The Berlin Republic: German Unification and A Decade of Changes

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Indirect taxes are normally "hidden" in the price of an item, rather than explicitly listed as a tax. Consumers therefore forget that they are paying taxes every time they purchase a product. This situation also makes it easier for policy makers to raise indirect taxes without evoking public awareness and opposition because the taxes are hidden.

The VAT on consumer durables has increased from 10 percent in the s to its present 19 percent less on food and books. Furthermore, indirect taxes rise automatically with inflation; as the price of goods rise, so does the indirect tax. A negative aspect of indirect taxes is their regressive nature; they weigh more heavily on low-income families because a larger share of their income is used for consumer goods. Nevertheless, indirect taxes remain popular with political leaders because of their low visibility.

The Berlin Republic: German Unification and A Decade of Changes

They are mandated by the European Union as one method of standardizing cost structures within the EU. Even with these multiple revenue sources, public expenditures repeatedly have exceeded public revenues in recent years. To finance this deficit the government draws upon another source of "revenue" -- loans and public borrowing -- to maintain the level of government services. Although politicians initially viewed government borrowing originally as a temporary measure for dealing with an economic recession, the total public debt has grown in good times and bad.

German unification also created huge new demands on the government, and deficits spiraled up by the s. A full accounting of public spending would show deficits averaging more than 50 billion Euros a year since union. To grapple with this problem, the Basic Law was revised in to add a constitutional limit on public deficits beginning in The new provision limits the deficit to 0. A skeptic might expect the government to find ways around this limit once it takes effect.

The sharing of these various tax revenues is a basic element of Germany's federal system of government. About two-thirds of the VAT goes to the federal government, with the other third distributed among the states. Other taxes are used exclusively or primarily by one level of government. For instance, the energy, tobacco, and liquor taxes are assigned to the federal government. The revenues from the automobile, inheritance, and lottery taxes go to the state governments.

The local communities primarily benefit from the property tax. The distribution of tax revenues is one of the continuing sensitive issues of the federal system. The taxes divided between the federal and state governments are subject to periodic review, as the distribution of policies responsibilities changes between the two levels of government. The government addressed this issue with a series of reforms in the s, which decreased the requirements for equalization while giving the states more control over their budgets. This also changed the type of laws requiring Bundesrat approval, effectively decreasing the Bundesrat's political influence as part of the bargain.

The average German obviously has deep pockets to fund the extensive variety of public policy programs.

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American taxation levels look modest by comparison, though cries of a tax revolt are heard more often in the United States than in the Federal Republic. And when contributions to social service insurance programs are included, more than half of the average worker's wages go to the government. It may seem like the taxpayer contributes an excessive amount to public coffers, and Germans are no more eager than other nationalities to pay taxes. In fact, one of the main reform policies of the FDP during the campaign was to reduce tax levels but this reform was forgotten after the election as the government gave priority to reducing the deficit.

Still, the main question is not how much citizens pay, but how much value is returned by the government. In addition to normal government activities, Germans are protected against sickness, unemployment, and disability; government pension plans furnish a livable retirement income. Moreover, the majority of the public expects the government to take an active role in most policy areas. Current Policy Challenges. Recent years have been a time of tremendous policy change and innovation for the Federal Republic as it has adjusted to new domestic and foreign policy circumstances. While there are policy needs in many areas, we discuss four prominent issues.

The first involves the problems flowing from German unification. The second discusses reform the economic and social systems. The third area involves protecting the environment and the quality of life. The fourth is to define a new international role for Germany in foreign and defense policy. As unification progressed in , Helmut Kohl promised a rapidly "blooming landscape" in the East to improve the living conditions of the FRG's new citizens.

Reality fell short of these promises. Even before unification occurred, the economy in the East was struggling. The root of the GDR's economic problems was its obsolete and inefficient economic structure.

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Most manufacturing facilities were severely outdated by Western standards or by the standard of other economies trading on the world market. The GDR had deferred capital investments for more than a decade. Moreover, the lack of market forces made it difficult for GDR planners to even determine which investments would generate a significant return. For many Western businesspeople, their first tours through eastern plants were like trips to industrial museums. One observed that the East was an industrial junkyard, albeit a very strictly organized and supervised junkyard.

