Reunified Germany : Economic Restructuring

In early 1997 Germany’s unemployment rate reached 12.2 percent, its highest level since World War II. Among the reasons cited for the increase were an economic downturn, cold weather that hampered the construction industry, and high wages. These economic difficulties underlined the challenges Germany faced in meeting the strict economic criteria outlined in the Maastricht Treaty for adopting the euro, the new single currency of the European Union (EU). Many Germans worried that efforts to meet the qualifying criteria, which included low annual budget deficits and low rates of inflation, could further weaken the German economy. Facing a growing budget deficit, Chancellor Kohl announced plans to cut Germany’s welfare system by billions of dollars. His proposal, which called for reducing unemployment and sick-pay benefits, drew immediate protests from labor unions and the opposition Social Democratic Party (SPD).

Despite austerity measures and cuts in spending, German unemployment continued to rise throughout 1997, and there were growing calls in Germany to postpone or even abandon the move to the euro in 1999. Kohl continued to firmly back the new single currency, however, even as his popularity declined over his seeming inability to end spiraling unemployment and growing inflation. In September, only a year before national elections, Kohl was faced with an 18.3 percent unemployment rate in the former East Germany. Although traditionally the east tended to support Kohl’s governing coalition, this high unemployment was seen as a potential disaster for Kohl in the coming 1998 election as dissatisfaction with his policies grew. In February 1998 the German unemployment rate hit a new high of 12.6 percent for the nation as a whole and 21.1 percent in eastern Germany.

This prompted large protests from unemployed workers throughout the country, many of whom called for Kohl’s replacement. In May 1998 Germany officially agreed to adopt the euro as a new single European currency. The euro was gradually phased in between 1999 and 2002, and the German deutsche mark, or DM, ceased to be legal tender. Encarta