Transfers to Germany’s eastern Länder: a necessary price for convergence or a permanent drag?

Since unification, support to the former East Germany has totalled upwards of €1.2 trillion. Public and private net payments of over €80 billion annually (some 4% of GDP) for over a decade have periodically spawned debate on the quality and quantity of the transfers. There is particular concern that the massive transfers represent a substantial drag on the West's economy while creating a benefit dependency trap in the East's labour market that makes its convergence painfully slow. Although outward transfers are slowly falling in volume, they still represent 4.5% of western GNP, and up to 10% for some Länder when intra-western transfers are included. On the receiving side, they make up about one third of GNP in the former GDR. Most of the transfers are channelled through the social security systems in the form of pensions and unemployment benefits. Unless convergence accelerates sharply, transfer volumes will decline only slowly.

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