t step toward economic unification came on July 1, 1990, when the Federal Republic's Deutsche Mark became the sole currency of the soon-to-disappear German Democratic Republic. It had become clear not long after the opening of the Berlin Wall that East German industry would have great difficulties competing on open international markets while, at the same time, facing the prospect of losing its traditional markets in the COMECON nations. Hoping to stave off economic collapse in the east, the government of the Federal Republic proposed a plan in early 1990 to make the West German Deutsche Mark the common currency of the two German states in anticipation of political union. Although the East German mark had become almost worthless, Bonn agreed to a 1:1 exchange for salaries, wages and certain categories of personal savings and a 2:1 exchange for most individual and commercial accounts in eastern banks. In all, assets with a face value of 300 billion GDR marks were exchanged for DM 182 billion, U.S. $110 billion at the time. Implicit in the agreement on currency union and the concurrent plans for merging the economic and social welfare systems of the two German states was the understanding that Bonn would shoulder much of the financial burden of closing the economic gap between unified Germany's eastern and western states. That turned out to be a more costly undertaking than anyone anticipated in 1990. Initial assessments of eastern Germany's competitive potential proved to be far too optimistic. Eastern industry was, by and large, technologically outmoded and heavily over-staffed. The agency responsible for privatizing eastern enterprises, the Treuhandanstalt, quickly found that investors had little interest in acquiring eastern commercial assets unless offered substantial incentives or subsidies and, in many cases, a free hand in cutting payro...