Labor practices compounded these problems. The GDR guaranteed every worker a job. But without the competition of a market economy there were few incentives to ensure the productive use of labor. More hours of labor were required to provide the same level of output as in the West. Inefficiency was everywhere. For instance, industrial enterprises employed large secretarial pools to recopy typed materials because the communist government restricted access to xerox equipment. Inefficiency was then magnified by the large administrative structure of the state.

The consequences of these economic practices became glaringly obvious following Currency Union in July Eastern managers realized that their labor costs and productivity levels were costing them more to produce goods than what they were worth on an open market.

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The FRG government's choice to transition to a market economy with an economically unrealistic currency exchanged rate of Ostmarks to DM forced the Eastern economy into virtual bankruptcy. Industrial output decreased in the turbulent months of early , and then plunged downward following Currency Union in July Most firms laid off employees as orders decreased, and to cut their labor costs in the hope of maintaining the viability of firm. Cuts in the size of the Eastern civil service and other public employment further increased unemployment.

More than old Stasi agents were out of work; there were layoffs in the GDR's foreign service, military personnel, economic managers, public administrators, and even the famed Olympic sports coaches. In nearly one-third of the Eastern labor force was unemployed or on "short hours" where they received their salaries but did not work, with FRG social programs picking up the tab. The Federal Republic then faced the challenge of rebuilding the economic system of the East. One of the first steps was the creation of a trust agency Treuhandanstalt , THA that was charged with privatizing the more than 8, firms that the GDR government owned.

The trust dissolved the large state-owned cartels, converted individual enterprises into corporations, and sold them off to private buyers. The privatization program confronted some of the fundamental problems of economic reconstruction. Because of the antiquated production methods, Western firms often found that it was more cost effective to upgrade their existing facilities in the West than to rebuild an outdated Eastern factory. The lack of economic expertise and entrepreneurial spirit among Eastern managers further discouraged Westerners from joint ventures in the East.

Legal problems further hampered rebuilding efforts. The unification treaty guaranteed that individuals who illegally lost property under the Third Reich or GDR regimes could reclaim their property. This guaranteed the property rights of Jews and other Germans who had suffered under the Nazis and individuals who fled West to escape the communist GDR government.

The uncertain liability of new owners for the past practices of Eastern firms, such as unknown toxic wastes or groundwater pollution, further stunted investment. The Difficulties of Economic Transition.


One practical example can illustrate the magnitude of the problems of restoring Eastern industry. SYS boasted a relatively modern facility built with western technology. It produced polyurethane that BASF hoped could expand its plastics manufacturing capability in Europe. In addition, the Treuhand assumed the liability costs for any environmental damages discovered after BASF assumed control of the plant.

To increase productivity, the new managers cut the labor force by nearly half -- increasing the demand on the FRG's social welfare programs. BASF reduced employee benefits provided by the plant, such as daycare and recreational facilities.

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  4. Many of SYS's assets were written off as economically unviable or unproductive. Attempts to restructure the plant ran into problems ranging from the need to retrain workers to the difficulties of getting telephones service to BASF's western headquarters and potential customers. In the midst of this economic transformation, SYS lost its contracts with other East European nations.

    Within two years BASF had spent the majority of its DM million commitment and the renovations were far from complete. A decade later, BASF had invested almost three times more than its initial plans in order to construct a modern chemical and plastics manufacturing center around the original plant.

    Nobody really knew what it would cost to rebuild the East and to subsidize the economy through reconstruction. The costs were staggering. Huge investments created a transportation system and communication system in the East to sustain a modern economy. The costs of renovating Eastern industry and agriculture far exceeded initial predictions. In addition to these investment costs, the Federal Republic provided government social programs in the East during this transition period. As eastern workers were laid off or encouraged to retire, they collected benefits from the FRG's liberal social programs funded largely by workers in the West.

    Almost billion Euros in public funds flowed from the West to the East in Only one-third went toward capital investments in the East, the rest was spent on unemployment benefits, pensions, other social programs, and on-going government activities.