Germany's Eastern Burden The Price of a Failed Reunification

On the campaign trail, Germany's politicians are mostly silent about one of the country's most pressing problems. Former East Germany is a major liability costing the economy €100 billion annually. An eastern German report card 16 years after reunification.

Arnold Vaatz, 50, a native of the eastern German state of Saxony, is accustomed to conflict. When East Germany still existed, he was constantly at odds with the SED, the country's single political party. Ever since German reunification in October, 1990, he has been quarrelling with Christian Democrat (CDU) party leaders in eastern Germany. Now Vaatz, a CDU member himself, is fighting with the Wessis (a pejorative term for residents of the former West Germany) within his own party.

The chancellor had hardly announced his plans for early general elections when Vaatz, the spokesman for a parliamentary group made up of eastern German CDU lawmakers, began touring the country in an effort to put the issue of eastern Germany on his party's campaign platform. After all, the CDU is the party of German unity, at least in the words of former Chancellor Helmut Kohl who orchestrated reunification. Armed with a document from Georg Milbradt, the governor of Saxony, Vaatz made the rounds among other CDU governors of eastern German states, and then paid a visit to Volker Kauder, general secretary of the party. But Kauder had already taken the precautionary step of signalling to Vaatz that he shouldn't overstep the mark with excessive demands, and that it's important not to alienate the governors of Germany's western states.

But what mathematician Vaatz, considered a rebel, was demanding wasn't even all that outrageous. All he did, says Vaatz, was to demand "a little consideration for the unique conditions in the East," such as a few guarantees for brown coal mining.

Matthias Platzeck, a member of the Social Democratic Party (SPD) and governor of the eastern state of Brandenburg, also sees the negative reactions of many a western German in his own party whenever he touches upon the issue of problems in the East at party conventions. Fellow SPD members from the western state of North-Rhine Westphalia were still licking their wounds after a poor showing in the state parliamentary election when Platzeck began talking about eastern German special requests for the campaign platform: extension of aid for the East, for example, and adjustment of unemployment benefits in the East to match western German levels. As Platzeck relates, some of his fellow party members from the West could barely contain themselves after listening to his demands.

In recent weeks, people like Vaatz and Platzeck, but also Free Democratic Party (FDP) politician Cornelia Pieper, who is from the eastern German city of Halle, and Green Party chairwoman Katrin Göring-Eckardt, have managed to secure a small slot for the East in their respective party platforms -- platforms which are traditionally dominated by their compatriots from the West. But Joachim Ragnitz, an expert on the East at Halle's Institute for Economic Research, says that the eastern planks now embedded in the party platforms are hardly adequate to address the huge problems facing former East Germany. The program to reconstruct the East -- known as Aufbau Ost -- has always been treated as an afterthought, he says.

And in this campaign at least, it seems that Ragnitz is right. The Left Party, a new party formed out of the post communist Party of Democratic Socialism, is the only party explicitly addressing the concerns of the East. Germany's other major political parties -- including the SPD, CDU, FDP and the Greens -- scarcely manage to devote more than a few sentences to the issue. The FDP is non-committal in its 22-line statement, mentioning what it calls "total German solidarity" and, in keeping with Germany's constitution, calling for the "establishment of equal opportunities for all." The SPD, in its eleven-point laundry list of goals for the East, waxes poetic about the "long journey" on which it plans to embark to attain a true "inner unity." The CDU -- led by Angela Merkel who grew up in East Germany -- devotes eight paragraphs to the East, but much of it talks merely about creating "new opportunities for the East," although plans to resume "delayed or halted transportation infrastructure projects" are given a concrete mention. The Greens say they have recognized that the ongoing emigration of "young and qualified people" is making the East's problems even worse, and that "politicians cannot sweep this development under the table."

But that's exactly what they are doing.

The true outcome of an economic process that to this day continues to be candy-coated as "Development East" is devastating. Ironically, the East, in addition to having the power to decide the election, will also play a decisive role in shaping the entire country's short-term economic future. For many western politicians, the money pit of East German reconstruction has long since turned into a dangerous burden.

It should, of course, be mentioned that the political and administrative reforms made in the East have largely been successful. Reforming and rebuilding the judiciary in the East has worked well as has the reconstruction of government administration. The East's cultural heritage has been rescued, western environmental standards have been implemented in the East, police investigations in the eastern state of Mecklenburg are now not dissimilar to those in Bavaria, and the East has in many cases outpaced the West when it comes to the quality of higher education. But despite these advances, the East's social framework lacks an adequate economic base. To this day, the East is still unable to survive without government subsidies amounting to some €70 to €80 billion a year.

