Even twenty years after the reunification of Germany, the eastern states have still not caught up with the western ones.
Year after year, the former GDR remained synonymous with a depressed, depopulated region where economic stagnation fuels the rise of neo-Nazi sentiment, and the urban landscape is defined by abandoned houses with broken windows. Unsurprisingly, the words of the former chancellor were recalled by politicians and economists exclusively in a sarcastic vein. But now, apparently, East Germany is destined to lag behind West Germany for only a short while longer.
“The results of German reunification are much better than commonly thought. Of course, the eastern and western regions have not yet equalized in economic indicators, but, for example, labor productivity in the new states today already exceeds 70% of the West German level—that is already very significant,” assessed Klaus-Heiner Röhl, an analyst at the IW German Economic Institute, in an interview with Expert on the results of the twenty-year period.
Mr. Röhl's satisfaction is understandable, because in 1991 labor productivity in the former GDR was only 42% of the West German level. Over twenty years, the productivity gap between West and East has nearly halved—the average annual growth in labor productivity in Germany is 2%, while in the eastern regions it stands at 2.4%.
Other indicators are also improving. Export growth last year ranged from 26% (Brandenburg) to 37% (Saxony) in various eastern federal states. The pre-tax wage level in the former GDR is 80% of the western level—as a result, the cost of producing a unit of output is 13% lower than in the western part of the country. “In the East, wages are relatively low, working hours are longer, and labor productivity is rising. Of course, labor costs are higher than in neighboring Czech Republic or Poland, but productivity is also higher,” explains Klaus-Günther Deutsch, an analyst at Deutsche Bank Research.
Growth Fueled by Subsidies
The rapid growth in East Germany's economic indicators is largely based on the huge subsidies pumped by western Germans into the economy of the new states. Under the direct subsidy program for the former GDR alone, financed through an additional “solidarity tax” paid by all working citizens in the western states (including migrants from the eastern regions), the eastern states have already received €1.4 trillion. They will continue to receive support until 2019, when the program is scheduled to end.
Such massive stimulation of the eastern states has regularly sparked discontent among residents of the former West Germany—and even among East German politicians, voices supporting the abolition of subsidies are increasingly being heard. But be that as it may, subsidies have played a positive role in the development of East Germany, according to DB Research.
“Whether the subsidization of the eastern states could have been done more efficiently is a matter for debate for the next hundred years. But it is clear that the only economically more sensible step would have been a gradual integration of the former GDR, step by step. Since reunification happened overnight, there was no alternative to massive subsidies. Otherwise, the outflow of population from the East would have been much more intense, production would have declined sharply, consumption would have spiraled downward, and the consequences would have been extremely severe. Today it is evident that, overall, subsidies have proven to be an effective mechanism for supporting the economy of the former GDR,” says Klaus-Günther Deutsch.
Development Challenges
Depopulation could indeed have been disastrous for East Germany. Even with subsidies, the former GDR faced a long-term decline in population. Starting in 1991, annual migration from the eastern states to the western ones exceeded the reverse flow by 20-160%, with an average of 60%. In other words, for every 1,000 “Wessis” who moved to the East, 1,600 “Ossis” moved to the West. And this process has not fully stopped: a year and a half ago, five of the six German federal states most severely affected by depopulation were eastern states (the exception being the traditionally depressed western Saarland, which ranked fifth in terms of depopulation rate).
A separate problem is the fact that about 400,000 eastern Germans regularly commute to work in the western part of the country. These are primarily young, educated Germans who cannot find suitable employment in the East. “When the government of Saxony-Anhalt chooses the federal state's slogan ‘We wake up earlier than others,’ one could say: of course, you have to drive to a neighboring federal state for work,” quips Sascha Brock, an analyst at Deutsche Bank Research.
Even positively inclined experts admit that East Germany's development is far from ideal. “The economic development of East Germany is uneven. There is an industrially developed south—Saxony, part of Saxony-Anhalt—and an industrially weak north. The northern states, such as Mecklenburg-Western Pomerania, have tried to bet on tourism, but it is clear that tourism alone cannot bring prosperity to the region,” says Klaus-Heiner Röhl of IW.
The problem of regional development heterogeneity was clearly demonstrated by the recent elections to the parliaments of three German federal states – East German Saxony and Thuringia, as well as West German Saarland. If in relatively prosperous Saxony the conservative CDU retained its leadership, gaining 40% of the vote, the same as five years ago, then in neighboring Thuringia the conservatives suffered a crushing defeat. Here, Angela Merkel's party lost 13% of the vote and was only able to lead the radical Left party by 3%, which gained 27% of the vote and became the second most significant party in Thuringia. 'Residents of Thuringia are dissatisfied with the CDU's policies. They are dissatisfied with unemployment, low wages, and depopulation of the region,' said Katrin Christ, a board member of the Left party in Thuringia, to Expert.
The East catches up
However, the success of the Left in East German Thuringia can, with some irony, also be called a success of East German integration. After all, the leader of the Thuringian Left is Bodo Ramelow, a native of West German Bremen who moved to East Germany only after the country's reunification. 'The CDU youth organization tried to attack Bodo Ramelow by claiming he was "not local," but they did not succeed,' summarizes Katrin Christ.
The successes of left-wing forces are especially noticeable in those regions of East Germany that were most seriously affected by the global economic crisis. The crisis severely impacted export-oriented companies, primarily in the chemical, metallurgical, and machine-building industries. Subsidiaries of West German companies located in the east also suffered greatly. In the Thuringian city of Eisenach alone, where one of Opel's plants is located, 6,500 jobs directly depend on the future of this company.
But overall, the situation of the eastern states is not as bad as one might expect. Thus, the crisis has relatively little affected small East German companies operating in medicine, the food industry, and other non-cyclical sectors. 'The crisis will generally strengthen East German companies and help them transition to a "higher" specialization. The same Baltic shipyards, which before the crisis were riding the wave of the boom and could not cope with orders for tankers and ferries, will now naturally be forced to switch to producing, say, icebreakers. They have wanted to do this for a long time, but during the boom years there was no reason to take this step,' believes Deutsch from DB Research. 'Recall that five years ago we predicted the cessation of economic growth in Mecklenburg-Vorpommern, but since then the economy of that state has grown by more than a third. We are not going to repeat our mistake then and talk about a halt in growth.'
Klaus-Heiner Röhl from IW agrees that the crisis will benefit East Germany: 'Some sectors of the East German economy received a heavy blow from the crisis – it is enough to recall the bankrupt Wadan Yards shipyards in Wismar. But overall, the new states suffered less from the crisis than the west of the country. The downturn here is not as deep. As a result, the gap between East and West will shrink even further thanks to the crisis.'