Investment update 19 February 2018

Last week in the markets

Over the past week Australian shares were up 1.4% while small company shares were up 1.5%. Shares in developed countries rose 4.2% with the US market up 4.3%. Shares in emerging markets were up 5%. The Australian dollar increased 1.2% to 79.05 US cents. The Australian 10 year bond yield increased to 2.92% while the US 10 year bond yield increased slightly to 2.87%. The oil price rose 4.2% to 61.68 US dollars per barrel.
  

The Berlin Wall and Brexit

You may have noticed an amazing fact reported in the news recently: the Berlin Wall has now been down longer than it was up. Millions of Germans around the world have been celebrating.

When World War II ended in 1945 Germany was divided in two; West Germany and East Germany. Berlin, which sat in East Germany, was also divided in two. In 1961, East Germany built the Berlin Wall to stop the flow of East Germans into West Berlin and then onto West Germany. Berlin became a focal point for the future of Europe and its systems of government: democracy and communism.

The revolutions in Poland and Hungary spread into East Germany in 1989. Dissatisfaction centred on the controls on freedom. Civil unrest was fuelled by the lack of opportunity and absence of products freely available in the West, fresh fruit and better cars for example, benefits that come with free trade and labour mobility. 

That year crowds of East German protesters breached the wall and people on both sides began to take their tools to it. Government-directed demolition began in 1990 along with the country’s reunification. The British Prime Minister at the time, Margaret Thatcher, opposed unification. She allegedly said 'we beat the Germans twice, and now they're back'. In early 1990, 27% of Britain opposed German unification. In West Germany it was 17%.

German unification has had a very positive impact on the human rights, standard of living and opportunities for millions of East Germans and their families. But the economic shocks were large too. East Germany had many uncompetitive industries and as they were shut down unemployment and social welfare payments soared.

The costs of reunification were borne by the West German people, although not evenly. Spending on infrastructure and a housing boom generated income for West German industries. The money spent on social welfare programs lead to additional consumption that German firms profited from. In short, investors benefited. Of course the sailing was far from smooth.

After 25 years the scars of the East-West divide remain, although they continue to fade. The German states that were once within East Germany (Brandenburg, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia) have the highest unemployment rates, but the East-West disparities in wellbeing and unemployment have fallen greatly from 1990. In 1991, the Gross Domestic Product (GDP) per-capita in West German states was 2.5 to 3 times greater than that of the East German states. Today it’s around 1.5.

Two important points place this in perspective. First, since the Berlin Wall fell German GDP per-capita has risen by about 40%. This means that, though differences remain, Germans are better off today than they were when the country was divided. And on the point of personal freedom at least, they are likely happier. Second, the European Union would not have been possible without German unification.

Labour mobility and free trade within Germany has led to a better outcome, even if the road has been a difficult one. This same challenge presents itself today for Europe and Britain in a post-Brexit world. History never repeats itself but it often rhymes.

Signing off

Sean Anthonisz | Senior Quantitative Analyst