And it gets worse. According to the German Institute for Economic Research (DIW), economic aid for the eastern part of Germany is increasingly dragging down the economic cycle in western Germany. Experts warn of a growing risk that "development in the new federal states" could trigger a "self-fuelling recession."

It was only last year that a team of government consultants, headed by former Hamburg Mayor Klaus von Dohnanyi and the former head of the East German state bank and subsequent managing director of Deutsche Bank's Berlin office, Edgar Most, presented Manfred Stolpe (SPD), the cabinet minister charged with eastern reconstruction, with a 29-page report ("Recommendations for a Change in Direction for Development East") outlining the full scope of the problem. Experts complain that:

  • only about 60 percent of eastern Germans capable of gainful employment are in fact employed. The average unemployment rate in the region tops 18 percent. According to the Institute for Economic Research in Halle, eastern Germany is short of about 2 million jobs;

  • migration away from the East continues unabated, especially among young people. According to the Dohnanyi report, "eastern Germany is threatened by a dramatic aging of the population and a dangerous loss of especially well-trained workers and its creative force";

  • the economy in the new German states has been growing more slowly than in the West for years. The catch-up process has stalled, leading to an ever-widening gap between East and West;

  • the East lacks medium-sized businesses when compared with the western standard. Companies in the East are generally too small and short on capital;

  • the costs of reunification consume four percent of the gross domestic product annually. But because economic growth falls short of this figure, aid to the East is eroding the West's economic base;

  • billions in aid and subsidization policies are no longer effective. Without a "change in course," according to the report, the "need for West-East transfers of funds can even be expected to increase in the future."

Immediately after the report was issued, it actually looked as though action was going to be taken to address the problem. Minister of Economics and Labor Wolfgang Clement called for reforms, and even Manfred Stolpe, the cabinet minister responsible for development in the East, seemed impressed. This time, Stolpe didn't take his usual gruff approach in seeking to appease critics, and this time he openly conceded that Development East needs to be rethought. The debate came to a head, the governors of the eastern states held an emergency summit in Berlin and everyone tried to create the impression that something was actually happening. It seemed that the politicians had finally decided to take action.

Part II: The Political Failure to Help the East

Wrong. Even as officials were busily issuing press releases on the issue of the East and its problems, the topic had long since been buried in government bureaucracies. When an eastern German Social Democrat asked an official in Stolpe's ministry about what was being done with the Dohnanyi report, the answer was direct and to the point: "It's being shelved." Dohnanyi had not just called for an end to the practice of keeping the subsidy spigot running; he also demanded stricter, more centralized coordination of subsidization policies by the federal government. According to his proposal, the government ought to select a few growth-oriented regions and focus its support on clusters of economic activity where collaboration between research and industry could generate new jobs.

This, at least, was a proposal that Stolpe planned to implement. But the governors refused to cooperate, fearing funding cuts in their jurisdictions.

Other plans never made it past the proposal stage. Officials immediately discarded the idea of a "special economic zone" with reduced tax rates, citing obstacles under EU law.

After Dohnanyi, it was the German head of state who put the debate over eastern Germany back on the agenda -- by stating a simple, but previously unspoken truth. Last September, German President Horst Köhler warned Germans that they would have to start getting used to the idea that Germany was unable to have one uniform standard of living. "It goes from north to south and from east to west," he said, adding that those who would even out the differences are merely "bolstering the idea of a welfare state and imposing an unbearable burden of debt on the younger generation." Köhler's comments were perceived as especially stinging in the East, whose leaders reacted reflexively. Eastern state governors, like Dieter Althaus (CDU), the governor of Thuringia, and Brandenburg Governor Platzeck let it be known that they were not at all pleased with Köhler's comments.

But the president was merely describing a reality that Germans have long since acknowledged, even in the East, where hardly anyone believes that the standard of living in places like affluent south-western Germany could take hold everywhere else. There is already a big difference between the standard of living in the Erzgebirge, a former, eastern German coal-mining region, and in the nearby, relatively successful city of Dresden. And the affluent belt surrounding Berlin, which is part of the state of Brandenburg, is home to a new, prosperous middle class. Indeed, Teltow-Fläming, one of the counties in this region, was recently dubbed "Germany's fastest-growing county" in a survey conducted by German financial daily Handelsblatt.

But other areas, like parts of the Lausitz region (in the state of Saxony) located less than a hundred kilometers southwest of the Berlin belt, have been virtually given up on. It is in this region that the town of Weisswasser is located. Closer to the Polish town of Nowe Czaple than to Dresden, the West seems worlds away.

