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

3.1.2 Trade developments
The decline in competitiveness indicators as a result of re-unification is clearly visible in
Germany’s trade performances. This is of particular significance, because despite its large size,
Germany’s economy appears surprisingly dependent on external trade.
Evolution of external demand
Unification brought about a substantial structural break in former West Germany’s external
balance. In 1980, at the height of the second oil crisis, West Germany had a current account
deficit of about 1½ % of GDP. During the first half of the 1980s this deficit was reversed into a
large surplus of over 4% of GDP, a level which was attained throughout the second half of the
decade (Figure 3.5). While a surplus of this magnitude was certainly not sustainable over the
long run, it put West Germany into an extremely favourable position to accommodate the large
import demand of the re-unification boom without endangering the pan-German external
position. Within two years, the large West German current account surplus of nearly 5% in 1989
was more than wiped out and turned into a pan-German deficit of 1% in 1991.
A deterioration of the external balance by 6% of GDP would have caused much greater
difficulties, had there not been such a large current account surplus. However, it may have been
exactly the ease with which the economic impact of re-unification could be managed in the
early years that led to the surprisingly careless treatment of economic re-unification. Arguably
then, the advantageous external balance in West Germany was a hidden curse, if otherwise the
costly economic mistakes of re-unification would have been avoided out of immediate
necessity.
The substantial fall in the current account is not necessarily a worrisome sign, because a large
inflow of goods could be expected in light of the large pent-up demand in the New Länder.
Partly, it may have simply accelerated a reduction of the unsustainable large West-German
current account surplus to attain a more balanced external position. However, as the boom
subsided in 1993, the current account deficit remained stuck permanently at a level of around –
1%. A deficit of this order is not dramatic, but it is astonishing that it persists even though
domestic demand during the second half of the 1990s grow significantly slower than that in the
rest of the world.
A disaggregation of the current account into its constituent components shows that re-
unification affected most severely and immediately the balance of trade. The trade balance fell
substantially by around 5 percentage points from a pre-unification surplus of 6% of GDP to 1%
in 1991. It took about five years for the trade balance to attain a new plateau of a surplus of
around 3% of GDP, as the real exchange rates began to fall.
However, this recovery of the net trade balance was cancelled out by developments in the
primary income and services balance. The decline in balance of primary income simply
magnified the effect of a long-run current account deficit. As Germany’s net external capital
39
Due to a lack of national accounts data for the two parts of Germany results are available only up to 1997.
Moreover, it has to be noted that the calculations in sub-section 3 are based on ESA79 data, while the series
displayed in sub-sections 1 and 2 are based on ESA95 data.

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position fell, so did the primary income
account, declining steadily from a peak
of about 1% of GDP in 1990 to around –
½ % in 2000.
In parallel, the services balance declined
progressively. In contrast to trade,
however, the service balance does not
show any dramatic shift during re-
unification. Instead, net exports in
services remained on a secular decline,
which had started already in the mid-
1980s when the service account was
nearly balanced. From then it fell to the
present deficit of around 2% of GDP.
Much of this is explained by the ever
more negative tourism balance but also
by an increasing deficit in business
services.
East Germany
Clearly re-unification is at the heart of
the sharp decline in the external balance.