Germany's Disappointing Reunification How the East Was Lost

July 1 marks the 20th anniversary of the introduction of the deutsche mark in East Germany in the runup to full reunification. But the economic benefits that West German politicians promised failed to materialize. What went wrong?

German Interior Minister Thomas de Maizière, 56, is from Bonn, deep in the west of Germany, but his memories of the days between the fall of the Berlin Wall in 1989 and German reunification in 1990 are those of an East German.

Lothar de Maizière, the first and last democratically elected prime minister of East Germany, had asked his cousin whether he wanted a job. Thomas de Maizière agreed, moved into an office on Klosterstrasse in East Berlin and, from then on, sat on the side of the table reserved for East Germans at the negotiations on German reunification.

Thomas de Maizière has often asked himself what went wrong at the time. "Objectively speaking, we didn't have enough time. We were under a great deal of pressure," he says. He compares it to a "sudden political birth."

The emergency delivery happened exactly 20 years ago. Today, as the federal government's commissioner for the "new German states" (as the former East Germany is known), de Maizière's job is to promote the development of eastern Germany. He is the first interior minister and the first West German in a long time to hold the position, but de Maizière downplays his role.

The minister remains reserved in interviews on the subject. And when he does say something, it doesn't sound like what his predecessors said.

He has an aversion to official phrases like "harmonization of living conditions in the east and west." Nor is he keen on the term "Aufbau Ost" ("development of the east"), which German governments have used as shorthand for efforts to promote economic development in the former German Democratic Republic (GDR), as East Germany was officially known. "When people from western Germany come to Potsdam, Dresden or Stralsund," he says, referring to three relatively prosperous eastern German cities, "their first impressions prompt them to ask: 'What still needs to be developed here?'"

Overnight Change

It was 20 years ago that then-Chancellor Helmut Kohl made a lonely decision. The Berlin Wall had come down, and thousands of East German citizens were moving to the West every week. Kohl offered Hans Modrow, the interim communist leader of East Germany at the time, a monetary union for the two Germanys. Experts were annoyed by the proposal, and Karl Otto Pöhl, the then-head of West Germany's central bank, the Bundesbank, warned against it. But Kohl had his way. Money transporters began rolling eastward overnight. The West German deutsche mark was named East Germany's currency on July 1, 1990.

Politically speaking, the monetary union was a success. The people were delighted, because they no longer had to travel to the west to get deutsche marks. But the move had a devastating effect on the economy. Overnight, all pensions, wages and savings of up to 6,000 East German marks were exchanged on a one-to-one basis. This was beneficial for East German citizens but not for businesses, many of which went under when they suddenly found themselves having to compete with the highly modern West German economy.

"Although there was no reasonable political alternative to the fixed exchange rate, it was a bad move economically," says de Maizière. "Instead of one to one, the exchange rate should have been one to three or one to four, to reflect the economic reality, but this would have had the devastating political consequence of further migration."

Lagging Behind the West

Today, the eastern German economy is still in a sorry state, and there are no indications that the situation will change. An estimated €1.3 trillion ($1.6 trillion) have flowed from the former West Germany to the former East Germany over the last 20 years. But what has that money achieved? Historic neighborhoods have been restored, new autobahns built and the telephone network brought up to date, but most of the money was spent on social benefits such as welfare payments. The anticipated economic upswing failed to materialize.

Some eastern cities, like Leipzig, Dresden, Jena and Erfurt, have experienced economic development. The state of Thuringia has a relatively robust auto industry, and there are successful high-tech companies in Saxony. Research institutes and universities are doing well, thanks in part to generous government subsidies.

But the success stories are rare. Most of eastern Germany has turned into an economically depressed region that lags behind the west in all respects:

  • The per capita economic output in the east is only at 71 percent of the western level, with a disproportionately high share of economic output attributable to the public sector. The economic output generated by the private economy is only at 66 percent of the western level.
  • To close the gap, the eastern German economy would have to grow more rapidly than in western Germany, but precisely the opposite is the case. Germany's leading economic research institutes expect the economy in eastern Germany to grow by 1.1 percent this year, compared with 1.5 percent in the west.
  • Since the fall of the Berlin Wall, the population of eastern Germany has declined by almost 2 million people, a trend that is continuing unabated.
  • The proportion of household income derived from welfare payments is 20 percent higher in the east than in the west.
  • Of Germany's 100 largest industrial companies and 100 largest service providers, not one has its headquarters in eastern Germany.

