EEC lesson

The EU’s Brexit solution: trade between East and West Germany

DDR – Kombinat Baumwolle
Spinning a solution? Source: dpa Picture-Alliance / Wolfgang Thieme

Even amid the Cold War tanks, snipers and barbed wire borders, West German politicians always insisted that East Germany wasn’t a foreign country — and made sure trade continued between the two Germanys.

That involved a special currency and a special commitment by politicians. Now, economists look back at that historic compromise and hope for similar will for a solution if Britain does leave the European Union. While London and Brussels reportedly mull a customs agreement, German economist Rolf Langhammer notes that European history is packed with such exceptions: Another one makes good sense.

Back in the 1950s, Langhammer recalled, officials and lawmakers created a unique workaround so that all kinds of goods, from tractors to textiles, and minerals to office equipment, could pass between the two halves of Germany.

There were complications, not least the fact that there were differing versions of German currency. West Germany had the Deutsche Mark. East Germany, part of the Soviet Zone of Occupation, had a currency also called the Deutschmark, but commonly known as the Ost (or east) Mark. The values of both currencies differed. So authorities created a special “clearing unit” of currency known as the VE. That unit never became a coin or note, but existed only to quantify trade between the countries in accountants’ ledgers. Special accounts were kept on both sides.

That enabled trade in textiles, chemical products and farming equipment to steadily increase. West Germany received cheaper goods, particularly textiles, while East Germany was able to import some Western products by way of West Germany without spending hard currency.

G SXX Warenverkehr-01 (003)

The situation became more complex in 1957 and 1958 with the signing of the Treaty of Rome. Western European countries were united in the European Economic Community, or EEC, which included West Germany but not East. Nonetheless, trade continued under the special arrangement between Bonn and Berlin. In fact, the EEC tacitly approved the relationship and didn’t apply its quotas and tariffs to East Germany.

The system proved robust: Trade continued throughout various Cold War incidents, including the Hungarian uprising of 1956, the Warsaw Pact countries’ invasion of Czechoslovakia and even the building of the Berlin Wall. In the late 1960s, the leaders from East and West Germany negotiated, enabling the border between the two to become even more porous, thanks to the trade between the two.

Not everyone was happy with the arrangement. Often, the far cheaper textiles from East Germany left West Germany and were exported further afield, to countries like France. This irritated the French government in Paris which had signed treaties to protect French producers.

Nonetheless, the German exception made for trade was sustained until German reunification in 1990. Sigmar Nehring, Germany’s expert in trade between the GDR and the BRD, pointed out that a similar construct, involving a free-trade zone between two different customs regimes, could help regulate trade between the European Union and post-Brexit UK. What was critical, he said, was that all the countries involved were willing to accept the “fiction that economically, we were not separated, even if we were divided politically.”

Such political will could certainly help the contemporary Brexit experience, the economists say. Brussels has a history of exceptions, Mr. Langhammer said, so why not now? Even at present, there isn’t totally free movement of goods, capital and services in the EU, he noted. People are labeling post-Brexit trade exceptions as “cherry picking” but this is nothing new. And in the context of possible exceptions around the Irish border, Langhammer and his colleague, Dennis Snower, urge both sides to find a solution. The EU can still make exceptions — even now.

“We should agree on a compromise,” Langhammer concluded. “It’s in our own interests.”

Allison Williams is deputy editor of Handelsblatt Global. To contact the author: williams@handelsblatt.com

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