Since the short reunification boom, the German economy registered very low growth rates which are substantially below those of other EU countries. This paper analyses the underlying reasons for this under-performance. The fiscal burden of unification, the decline of the construction sector and a rigid labour market are found to be the most significant factors.

A first chapter describes the short and long-run macro-economic developments during the 1990s, pointing in particular to the growth shortfall in the East and the decline in the construction sector. A second chapter finds that monetary and fiscal stance of the economy played only a minor role in reducing growth. Instead, as is shown in the third chapter, the root of the problem is that the economic challenges of unification were not addressed fully due to structural rigidities, which persist mostly in the labour market. As a consequence, without labour market reforms economic growth in Germany will continue to lag behind that of other European countries in the years to come.