Politicians across the political spectrum tend to sugarcoat the meager economic results of reunification. Chancellor Angela Merkel, the leader of the center-right Christian Democratic Union (CDU), is fond of saying that "a great deal has been achieved" in the development of the east. Former Transport Minister Wolfgang Tiefensee of the center-left Social Democratic Party (SPD), who is also a former commissioner in charge of developing eastern Germany, says jubilantly: "We have successfully made it three-quarters of the way."

"We are firmly convinced that the creative forces of the people that have now been unleashed will lead to a new Wirtschaftswunder," then-Chancellor Helmut Kohl proclaimed on June 5, 1990, referring to the "economic miracle" of postwar West Germany. But anyone who travels through eastern Germany today, 20 years later, will encounter failed mega-projects, depopulated downtown areas and many people who haven't had a regular job in two decades.

The East's Shrinking Cities

"Our fellow citizens in East Germany now have the opportunity to achieve rapid and sweeping improvements."

(Helmut Kohl, June 21, 1990)

Georg-Wilhelm Westrum is not someone who spends much time bemoaning lost opportunities. "In my profession," says Westrum, who is head of the building authority in the eastern German town of Stendal, "you have to face up to reality."

Westrum is standing in a drab parking lot in the town's Süd neighborhood. Some 15 years ago, this was a lively area with a string of shops, cafés and a lot of green space, in keeping with Westrum's plans for the city.

Now six-foot-tall fences block the sidewalk, the shops are empty and most of the apartment buildings have been torn down. Today, Westrum's job consists of "deconstruction" rather than construction. The head of the building authority seems to think that it's perfectly normal to demolish what was once his model neighborhood. "If we didn't take any action," he says, "this would turn into a slum."

Too Much City for Too Few People

Since reunification, the German government has pumped hundreds of billions into the construction of housing in eastern Germany, either in the form of direct subsidies or loans. The result, says Berlin economist and real estate expert Harald Simons, was a "double catastrophe."

Initially in the post-reunification era, hundreds of thousands of people moved from neglected downtown areas into pre-fabricated high-rise buildings on the outskirts of cities, which the socialist state had built on a massive scale in the 1970s and 1980s and which were expensively renovated after the fall of the Wall. But then billions were spent to restore the downtown areas and historic districts, which triggered a reverse migration. Today about a million apartments are standing empty,  paving the way for the third stage in eastern Germany's urban development: The government is now spending billions to demolish surplus high-rise apartment blocks.

In Stendal, for example, the population has declined by almost 10,000 in the last 15 years, to its current level of 35,000. Another 5,000 people are expected to leave by 2020. This creates a unique problem for local politicians: too much city for too few people. The city has empty beds in the hospitals, schools with hardly any children and an enormous wastewater system that isn't being fully utilized, so that extra water has to be constantly added in order to flush out sewage.

Now the city's administration wants to force residents to move from the periphery back into the downtown area. "We have to be honest with people," says Mayor Klaus Schmotz, "and tell them that we can no longer maintain all city facilities at the level of quality to which they are accustomed."

The only question is whether this is a message Stendal's residents want to hear.

Reversing Development

Westrum, the head of the building authority, is meeting with an old acquaintance. Jörg Michael Glewwe used to be the East German official in charge of a planned nuclear power plant in Stendal. Now he works for a real estate company that owns several apartments in the Süd neighborhood. The two men are standing in Glewwe's office on the ground floor of a run-down apartment building, which Glewwe has equipped with cheap furniture from a second-hand store. They are looking at a color-coded map of Süd, on which buildings that have already been torn down are marked in red and the ones that are still standing are marked in yellow. Westrum would like to see those buildings demolished as well, while Glewwe wants them to be preserved.

Westrum's position is backed by the city administration, the current development plan and the prevailing philosophy of focusing on downtown areas. Glewwe's supporters are the building owners plus dozens of unemployed people and retirees who don't want to move out of their inexpensive apartments in the high-rise blocks.

