potential
of the German economy. In addition, the growth potential has also suffered due to the
unfortunate combination of a rise in the tax (and social security) burden and only minor changes
in the generosity of social transfers. Since 1996, however, the consolidation strategy pursued
appears more positive in qualitative terms, i.e. more conducive to economic growth in the
medium-term.
In 1999, when expenditure restraint was interrupted at the federal level, a new element,
however, was added to the strategy pursued: While expenditure was to continue its decline, the
burden of social security and taxes was to be lightened at the same time. While this strategy
promises to improve further on the medium-term growth potential, there is, however, an evident
danger that expenditure overruns occur (as happened in the health sector and at the lower levels
of government in the year 2001), putting into question the credibility of envisaged
consolidation process.

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