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  Germany's Eastern Burden: The Price of a Failed Reunification

Germany's Eastern Burden The Price of a Failed Reunification

By Stefan Berg, Steffen Winter and Andreas Wassermann

Part 3: Part III: Can the East Survive an End to Federal Help?

Siemens, the Dresden Microelectronics Center, Infineon and US semiconductor maker AMD have transformed this city on the banks of the Elbe River into a European Silicon Valley. Saxony, the German state of which Dresden is the capital, already boasts 200 companies in the microelectronics industry, employing some 20,000 people. Handelsblatt recently raved that Dresden, along with the nearby university town of Freiberg, has "grown into the home of Europe's biggest cluster of microchip manufacturers." This boom has certainly had its price, but it appears to have been money well spent. According to the German Institute for Economic Research (DIW), by the end of 2003 the government had already recouped its €1.2 billion investment in the semiconductor industry in the Dresden region through tax revenues. Indeed, the DIW estimates that surpluses could reach €6 billion by 2010.

Most important, the upturn in Dresden is consistent, with more and more new companies being added to the ranks of existing businesses. AMD is investing $2.5 billion -- including €544 million in government subsidies -- in the construction of a second factory next to its existing plant.

But the truth is that growth rates are still not sufficient to close the gap with the West. And, perhaps more importantly, growth is incapable of eliminating the East's biggest problem, unemployment. According to the Dresden-based ifo Institute, even if Saxony's economy, praised as exemplary throughout Germany, were to grow by 1.7 percent in 2006, this would "still be far from sufficient to produce an increase in employment." The East's star pupil is good, but not good enough. And, to make matters worse, the production structure developing in this high-tech region requires a lot of capital but isn't especially labor-intensive.

Most politicians -- from the right and the left -- had promised otherwise from the very beginning. There was plenty of money to go around after reunification. After all, a unified Germany and the addition of a new consumer market provided the West with more tax revenue. In the beginning, generosity came easily to West Germans, encouraged by the naïve belief that throwing enough money at the East would ultimately produce the desired results. The East's governors spent more than a decade touring the countryside, spreading wealth. Every local official got his industrial zone, almost every mayor his municipal swimming pool, and even smaller cities were slated for new airport construction -- even in places no one was interested in flying to.

Money seemed to be growing on trees within the federal government and at the European Union. It is especially telling that staff members who worked for Regine Hildebrandt, the now-deceased former minister of social services for the state of Brandenburg, used to write "hooray" on government and EU subsidy notices as soon as the funds were disbursed.

But the enormous system of subsidies that fueled the Germans' faith in rapid development concealed a hard and completely different reality that was developing in the businesses of the East. Former East Germany was becoming a laboratory for deregulation. While politicians demanded, and achieved, wage equality in the public sector -- a move that severely strained government budgets -- private sector workers who had once been celebrated as the socialist state's "working people" soon found themselves left out in the cold, at least when it came to promises of affluence. The trade unions' attempted to achieve wage equality with the West, but their efforts were unsuccessful.

The reason for this is that the balance of power between employers and unions, the result of decades of painstaking negotiation in the West, has long since been eliminated in the East. Although the West's structures were applied successfully to developing an acceptable social framework in the former East German economy after reunification, they proved to be a hindrance to building new businesses during reconstruction, and quickly became irrelevant.

Karl Brenke, a labor market expert at the German Institute for Economic Research, estimates that nowadays "three-quarters of eastern German industrial workers are not subject to collective bargaining agreements." In addition unionized workers are a dying species in eastern Germany, with only about 8 percent of the working population paying union dues. Business owners in the East have also lost faith in western Germany's time-honored give-and-take between unions and employers. Only about 10 percent are organized as part of employer associations.

Longer and more flexible working hours, labor costs a third lower than in the West, weak unions -- these sound like textbook conditions for an economic upswing, at least if one is a macroeconomist with a radical view of the market. But this isn't the whole story.

That's because employers can find even more favorable conditions not far from Germany's eastern borders, in the new EU member states of Poland and the Czech Republic. Companies that were initially persuaded to invest in eastern Germany by millions in subsidies eventually moved on -- from the Erzgebirge they moved to nearby Czech Republic, from Brandenburg they crossed the river into Poland.

