Case | HBS Case Collection | September 1992 (Revised July 1998)

Germany in the 1990s: Managing Reunification

by George C. Lodge and James W. Ragsdale

Abstract

In October 1990, eastern Germany was incorporated into the Federal Republic of Germany. The German people rewarded the architect of these changes, Helmut Kohl, with an enhanced majority in national elections. But only two years later it was hard to remember these heady times. Re-unified Germany's external and internal economic situation were out of balance. The current account fell from a large surplus to deficit. Inflation rose as the German government ran a mounting deficit to finance reconstruction. In June 1992, the Bundesbank council, the interest-rate-setting body of Germany's central bank, raised interest rates to combat this inflation. Other members of the EMS were less willing to raise interest rates as they feared recession rather than overheating. Within months, Italy devalued and the United Kingdom dropped out of the EMS. Had Kohl's reunification strategy caused the EMS crisis? What did this crisis imply about the hopes for closer European integration?

Keywords: Economy; Inflation and Deflation; Central Banking; Interest Rates; Political Elections; Situation or Environment; Integration; Europe; Germany; Italy; United Kingdom;

Citation:

Lodge, George C., and James W. Ragsdale. "Germany in the 1990s: Managing Reunification." Harvard Business School Case 793-033, September 1992. (Revised July 1998.)