European Monetary Integration

European Monetary Integration

Past, Present and Future

Edited by Eric J. Pentecost and André Van Poeck

This highly topical book examines the development and future prospects for economic and monetary union in Europe. European Monetary Integration examines the background to economic and monetary union from a historical perspective that distinguishes between national and supranational currency areas, and an optimal currency area theory. The gradualist transition process is also considered.

Chapter 3: German monetary unification and its implications for EMU

Friedrich L. Sell

Subjects: economics and finance, financial economics and regulation, money and banking


3. German monetary unification and its implications for EMU Friedrich L. Sell* 1 INTRODUCTION On 1 July 1990, a monetary union was implemented between West and East Germany. By the next day, all stocks of Ostmarks were converted into DMarks. Different conversion rates were applied according to the age of the Ostmark owners, the ‘liquidity’ of deposits and the speculative character of the Ostmark acquired in the year of conversion. Most of the bank deposits, firm and household debts and financial claims were converted at an exchange rate of 2:1 (Ostmark/D-Mark), whereas price and wage contracts as well as old-age pensions enjoyed an exchange rate of 1:1 (see Sinn and Sinn 1991, p. 34). Before and after this remarkable event a lively discussion took place that centred on the following issues: did a monetary union actually make sense from the theory of optimum currency areas’ point of view? This question was raised mainly by the economics profession. Should the conversion use a much higher exchange rate given the fact that the monetary union had to be accepted politically? This position was maintained primarily by the Deutsche Bundesbank. Finally, should there be a unique conversion rate of 1:1 just to avoid any kind of bad feelings from East Germany’s population and to stop East–West migration? These issues are addressed in Section 2. By the end of 1990, the federal government organized general elections with great emphasis on winning the majority not only of the West German,...

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