IZA Tower Talk - Report

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Klaus von Dohnanyi: "Unemployment in Germany – Why Our Explanations Are Questionable"
Klaus von Dohnanyi
March 28, 2006 marked the 13th “IZA Tower Talk” taking place in the headquarters building of Deutsche Post World Net in Bonn. The invited speaker, Klaus von Dohnanyi, is Vice Chair of the “Convent for Germany”. Analyzing the causes of Germany’s high unemployment rates, he rejected the hypothesis that the country’s role as Europe’s economic laggard is due to a blatant failure to implement the necessary reforms. Although he stressed the need for courageous reforms, von Dohnanyi viewed the historically and internationally unprecedented economic burden resulting from German reunification as the main cause of the unemployment crisis. The fiscal requirements to meet the convergence criteria for the introduction of the Euro further aggravated the problem.
In 1989, “the first EU eastern enlargement took place in our own country”, abruptly forcing Germany to integrate a large number of workers “without products or customers” and necessitating massive fiscal transfers to the east. In order to finance German reunification, the German labor market also had to bear additional non-wage labor costs, von Dohnanyi claimed. “We are reluctant to recognize the economic burden of the politically fortunate German reunification,” he criticized. Since a closer look reveals that the economic performance of former West Germany continues to measure up to international standards, von Dohnanyi deplored the “typically German” way of lamenting one’s own “misery”. After all, Germany has been able to maintain its strong position in the global marketplace despite the entry of new competitors such as China and India.

Since the 1980s, Germany’s de facto competitiveness has not declined although the negative economic impact of German reunification coincided with a loss of competitive advantage over other EU member states when Germany’s exceptionally strong currency and stable prices were sacrificed to the introduction of the Euro, which von Dohnanyi explicitly supported.

Against this background, he called for more self-confidence in Germany’s economic power and reformability, but also for more “truthfulness” in dealing with economic facts. This would be a prerequisite for inspiring the confidence and courage among society that is needed to tackle the most important reforms in the light of Germany’s unique situation.