Glewwe believes that his campaign will prevail. He hopes to convince the owner of a local discount clothing store to stay in the neighborhood. He wants to install solar cells on the rooftops to generate low-cost energy. Glewwe is a member of the town council for the far-left Left Party, which was formed in 2007 after the successor party to the East German communists, the Party of Democratic Socialism, merged with a left-wing western German party, and which receives strong support in the east.

"But the Left Party also voted in favor of the development plan," says Westrum.

"As a town council member, I supported it, but as a citizen, I'm against it," says Glewwe. "After all, you can't just expropriate the investors."

"One thing is clear," says Westrum, who is now sitting in his official car again. "Developing the city is easier than undoing the development."

A Government-Supported Tropical Paradise

"I have this to say to my fellow Germans in East Germany: The introduction of the social market economy offers you every chance, in fact, even a guarantee, that (the East German states of) Mecklenburg-Western Pomerania, Saxony-Anhalt, Brandenburg, Saxony and Thuringia will soon become blossoming landscapes in Germany once again."

(Helmut Kohl, May 18, 1990)

The place some might consider paradise is situated in the eastern state of Brandenburg, just off the A13 autobahn between Berlin and Dresden. It's easy to recognize from a distance. What is probably the world's tallest, freestanding domed roof rises from the sandy soils of Brandenburg, enclosing the "Tropical Islands" resort. According to the brochure, it's the largest tropical landscape in Europe.

Everything here is gigantic -- it's part of the business model. The water slide is supposedly the tallest in Germany. The "tropical sauna landscape" is touted as being unique in Europe. And the "indoor rainforest," say the operators of Tropical Islands, is the biggest ever created.

The resort was supposed to attract 2.5 million visitors a year. At least, that was the plan when the building was officially opened on a cool winter day in December 2005. For the residents of a region plagued by unemployment and population decline, it sounded like a dream come true. The developers hoped that the facility would put the southern part of the state of Brandenburg on the map, and that it would soon be mentioned in the same breath with world-class attractions like SeaWorld, Disneyland and Copenhagen's Tivoli.

The plans were great, the reality less so. Admittedly, everything seems to now be working relatively well at Tropical Islands, after some initial hiccups. The heating system in the building operates perfectly almost all of the time and the plants are developing nicely, thanks to a new roof membrane. The water is clean and the prices are reasonable. But the predicted onslaught of guests hasn't materialized. Last year, only about 900,000 people visited the resort.

Water, Water Everywhere

The problem is that, unfortunately, Tropical Islands is constantly mentioned in the same breath as the "Lagoon" in Cottbus, the Templin Thermal Spa, the "Bathing Paradise" in Lübbenau and a dozen other water-related recreational venues in the immediate surroundings.

It appears that there is hardly a town in Brandenburg that doesn't have its very own aquatic resort. In fact, the rule of thumb appears to be: the more isolated the location, the bigger the recreational facility.

The excess capacity is the result of a bizarre policy of subsidization. According to a study by the Cologne Institute for Economic Research, there are more than 90 water parks in eastern Germany. In Brandenburg alone, close to €170 million in subsidies had been spent on swimming pools by 2005. Although newer figures are not available, the wave of water-park construction continues. The city of Potsdam near Berlin is currently considering plans to build a new facility. The plans for the project, which will cost an estimated €20 million to build, were designed by the legendary Brazilian architect Oscar Niemeyer, best known for his buildings in the capital Brasilia.

Government Help

The future of Tropical Islands will be decided in the next few months. The palm-studded paradise has received about €30 million in development funds. The developers paid relatively little for the building five years ago. The original structure was a massive hangar that was part of the estate in the bankruptcy of the company Cargolifter, which wanted to build high-tech airships to transport industrial payloads. The hangar was also built with the help of government subsidies.

Kim Schäfer, the marketing manager, dreams of transforming Tropical Islands into an "international vacation destination." According to the company's master plan, the former hangar will serve as the centerpiece of a resort region complete with several campgrounds and vacation rental communities. The plan looks as if it includes enough space for half of Berlin's residents.

Of course, connections to the German capital could be better. In fact, the railroad line between Berlin and Tropical Islands is out of service for at least a year because of maintenance work.

Paid to Do Pretend Work

"I can say to the Germans in East Germany that no one will be worse off than before, and many will be better off."

