The economic integration of the eastern German states has progressed rapidly in many respects. The infrastructure has been rapidly built up and modernised. A strong trend to modernise the business capital stock has been established, aided by financial assistance from the west. Already at the beginning of the 1990s the elaborate western German social security system had been extended to the new states. Incomes of both the employed and the non-employed, in particular retirees, have risen fast, and have approached west German levels. There has also been a high degree of structural change, as witnessed by high growth rates in manufacturing, increasing export shares, the rapid expansion of the service sector and the down-sizing of the construction sector after very high -- and largely policy-induced -- growth rates in the first half of the 1990s. However, in the second half of the 1990s economic growth in the east decelerated, and income convergence has stalled and employment stagnated ...