At the end of World War II, Germany was broken up into four occupied zones. The American, British and French zones eventually formed the Federal Republic of Germany i.e. West Germany, and the Soviet Zone formed the German Democratic Republic aka East Germany, during the Cold War. When the Berlin Wall fell in November 1989, German Chancellor Helmut Kohl immediately moved to lay the ground work for the unification of the two countries as soon as possible.
The move was supported by US President George Bush, and several of the smaller NATO members, but was opposed by French President François Mitterand, Soviet President Mikhail Gorbachev, and most vehemently, British Prime Minister Margaret Thatcher. She once said, “We’ve defeated them twice! Now they’re back!” To be fair the leaders of Germany’s historic adversaries were for the democratization of East Germany just not for a unified German nation-state in the heart of Central Europe. Their worst fear was a unified neutral Germany no longer aligned with NATO. This was a very real fear in 1989 – Only 20% of Germans wanted to remain in NATO post-unification. That they did so was almost entirely due to the efforts of Margaret Thatcher and the presence of 250,000 NATO, mostly American, soldiers garrisoned on German soil.
Nonetheless, Kohl unilaterally unified the two countries’ economies in the summer of 1990, and in August both German parliaments approved the Unification Treaty. However there was still the matter of the Red Army on German soil. At the NATO-Warsaw Pact conference on 23 September 1990, Kohl offered 55 Billion Deutchmarks to the Soviet Union to remove the troops. The German offer Gorbachev, whose Soviet Union was in the midst of a society-destroying economic depression caused by 40 years of crippling socialist policies, was all too happy to take. At midnight on 3 October 1990, the German Unification Treaty came into effect, and the unified Federal Republic of Germany became a reality.
The honeymoon didn’t last long though. As India, the United Kingdom, and Israel had learned over the preceding decades, switching from a socialist economic model back to a capitalist model was painful. And German unification was the first time the two combined. The West Germans took over the “Treuhand”, or “Trust Agency” in East Germany, a corrupt and mostly failed Gorbachev reform that attempted to privatize even more corrupt and unproductive state businesses. The new Treuhand, comprised of Bundesbank and Frankfurt financial district executives and their staffs after the unification, became the de facto government in the former East Germany as they were given nearly unlimited power to determine who could buy the businesses and who would be permitted to rescue the failed East German economy. The Treuhand’s problems with privatization were exacerbated by six decades of totalitarian socialist expropriation of private property, first by the Nazi’s, then the Soviets, then finally by the GDR. Most foreign investors couldn’t navigate the complexities of the East German property rights situation, nor were they encouraged to by the Treuhand. Consequently, the Treuhand awarded nearly 14,000 former East German companies or former GDR state entities to almost exclusively West German firms.
Cutting economic ties with former Soviet satellites to the south and east was easy, as almost everything in the West was available in superior qualities and quantities, so much so that East Germans overcompensated toward the West, at their own expense. “Brain drain” was particularly devastating as hundreds of thousands of skilled and educated former East Germans migrated West to find jobs, and enjoy the ridiculously high living standards compared to their previous lives in the socialist GDR. Even the East Germans who didn’t leave spent their money in the former West Germany because the quality of goods was so much higher. As just one example, East German housewives crossed the border to buy eggs from West German farmers, because they were larger and tastier. Hundreds of thousands of East German workers who didn’t migrate chose to commute. The brain drain was alleviated somewhat by Berlin, partitioned after the Second World War by the Soviets and Western Allies. Berlin was an island of capitalist opportunity in a sea of socialist despair, and served as an economic anchor for millions of Germans that other cities in East Germany, such as Leipsig, Dresden, and Erfurt, couldn’t. Furthermore, in June 1991, the seat of the government moved to Berlin, providing government jobs in the bureaucracy, employment with which East Germans were familiar. Nonetheless, production in the newly acquired eastern parts of Germany was halved compared to even the sluggish and anemic standards of the GDR, and over a third of the remaining East German working age population was unemployed.
East Germany, and by extension the newly unified Germany as a whole, fell into a deep recession, a recession that required high interest rates on loans to combat inflation caused by assuming the East German debt and massive government subsidies. Despite the population of Germany increasing by nearly 25% with the incorporation of the GDR, the German GDP rose only 8%. Nonetheless, the Germans persisted and after a few years of economic hardship, Germany returned to its pre-unification growth. By 1995, the German government dumped almost 850 billion (with a “b”) Deutschmarks into the former East Germany. Almost all of the money went to keeping East German workers in East Germany through subsidies and unemployment, or to infrastructure projects to bring the thoroughly neglected East German infrastructure up to Western standards. Though the standard of living for East Germans remained much lower (and still is) than their western counterparts, the economic and political unification of Germany was complete when the Treuhand disbanded at the end of 1995.