The monetary and fiscal costs of German reunification

When the Deutsche Mark became sole legal tender across both German states on July 1, 1990 under the German-German monetary, economic and social union treaty, the Bundesbank had to convert roughly 25 million East German accounts, with East German savings and giro balances of about 180 billion Ostmarks converted into roughly 120 billion Deutsche Mark, an exercise its October 1990 Monthly Report covered in detail as 'technical and organisational aspects of the monetary union with the German Democratic Republic.' The conversion lifted West German M3 money supply by around 15%, a one-off monetary expansion the Bundesbank had to manage carefully to avoid destabilizing inflation expectations even as it extended its policy remit eastward overnight. Beyond the currency conversion itself, the Bundesbank's own analysis attributed more than half of the roughly DM 1,200 billion increase in combined central, regional and local government debt since 1989 to reunification-related costs, as transfers financed East German infrastructure, social security harmonization, and enterprise restructuring. The resulting fiscal and monetary strain contributed to the high German interest rates of the early 1990s that later helped trigger the 1992 European exchange-rate mechanism crisis.