Rebuilding East Germany "has failed"

Reuters | 4/05/04

[kattracks]

BERLIN (Reuters) - Germany's bid to modernise its former communist eastern states with 1.25 trillion euros (830 billion pounds) of transfers since 1990 has failed, and the region will remain a serious drag on the wider economy, according to a leaked report.

The study, commissioned by Economy Minister Wolfgang Clement and Transport Minister Manfred Stolpe, concludes that the 90 billion euros Berlin spends annually on rebuilding the so-called new federal states is largely wasted, weekly news magazine Der Spiegel reported.

The 13 experts on eastern Germany charged with compiling the report, including former Hamburg Mayor Klaus von Dohnanyi, industry and union officials and economists, said the east has ground to a halt and the west is falling into ruin as a result.

"The ongoing internal west-east transfer of cash and other consequences of German unification are directly or indirectly responsible for about two thirds of the country's economic weakness," Der Spiegel quoted the report as saying.

Chancellor Gerhard Schroeder promised in 1998 when he took office that rebuilding the eastern states would be a top priority for his coalition of Social Democrats and environmentalist Greens.

Recently, however, opposition politicians including Christian Democrat leader Angela Merkel, an east German, have accused him of ignoring the east's woes as reforms to the wider economy, terrorism and other issues have taken centre stage.

Heinz Schmalholz, an economist specialising in structural change at the Ifo Institute's branch in Dresden, eastern Germany, said that while it is easier with hindsight to identify mistakes made after reunification, no politically viable alternatives have been put forward.

WESTWARDS MIGRATION

"One of the main criticisms has been that wages rose much too quickly after reunification," boosting unemployment, he told Reuters.

"But what would people then have done without that? They would of course have migrated to the west where there were higher wages," he added. "I don't know whether the politicians would have wanted to take responsibility for that."

Although east Germany makes up just a quarter of the total German labour force, it accounts for half the nation's unemployed, said Lehman Brothers' economist Sandra Petcov.

That meant that nearly half of the gross transfers to the east during the second half of the 1990s was spent on social security payments. Investment accounted for just 15 percent.

The leaked government report suggests some remedies to reverse damage caused to the east's economy in the last decade and officials in four working groups are currently evaluating which can feasibly be implemented, Der Spiegel said.

The suggestions include long-term tax relief for eastern German companies and cash incentives for guaranteed jobs; concentration of economic aid in specific growth centres; a new reconstruction master plan; and the inclusion of at least one eastern German firm in tenders for government contracts.

Some analysts, including Lehman's Petcov, are more upbeat about the process of reunification and suggest former Chancellor Helmut Kohl's goal of creating "blooming landscapes" in the east is gradually being achieved.

"It may well be that another 10 or 15 years are required until full convergence has been achieved, but the costs of getting there are likely to decline as the goal is approached," Petcov said.

"An optimist might even argue that if current structural reform plans are implemented, Germany may yet eventually emerge economically stronger than west Germany ever was," she added.

Minister Stolpe, who is also responsible for rebuilding east Germany, said on Monday that the government needed to re-think funding for the east and a "readjustment" was in order.

[samtheman]

You mean massive investment in socialism has failed?

Aw, that's a shame.

And a really big surprise!

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[blanknoone]

After East Germany (along with the rest of the soviet bloc) economically collapsed, you wouldn't think they needed another lesson on socialism not working. Then again...it seems we need another lesson too.

[traumer]

What is the chance with Iraq... ?

[sphinx]

How much have we poured into the inner cities to like effect?

[r9etb]

Interesting -- always assuming, of course, that the article, and the assessment, are accurate. Something about this gives me the sense of there being an agenda at work here -- in the analysis, and in its convenient leak.

One could speculate about any number of agendas, including a variety of nationalistic ones. ("Nationalism" is always a troublesome word when it's used in the context of Germany....)

[thedugal]

The saddest part is that the east votes almost uniformly socialist. In the last election, it was very close and the conservatives almost won. If it weren't for East Germany, the Germans would have elected a conservative government in 2002 and would have supported us in Iraq.

[goldstategop]

A bottomless pit remains a bottomless pit. Eastern Germany is the sound of prosperous West Germany being bled dry with precious little to show for it.

[LurkedLongEnough]

Never mind Iraq - let's watch Spain spin down the flush bowl.

[TomGuy]

1.25 trillion euros (830 billion pounds) of transfers since 1990 has failed

But per the UN and EU, the Coalition in Iraq is supposed to have the nation up and running and prosperous and peaceful, yada yada yada, within the next 3 months (just over a year after their liberation).

[bogdanPolska12]

Kattracks thank you for this article. I knew it from beginning it would not work.

[AngryJawa]

Yet Poland, the Czech Republic, and East Germany's other neighbors transitioned nicely without trillions in handouts. Hmmmmmm.

[xJones]

It is pretty accurate, according to Germans, some of whom have posted the same sort of stories on FR.

For a personal note, my neighbor is a former West German who immigrated to the U.S. and takes regular vacations back home to Bavaria. She says they hate the East Germans, that they are lazy slugs and nothing but a drag on the rest of Germany.

[r9etb]

It is pretty accurate, according to Germans, some of whom have posted the same sort of stories on FR.

I'm sure there's some accuracy to the report. But I still have a suspicion that there's an agenda at work in this convenient leak.

[Buck72]

Couldn't happen to a nicer country. Well, except maybe France.

[nkycincinnatikid]

I remember well a conversation with a naturalize german co-worker at the time of reunification. He shuddered to think of the awesome task of reintegrating the east, thought it unrealistic. But when I high mindedly pressed him on the debt owed to the countrymen who spent generations enslaved to the Soviets he reluctantly agreed that it was the only moral thing to do. The right thing is being done and it is painful and unbelieveably expensive.

[rrrod]

"You mean massive investment in socialism has failed?"
I am shocked!

[rrrod]

Excellant point!

[Zack Nguyen]

Imagine what the bill will be when North Korea falls. From what I have read, they have been reduced and starved to the point of having almost no economy at all.