Of course, things don't happen as smoothly in Poland or the Czech Republic, and German investors frequently complain about the lack of well-trained workers. And this is where an unprecedented campaign by Saxony's economic development authority comes into play. The agency has dispatched representatives eastward to try to convince companies to return to Germany, and has also planted articles in local newspapers in western Germany detailing the frustrations German businessman face in Poland. According to these reports, wage costs are climbing rapidly in Eastern Europe, with labor costs in the metal and electronics industry in the Czech Republic rising by 34 percent within three years -- compared with an increase of only 8 percent in Saxony.

Although this plan provides a glimmer of hope for some de-industrialized regions, in reality they're more likely to be destined for a future as retirement havens. This future is already taking shape in cities like Görlitz. Millions in urban renewal funds have transformed this Renaissance city on the Neisse River into an architectural gem -- and a paradise for retirees from western Germany who can afford to live in magnificent apartments in old downtown buildings for rents that would be unheard-of in the West. But for young people, except those who work in professions caring for the elderly, the city offers little in the way of career opportunities. Like in many other places in the East, they either move away or commute, sometimes hundreds of kilometers, to jobs and job training sites elsewhere.

Neuhaus, a town in the Thüringer Wald region, has become the quintessential bedroom community. According to statistics compiled by the Federal Office of Labor, a record 49.4 percent of the town's 4,780 inhabitants commute across the former, inner-German border to more lucrative jobs in the West.

Many in the East are beginning to feel that they have spent enough time putting in their dues -- agreeing to longer working hours and accepting the necessity of lengthy commutes as a fact of life. But this part of Germany hasn't seen the last of its changes. As much as everyone agrees that the East still needs help, it will all end in 2019, when the Solidarity Pact II, legislation that regulates the billions in West-East transfers, is set to expire.

By then, says Brandenburg Governor Platzeck, "we'll have to be standing on our own feet." Rainer Speer, his assertive finance minister, did a few calculations to show residents of his state just how much federal support they get. He compared the funds available to the state with those of Schleswig-Holstein, a similarly sized state in the West. The results were astonishing. Thanks to various subsidies, Speer has access to 140 percent, on a per-capita basis, of the funding available to his counterpart in Schleswig-Holstein. About 40 percent of the eastern states' budgets are derived from western funds. Speer warns that if the East doesn't manage to save some of that money before the program ends in 2019, "politics will be a thing of the past here."

Platzeck and his fellow eastern governors face an enormous adjustment process, in which they must simultaneously:

• drastically reduce expenditures, especially for government salaries. The new states and their municipalities employ at least 10 percent more public servants per capita than the western states, partly because they were required to take on public servants from the former East Germany;



• clear out a jungle of subsidies, eliminate programs and concentrate funds. According to an intra-ministry project group, there were 198 government-funded programs in Brandenburg alone, many of which are scheduled to be phased out soon. The investment subsidy, which gives tax cuts to investors, has also missed its mark. According to economic researchers, many investors have treated the program as a cash-and-carry operation;



• react to demographic change. Special teams in a number of eastern states are currently studying how the government can continue to provide public services in regions that are essentially abandoned -- in other words, figuring out where schools can be closed, jurisdictions combined and bus routes eliminated;



• choose regions that will continue to receive financial support, while at the same time cutting off funding to others, the objective being to reinforce the strong and ignore the weak.

But none of these measures is a magic bullet for speedy growth. Everyone knows this, and that's why everyone is avoiding the issue. Even CDU leader Angela Merkel, who is routinely confronted with cold reality when she meets with constituents in her district (the Baltic Sea city of Stralsund), seems to have lost her faith in a quick breakthrough for Development East. When Bavarian Governor Edmund Stoiber recently complained about the West-East transfers, Merkel countered with a surprising fact: Bavaria received federal subsidies for almost 40 years until "the state finally became a net payer among German states." It's year 16 of reunification, and if Germany's easterners aren't any quicker than the Bavarians, they will need help from Berlin for another 24 years.

Translated from the German by Christopher Sultan