TCS Daily


When the Walls Come Tumbling Down

By Jeremy Slater - November 9, 2004 12:00 AM

The fall of the Berlin Wall was a glorious moment in European history. It brought freedom to the half of Europe that suffered under political and economic tyranny for over four decades. However, the past 15 years have seen an increase in national and European Union regulations and laws that could stop Europeans everywhere from taking their own initiatives and thus fulfilling the economic promise of the end of communism.

November 9, 1989, was not the final moment when the people of central Europe rid themselves of Communism, but it was a day that provided a lot of most memorable symbolism - and showed definitively that a system which had oppressed them for over 40 years was dying.

The collapse had started earlier that year when Mikhail Gorbachev told the United Nations that the USSR would give more independence to the states of Eastern Europe. This suddenly gave room to maneuver for the national governments in the rest of the Warsaw Pact - not that many leapt at the chance as most of their leaders had been Politburo and KGB appointees who were not hired for their ability to politically innovate or philosophize about the meaning of liberty.

However, in May, the Iron Curtain started to show stress fractures. Hungary, having allowed the formation of independent political parties three months earlier, opened up its borders to Austria, allowing unrestricted access between eastern and western Europe for the first time in over 30 years. When a border agreement with East Germany was revoked in September, thousands of Germans started to pour into their central European neighbor knowing that they had now an easy transit to the West.

During the summer and early autumn public demonstrations for reform in East German cities such as Leipzig and Dresden had done nothing to alleviate the pressure on the East German government led by Erich Honecker. One of his final props of power was kicked away when during a public meeting with Gorbachev in October the Soviet leader said of Honecker's potential reforms that, "Life punishes those who delay". This further demoralized East Germany's ruling elite, who a month later decided to open up the border between east and west Berlin.

It must have seemed to the West German government a great moment in history enjoyed by a truly modern state that had benefited from high growth rates, relatively low unemployment and a generous social and welfare system for decades. And now the final wound of the Second World War would be healed. With money in the bank and Chancellor Helmut Kohl seeking to make a positive entry in the ledger of history the government in Bonn swiftly agreed to reunification with the East, no matter what the cost. Lawmakers in the Bundestag also agreed to parity between the Ost Mark and the Deutschmark, ignoring the likelihood that if the currency had been floated on the world's currency exchanges it would have looked even more like rubble than the ruble.

They also decided that the regulatory and taxation structure would be the same in the east as it already was in the west, ignoring the damage 40-years of Communism had done to the economy. So, in the following years, while the infrastructure and city centers of the eastern states were being rebuilt little was done to ensure that those communities were able to recreate wealth. This would have included tax breaks or the creation of enterprise zones to encourage new businesses.

The present government is being punished for the decisions made by its predecessor. Unemployment in the east is officially around 20 percent and with a miserable economic environment many of the most talented east Germans, those that could help drive the local economy, have left for the west. In the past 15 years eastern Germany's population has fallen by almost a tenth to 13.5 million.

In an attempt to revive the German economy Chancellor Gerhard Schröder has started to push through a series of labor market reforms, which have been unpopular and brought people back onto the streets of east Germany's cities again. For the moment it seems unlikely that he will win re-election in two years' time.

In Brussels too there are those who believe similar reforms for the whole of Europe will raise growth and employment levels, but as ever they face a battle against others who say that social protection is more important. For all those who talk of competition and the need to produce a thriving economy there are others who will say "cohesion" is just as important. By this they mean laws which are already in place purportedly to protect workers but which actually reduce labor market flexibility. The likely effect is that European competitiveness will be further impaired. Another revolution is needed.


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