Fifteen years after reunification, the economy of the former East Germany is on the mend. Industrial production excluding construction has expanded by more than 60 percent since 1995 and by 28 percent since 2000, compared with only about 4 percent in West Germany, for the latter period. Real GDP has grown 3.5 percent per year since 1991 and 8.2 percent annually in the manufacturing industry alone. More than half of the measured labor productivity gap and more than a third of the GDP per capita gap between East and West have been closed, in considerably less time than predicted by Robert J. Barro (1991). As Table 1 shows, convergence has been impressive on a wide array of indicators, although it has slowed in recent years and remains most difficult in the labor market. Despite this positive news, net migration continues from East to West—about 70,000, or 0.5 percent of the population, per annum since 2000, especially concentrated among 18to 25year-olds. At the same time, new physical capital continues to flow into the East—80 to 90 billion euros, or about 20 percent of GDP each year. The reallocation of production factors is one of the most impressive aspects of German unification. Since 1991, more than 1.2 trillion euros of new investment (in 1995 prices) was spent in the East, yet the workforce of East Germany shrank by roughly 1.2 million, or 15 percent, over the same period; employment rose in the West by 4.1 percent. As Figure 1 shows, the intensity of factor movement was not constant, but rather high at first, and declining into the 1990s. Migration was greatest in the early 1990s, falling until mid-decade, rising again until 2001, and declining since. In addition, a large fraction (two-thirds) of the cumulated investment flow in Eastern Germany was dedicated to residential and business structures, compared with about one-third in business equipment. The large runup in investment spending on structures is often blamed on distorted investment incentives, with possible longer-run consequences for the structure of output and factor demands (Hans-Werner Sinn and Gerlinde Sinn, 1992). This intensive movement of production factors in opposite directions is difficult to explain as a reaction to disturbances in technology, preferences, or demand. To use Horst Siebert’s (1992) terminology, Germany was hit by a massive integration shock. I offer the following definition of economic integration: the achievement of the efficient production pattern by two or more geographic regions made possible by their union, measured at world market prices. The German integration episode presents a unique opportunity to study this form of economic integration and the roles of the relative importance of adjustment costs in determin† Discussants: Hans-Werner Sinn, CES-ifo and University of Munich; Nicola Fuchs-Schundeln, Harvard University; Claudia Buch, University of Tubingen.