Economy, Currency and Banking

The monetary unit of Germany is the single currency of the European Union (EU), the euro (1.07 euros equal U.S. $1; 1999 average). Germany is among 12 EU member states to adopt the euro. The euro was introduced on January 1, 1999, for electronic transfers and accounting purposes only, and Germany’s national currency, the deutsche mark, or DM, was used for other purposes. On January 1, 2002, euro-denominated coins and bills went into circulation, and the deutsche mark ceased to be legal tender.

As a participant in the single currency, Germany must follow economic policies established by the European Central Bank (ECB). The ECB is located in Frankfurt, Germany, and is responsible for all EU monetary policies, which include setting interest rates and regulating the money supply. On January 1, 1999, control over German monetary policy was transferred from the central bank of Germany, the Bundesbank, to the ECB.

Germany’s financial institutions include hundreds of lending banks and savings banks, thousands of larger credit cooperatives, and dozens of mortgage institutions and banks. Securities are traded at the Frankfurt Stock Exchange. The German capital market is characterized by a large share of fixed-interest securities, in particular local government and real estate bonds.

One of the biggest challenges to the German banking system was the instability of the DM that resulted from the merging of the East and West German currencies in July 1990. The East German ostmark had not been traded on international currency markets and could be bought on the street at rates as low as seven ostmarks to one DM. Yet, to gain East German trust in unification, the West German government agreed to allow East Germans to redeem up to 4,000 ostmarks of their bank savings at a one-to-one exchange rate for the DM. As East German private savings amounted to 70 billion ostmarks, the total money supply of DM rapidly increased by 20 percent. Attempts to control the resulting inflation by raising interest rates destabilized the finances of other European states and may have contributed to the international financial crisis of 1992.