(Helmut Kohl, July 1, 1990)

A light breeze is blowing on this sunny June morning in the forests south of Berlin. Knut Sprenger is standing in front of a trail map near the town of Luckenwalde in Brandenburg, preparing for his workday under a publicly funded employment program.

"We'll take the Holbeck circular route today," he says. "We haven't been there in a while."

Sprenger works for "Fläming Walk," a 450-kilometer (280-mile) network of hiking trails named after the Fläming region. The participating towns like to tout it as the "biggest Nordic walking park at the gates of Berlin and Potsdam." Sprenger, who is in his mid-50s and deeply tanned, monitors hiking paths, replaces damaged path markers and accompanies groups of hikers. "I spend a lot of time in the great outdoors," he says, "and I always have a destination in mind."

A Tradition of Concealment

Not everyone in eastern Germany is as satisfied with his or her job. Two decades after reunification, the labor market is the clearest indicator of the ongoing gap between the two Germanys. The unemployment rate in the eastern states is still almost twice as high as it is in the west, and the east has more temporary and seasonal workers.

According to a study by the Institute for Employment Research, "central indicators for the job market suggest more of a tendency toward stagnation than catching up."

Back in the former East Germany, it was common to conceal the true scope of unemployment behind a large number of unproductive jobs. This tradition was seamlessly extended into the post-reunification era.

The government came up with a series of publicly funded employment programs in the years after the fall of the Wall. But there was always an underlying contradiction. On the one hand, the jobs created under these programs were designed to resemble normal jobs as closely as possible, so that participants would be able to eventually return to the regular working world. On the other hand, this parallel labor market could not compete with the real job market.

It was not a success, as Germany's Federal Audit Office concluded two years ago in a devastating assessment of one such program involving so-called "one euro jobs." Under the scheme, the long-term unemployed could work a certain number of hours a week in, for example, old people's homes, schools or parks. In return, they received compensation of €1 an hour or more on top of their regular welfare payments. But, according to the report, the government-funded ersatz jobs were displacing many regular jobs and even decreased the chances of participants finding real work.

For the majority of long-term unemployed people, the one-euro jobs did not "provide any measurable advantages" in terms of finding work, the auditors concluded. Hundreds of thousands of East Germans were "branded as second-class workers," says Esther Schröder, a former SPD member of the Brandenburg state parliament.

Making Sundials for the State

Knut Sprenger is familiar with the experience. When Sprenger, a bricklayer by trade, was no longer able to work in construction because of a slipped disc, the job placement office helped him embark on what he describes as a "career in government-funded job programs." He went from one temporary job to the next, but the positions were either pointless or lacked job security.

At first, he received a one-euro job as a janitor in a center for the disabled. Even though his new employers praised him as the "man with the golden hands," Sprenger was unable to keep the job, because one-euro jobs are usually only temporary.

Then the employment office placed him in a so-called "qualification" program, in which he and other unemployed workers were supposed to build sundials. They were only permitted to use sandpaper and files as tools, and the results of their work disappeared into the basement of the company running the program.

The work making sundials was not supposed to resemble an ordinary job in the trades. Sprenger began to question the purpose of the project. "When I finish work in the evening, I have to be able to see what I've accomplished," he says.

Hopes of a Job

Now he hopes that he'll at least be able to keep his job with Fläming Walk, but the chances aren't good. The federal government program that provides the funding for his current position expires in two years.

By now it's early in the afternoon and Sprenger is back at his starting point. In a few moments, he'll report to his boss that he found no significant damage, except for a downed tree that had fallen on another tree behind a small grove. "If it comes loose," says Sprenger, "it could be really dangerous."

Too Much Supply and Too Little Demand

"It cannot be the goal of our policies that as many people as possible should move from East Germany to West Germany. Instead, it is my goal to provide them with an outlook for a future life there, in their homeland."

(Helmut Kohl, Jan. 10, 1990)

In the late morning, a peak period in German airspace, the biggest rush is already over at the Ostseeflughafen Stralsund-Barth airport. Two small aircraft have already landed, and a third is parked in front of the tiny hangar.

Airport manager Paul Wojtasik is standing in front of a red riding mower. The next plane isn't expected until the afternoon, which gives Wojtasik the chance to catch up on some of his other duties: servicing the fire department vehicle, doing some paperwork and making sure the toilets are clean. "I'm probably the only airport manager in Germany who picks up a toilet brush now and then," he says.

