Q. Show the effects of the reunification of eastern and western Germany in 1990 on both Germany and its neighbouring European countries using the AA - DD framework.

Answer: For Germany this was a period of rumble with high interest rates to fight inflation. Erstwhile European countries like Italy UK, and France were in recession trying to match the high German interest rates to hold their currencies fixed against Germany's thus pushing their economies into deep recession. Other European countries strive to continue the fixed exchange rate in order not to lose the credibility they had built up since 1985. The policy clash among Germany and the other European countries led to a series of fierce speculative harass on the EMS exchange parities starting in September 1992. By August 1993 the EMS was forced to move away to very wide (+- 10 percent) bands which was kept in force until the introduction of the euro in 1993.