Eastern promise flowers in what was once a broken land

The former East Germany is performing better than anyone expected when reunification happened after the fall of communism, writes DEREK SCALLYin Berlin

WHEN GERMANY celebrates the 20th anniversary of the fall of the Berlin Wall on Monday, even the economists will be cheering.

After two decades of restructuring, two new studies show that Germany’s eastern regions are performing far better than anyone could have predicted in 1989.

The six federal states east of the Elbe river have been through the wringer since unification in 1990. First came the economic collapse as one creaking East German factory after another was mothballed by the Treuhand, the agency appointed to privatise state holdings.

That had a knock-on effect, with the “blossoming landscapes” painted by the then chancellor Helmut Kohl blighted by jobless rates of 20 per cent-plus. Only now can economists see light at the end of the tunnel. “Today one can no longer look at raw economic data and say, ‘Here is clearly the east and here is the west’, says Karl Brenke, economist at the DIW economic institute and author of an economic study of eastern Germany.

“If anything, we now have a bigger economic gap between areas in western Germany than between areas in the east.”

Things looked very different in 1989: East Germans took to the streets calling for free elections and open borders. But for members of the Politburo meeting behind closed doors, the final nail in the socialist state’s coffin was a devastating report in early November saying that the country was as good as bankrupt.

Productivity was a third that of West Germany and economics minister Günter Mittag said the economy needed urgent modernisation at a cost of “at least DM500 billion (€250 billion)”.

The only way to bring East Germany’s finances back into order after years of living beyond its means was to cut the standard of living by 25-30 per cent. “That would make the state ungovernable,” he said.

The news was a shock to members of the ruling SED party’s central committee. Minutes of one of their last meetings record a contribution from an unnamed, furious official: “I was in favour of abolishing the death penalty but I would support its return for the people who got us into this mess.”

According to Brenke of the DIW, the bankrupt East Germany story is only part of the truth, one that dismisses the ruling SED party’s significant asset holdings at home and abroad.

“The internal planning committee showed the politburo figures suggesting the GDR was insolvent,” said Brenke. “Like all governments, East Berlin had a tendency to overspend money whenever they thought they had it. The money men made the situation out on purpose to look worse than it was to try and stop them spending.”

Bankrupt or not, few economists dispute that the East German economy was on the road to ruin, with runaway consumption way ahead of production and investment.

So how is eastern Germany doing today after 20 years and an estimated €1.4 trillion in cash transfers?

The west-east transfers are ongoing – down from €100 billion annually in the 1990s to €30 billion in 2006 and even less today. The largest amount is invisible, paid out in pensions and social welfare payments. Even still, the investment can be seen simply by driving through the countryside: new Autobahn, new airports, new everything.

“One cannot forget the long-lasting damage left by 40 years of socialism,” says Prof Karl-Heinz Paque, economist at the University of Magdeburg. Today eastern states have an average productivity of 60-70 per cent of the West. What seems disappointing is, he says, positively dynamic compared to other former Ost-bloc countries.

“In the Czech Republic, where they had no west-financed reconstruction programme after 1989, they continued to work with the only machines in the factories,” he says. “Today the Czechs have an average industrial productivity a third that of western countries.”

The last 20 years have been a rollercoaster ride for eastern Germany: the mass unemployment wave of the early 1990s as state companies were liquidated was followed by a construction boom as the entire region’s infrastructure – from schools to sewage plants – was replaced. That, in turn, crashed in the late 1990s and dragged the rest of the eastern states into a general recession in the last decade.

Today the construction sector continues to shrink, replaced as the largest employer by a growing services sector. Meanwhile, the individual states are establishing their own economic profiles: Saxony is now a high-tech, biotech stronghold while Mecklenburg on the Baltic coast is a new magnet for tourists and renewable energy.

Still, unemployment continues to plague the eastern states with an average rate of 15 per cent, twice the western average.

“Measured by the high expectations after the fall of the wall, such figures may disappoint,” remarked the DIW in a recent study. But its author, Brenke, says observers then as now fail to take into account that, compared to the densely populated western half of the country, particularly the Rhein-Ruhr industrial heartland, eastern Germany has always been economically weak and more thinly populated. “Many economic troublespots were not just trouble since the fall of the wall,” says Brenke. “Even in the Kaiser era, the regions east of the Elbe river were referred to dismissively as ‘Eastern Elbonia’.”

That traditional weakness was compounded in the 1990s by mass migration westward, from the countryside as well as from cities.

But migration is not just one-way: government figures show that, in total, 2.5 million Germans have moved from east to west between 1991 and 2007 – 13 per cent of the population – while 1.5 million have moved in the other direction.

Unlike their parents’ generation, young people show fewer inhibitions with taking up a study place in eastern cities. Today universities in Leipzig or Magdeburg have a “western” student quota of up to 30 per cent, many of whom stay in the region after graduation.

Economists say that the biggest mistake made in the eastern states in the last 20 years has been the emphasis on attracting foreign-direct investment while neglecting home-grown industry, innovation and entrepreneurship. “We still need an eastern version of software giant SAP,” said Prof Ulrich Blum of the IWH economic institute in Halle to Super Illu magazine.

“Extended eastern branches of western German and international companies cannot alone bring the economic catch-up process to a conclusion. We need special economic rules and zones to encourage this.”

After missing out on the post-war Marshall Plan behind the Iron Curtain, East Germany’s Aufbau Ost programme has increased wealth far ahead of eastern neighbours like Poland and the Czech Republic.

Today 80 per cent of eastern Germans have the same income and living standards as their western cousins. “To clear the last of the investment backlog of 40 years we’ll need another 10 years at least and a further €100 billion,” said Prof Klaus Schroeder, a researcher into East Germany at Berlin’s Free University.

“But the eastern Germans should be proud of what they’ve achieved. Sadly, pride is something we’re still lacking.”