After the fall of the Berlin Wall, the economy in eastern Germany suffered as a result of the poor public infrastructure. Many rail lines were in poor condition and the telecommunications network was hopelessly outmoded. After two decades of publicly funded development, the situation has changed dramatically. In fact, today it's more often the case that the private sector is unable to keep up with the rapid pace of expansion of the public infrastructure. The problem is the same as it is with the water parks: too much supply and too little demand.

Extremely Well Connected

With a population of about 1.7 million, Mecklenburg-Western Pomerania is Germany's second-smallest state, but it is extremely well connected to international aviation. Anyone who chooses to pilot his own aircraft to the state can choose among five fully-equipped regional airports and six smaller business airports: on the island of Rügen, in the Mecklenburg Lakes region, on the Baltic Sea coast and on the island of Usedom.

There is only one problem: The world's commercial airlines haven't quite discovered the outstanding conditions for aviation in Germany's far northeastern corner. The government has invested about €130 million in airport expansion over the last 20 years. Nevertheless, almost all of these airports are underused and in the red.

The Heringsdorf airport needs annual state subsidies to stay afloat. The management of the privatized Parchim International Airport complains about the stagnant air cargo business. And in the generously expanded terminal building at the Rostock-Laage airport, there are so few passengers that some have even wondered whether it's necessary to heat the building in the winter.

Losing Money

And at the Ostseeflughafen Stralsund-Barth airport, there is also a gaping void between expenses and profits. In the last few years, the government in the state capital Schwerin has spent more than €4.5 million on a brand-new runway and state-of-the-art lighting system. But annual passenger volume has declined sharply, from just under 28,000 in 1992 to roughly 8,000 today. The operating company, which is owned by the cities of Barth and Stralsund, as well as the Nordvorpommern administrative district, is losing about €250,000 a year. Two years ago, the state audit office concluded: "An improvement in the economic situation is not to be expected."

If the rules of economics were applied, the money-losing airport would have been closed long ago. But when it comes to developing the east, economic principles seldom apply.

Instead, the old logic used by lobbyists for the transportation industry still applies, which holds that there are no superfluous airports, just airports that aren't receiving enough government funding.

Maintaining the Infrastructure

Wojtasik, the airport manager, is standing in front of a tall construction fence. A digger is breaking off pieces of concrete from an old East German barracks which once served as the airport terminal. The building was so dilapidated that it wasn't even licensed to house a snack bar. Whenever VIPs landed at the airport, Wojtasik would have their limousines drive directly to the aircraft, so that the passengers wouldn't see the rundown bathrooms. "We couldn't compete with a building like that," he says.

That's about to change. Last year, the state government approved about €2.6 million to pay for a new terminal which will include a restaurant, conference rooms and an 11-meter (36-foot) tower. When the building is finished next year, local officials hope that it will finally provide the airport with the boost it needs, bringing in more tourists to stay in nearby hotels and more businesspeople to open offices near the airport.

The prospect of fresh state funding has also silenced local airport critics. Until recently, the city of Stralsund had planned to withdraw from the consortium that owns the airport, because the losses had become too significant for city officials. But now the administration has changed its mind.

Officials are now saying that if the city were to withdraw, it could be required to pay damages to the remaining partners. Besides, the state subsidies would go to other regions.

Although the Stralsund city officials don't have a clue as to where the additional passengers that the airport needs to operate at a profit are going to come from, this isn't their primary concern. According to a city presentation, "The maintenance of high-quality infrastructure is reflected in the budget in the form of costs."

An Open-Air Museum Tries to Attract Industry

"Naturally, there will be layoffs, but if we were to focus too rigidly on that aspect, we would fail to recognize that an extraordinarily large number of new job opportunities will arise at the same time, not least in the construction sector. For this reason, it is critical that we now establish the necessary conditions for vigorous and dynamic investment."

(Helmut Kohl, May 10, 1990)

When Joachim Paulick, 52, mayor of the picturesque small town of Görlitz on the border to Poland, has visitors, he doesn't know what to show his guests first. The staircase in the town hall, a "masterpiece of the early Renaissance," according to the guidebooks? The so-called King's Room, a magnificent late-Gothic reception room on the upper floor? Or his office, with its impressive wood paneling?