When Chancellor Schröder toured the depressed region in February, local officials presented him with their concept for renewing Weisswasser. Under the plan, entire housing tracts -- just under 4,400 apartments -- will be leveled by the year 2012. The program is cosmetically dubbed "City Reconstruction East" -- and it's a plan eerily reminiscent of former East German dictator Erich Honecker's Cold War development projects.

When it was still part of East Germany, the town boasted a population of 37,000. Now it's declined to 22,000, and demographers predict that it will drop even further, to 19,000, in the next 15 years. Most, especially young people, have moved to the West, leaving the elderly behind to populate a virtual ghost town that will cost €32 million to deconstruct. The only businesses that have a future in Weisswasser are nursing homes.

The story is much the same in another of the region's cities. Hoyerswerda's population has plunged from 68,000 to 43,900 since reunification. On holidays, when emigrants return to visit the relatives who stayed behind, the western German license plates in the city's parking lots tell the story of where local residents see their futures. But the cars in Hoyerswerda's parking lots have another thing in common as well: the emigrants have customized their plates to include the letters "HY" after the mandatory city code. They call it the "homesickness code," but it represents homesickness for a region that can offer them plenty of places to live, just no work -- a dying region.

The unemployment office in the city of Bautzen has already tried sending people to the Netherlands to pick tomatoes, while a local employment agency arranges jobs in Switzerland. Between March 2001 and 2004, the upper Lausitz region lost almost 20,000 jobs, as well as the corresponding contributions to social security -- an unparalleled decline in the labor market. First it was the textile mills that closed down after reunification, and then it was the turn of the open-pit brown coal mines. Now, other industries are following suit.

Politicians have tried to plug the gaps using outdated tactics. Fritz Hähle, head of the CDU's regional group in Saxony, has called for a program he calls "Transportation Projects for European Unity." All well and good, but the projects designed for German unity have yet to be completed. And it's unclear that they ever will. The "Lausitzring," a race track on the site of an old brown coal mine, built with €123 million in taxpayers' money, has long since been decried as a symbol of the kind of wastefulness that has plagued Development East. Nevertheless, politicians like Hähle are still demanding new road construction for the region. If they have their way, at least the area's economically depressed population will be able to drive to cheaper gas stations in Poland and Czech Republic more quickly.

Meanwhile, Mother Nature is steadily reclaiming the countryside. Wolves are native to Lausitz region once again. Former open-cast mines have filled up with water -- a symbol, locals say, of the region's uncertain future. The process of flooding mines has created a chain of lakes covering a total area of 130 square kilometers.

But the problems in the East aren't everywhere as obvious as they are in the Lausitz. Some cities, like Leipzig, even appear to hold considerable economic promise. Tourists, as they crowd through the Mädler Passage arcades and walk in Goethe's footsteps in front of the Auerbachs Keller inn, are likely to believe that Development East has been tremendously successful. Indeed, things look almost too good to be true here, in some cases even better than in the West.

Leipzig is the East's boomtown. BMW has invested €1.3 billion in its local plant, which will provide 5,500 jobs by 2006. Porsche, after having spent more than €130 million, now has 370 workers assembling luxury cars at its Leipzig plant. Freight carrier DHL plans to install a new hub in Leipzig by 2008, which is expected to bring in 3,500 new jobs.

But there is a disconnect between the media's portrayal of the East's shining metropolis and reality, a gap that is glaringly evident in Leipzig's dismal August unemployment figures, figures that even the city's media-savvy mayor and chief promoter, Wolfgang Tiefensee (SPD), cannot simply erase with a smile. Fully 21.1 percent of Leipzig residents are out of work.

A study by IW-Consult, a subsidiary of the Cologne-based Institute of the German Economy, highlights the problems that continue to plague Leipzig a full 16 years after reunification. After comparing 50 major German cities, the researchers concluded that Leipzig, despite its state-of-the-art factories, continues to suffer from a tremendous productivity deficit. With a per capita GDP of €41,000, the city ranks 49th among the cities studied. Like almost everywhere else in eastern Germany, Leipzig and the surrounding area lack industrial facilities and modern service providers. Besides, Leipzig, though a beacon of economic growth, has failed to generate the sort of trickle-down effect one might expect, with unemployment remaining high in the surrounding area. In 2003, 32,200 Leipzig residents were receiving some form of state assistance -- three times as many as in 1995.

In Dresden, on the other hand, the dream of "blossoming landscapes" former Chancellor Helmut Kohl once envisioned seems to have become reality. The link between research and industry experts see as key to development has been successful in Dresden, which has benefited from an abundance of skilled workers and professionals who have brought along their experiences from East German days.

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

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