There are roughly 4,000 historic buildings in Görlitz, and even Paulick hasn't seen them all. The town is regarded as the largest contiguous collection of historic buildings in Germany, and its designation as a UNESCO World Heritage Site is on the agenda. Three-quarters of the historic old town, which was uninhabitable in the communist era, now qualifies for historic preservation status. "Never in its history has Görlitz been as beautiful as it is today," says Paulick.

But the mayor still isn't satisfied with the status quo. The city treasury is short of €16 million, which represents a significant part of the budget, and Paulick sees no legal way to save an amount this large. He is thinking about levying an additional tourist tax and a second-home tax, as well as raising parking fees. But even these measures will fall well short of putting the budget on a solid financial footing.

Problem Zones

Görlitz's problem areas are the industrial zones a few kilometers outside the historic city walls. There is a long tradition of machine-building in the region, but few businesses survived German reunification. The only remaining companies today are a railroad car factory, a turbine plant and a brewery. A US investor, lured by the promise of subsidies, manufactured winter clothing in a plant near Görlitz for a while, but then moved on to what it viewed as an even cheaper low-wage paradise.

"We spent millions to renovate the city, but in the early years we didn't pay enough attention to attracting and keeping bigger companies," says Paulick. "It was a political mistake, and now we have to correct it." The mayor has sent about 2,500 letters to companies throughout Germany to promote his town, printed on letterhead with the city's coat of arms at the top. Paulick signed each one himself. It makes the letter look much more credible, he says.

The letter promotes Görlitz as a business location, but it hardly mentions the old town with its historic buildings. Instead, the mayor's selling points are the city's proximity to Poland, its relatively low wages and the fact that in Görlitz, unlike the rest of Saxony, people don't speak a strong dialect.

But companies aren't exactly lining up to move to Görlitz. "A city of this size cannot survive as a kind of open-air museum," says Paulick. "There are worries that it could already be too late."

"I am convinced that (former West German Chancellor) Ludwig Erhard's vision of prosperity for all will also gradually become reality in East Germany."

(Helmut Kohl, May 10, 1990)

Anyone who wants to know how to improve efforts to develop the east should speak to Edgar Most, the former director of the East German State Bank. After reunification, his insider knowledge enabled him to remain in the financial industry and pursue a career at Deutsche Bank.

He has written books about the financial sector, and he likes to hold readings today. He is considered a bestselling author in the east.

Thrown to the Wolves

On this day, almost 100 people have braved the summer heat to come to Strausberg outside Berlin to hear him speak.

"We threw East Germany's capital to the wolves of the west," says Most. The audience, many of them East German retirees, nods approvingly. According to Most, a mentality built around subsidies has developed in the former East Germany. Now the people in the audience are sitting up and listening. "The east is becoming poorer, older and dumber," says Most. At this point, the mood in the room isn't quite as positive anymore.

Most was once a member of Gesprächskreis Ost ("Roundtable East"), a group of advisers established by then-Chancellor Gerhard Schröder, which produced a study six years ago on ways to improve development efforts for the east. A key proposal was to concentrate government funding on research and technology, limit bureaucracy and accept that it didn't make any sense to continue pumping subsidies into remote areas that would be better left to their fate. The group of advisers concluded that the best approach would be to concentrate development efforts on the most promising regions.

The proposals were never implemented. Instead, government money is still being distributed widely in a kind of shotgun approach. In the small state of Brandenburg alone, with its population of 2.5 million, there are now at least a dozen self-proclaimed "growth centers."

Paternalistic Attitude

Economists predict that when the so-called Solidarity Pact, an agreement between the national and state governments to support the former East Germany financially, expires in 2019, all of the eastern states will still depend on support from the west. That also includes Saxony, widely viewed as a model state.

Experts are under no illusions that the principal blame for the botched economic aspects of reunification does not lie in the east, but with those in the west who made the political decisions.

"The west had a paternalistic attitude toward the east, based on the motto: We know what's best for our sisters and brothers in the east," says Interior Minister Thomas de Maizière. "In reality, we didn't know at all."

Translated from the German by Christopher Sultan
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