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.

[Cooter]

Doesn't Angela Merkel, the German "Maggie Thatcher", hail from the East?

[mitchbert]

The difference in the other countries was that there wasn't a "western brother" with which to compare themselves to. The Germans worked from a presumption that they could raise the East up to the standard of the West. This ignored the huge differences in the two societies with regards to the people's predisposition to the state's role in society. Simply, the East suffered from the old communist handicap of "we pretend to work and they pretend to pay us." Add this to the fact that the West wanted to make the East think that there would be minimal transition pain and you had unrealistically raised expectations. Simply, easterners had a chance to see the west and wanted it all without pain right away, while the other former client states knew they had a tough slog ahead of them. It took years of shock therapy to their economies, but once the primary pain passed the gain could emerge more dramatically for the folks in those countries.

[nkycincinnatikid]

That sceneario is truly unthinkable, is'nt it. It will be absolutely impossible for the South to undertake an integration, It would bankrupt and destroy the Souths institutions.

[MegaSilver]

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.

Christian Democrat Angela Merkel seems poised to win the next election, though.

[Zack Nguyen]

It is almost unthinkable. Yet one way or another it will undoubtedly happen. Either N. Korea will invade the South, or N. Korea will collapse. Unfortunately, the NK population is so starved, brainwashed and beaten down that no effective resistance may exist.

Perhaps the entire population should be moved to South Korea. I am fairly serious. Maybe that part of the world should simply be abandoned.

[Gritty]

So, a nearly socialist state (West Germany) is having trouble resurrecting a completely socialist state (East Germany) to the same nearly socialist condition through massive infusions of cash, failed socialist nostrums and massively restrictive labor and employment laws and they are wondering why their socialism with a kinder face is not working?

What a shock!

[r9etb]

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

The differences in starting conditions are significant, however -- not to mention instructive. In the case of Poland, the Czechs (and now also the Slovakians, apparently), they had the advantage of all being in the same boat, a direct experience that socialism didn't work, and an opportunity to rebuild from scratch.

When East Germany's government collapsed, it was basically replaced by that of the West Germans -- a group that had not yet had to deal with the need to start from scratch, and which believed it could extend the West German social state to the rest of the country. They tried, and are apparently failing.

I wonder if what we're seeing here is not so much a failure on the part of the East Germans, so much as it is a failure on the part of the West Germans. I think somebody in Germany has clued in on this, and is looking to use the leak to promote something different for the entire country.

Note the proposal for tax breaks for East Germany -- can you imagine the rest of Germany feeling happy about that? The EU, of course, would be upset, too.... Which is why I begin to wonder about a nationalistic element to the idea.

[r9etb]

She says they hate the East Germans, that they are lazy slugs and nothing but a drag on the rest of Germany.

I think we need to discount her opinions here, because there are long-standing regional animosities among the various parts of Germany. Sure, there's a nugget of truth, but....

[r9etb]

Perhaps the entire population should be moved to South Korea. I am fairly serious. Maybe that part of the world should simply be abandoned.

There will be (industrialized) Feudalism in North Korea. It can't be any other way.

[headsonpikes]

Your post exposes the myth of social welfare payments - they are ultimately destructive to their recipients.

[The Toll]

I just got back from Berlin yesterday. I spent a lot of time in east Berlin and I may have spent enough on beer to help revive the economy. East Berlin is a total reck, but it is the mentality that is the real problem. I sat at a pub and watched a construction crew across the street. I stared in amazement while one young man was digging and he was being advised by 3 other co-workers. On a good note I did get drunk and take a leak on Carl Marx Ave.

[varon]

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

At least Spain is doing it with its own money while it is OUR dollars that are going down the flusher in Iraq ;-)

[nkycincinnatikid]

Whereas east and west germany had always been politically integrated (in the Holy Roman style), and East Germany had the highest economic standards of any any Communist nation, and was only one third the size of the West, one of the richest of all states, putting the pieces back together was plausible if problematic.. In the case of Korea, South and North had only a common historical experience of foreign domination in the modern era. North is probably the poorest non African state on the planet, and it is at least half the size of the South. I just do'nt know what will happen when that evil regime falls, but the South can't absorb it. Imo.

[McGavin999]

Aren't these the same people who keep complaining about what hasn't been done yet in Iraq?

[Modernman]

She says they hate the East Germans, that they are lazy slugs and nothing but a drag on the rest of Germany.

I dated a (West) German girl who said the problem with East Germans is that, though the physical Berlin wall is gone, they still have a "Berlin Wall of the Mind" that keeps them, at least mentally, in the old Soviet Bloc.

She told me a story about her hair stylist. She had hired a Eastern German stylist. The East German woman was under the impression that, rather than doing as many cuts as she could during her shift, she was only required to do 10 haircuts a day, since that was how it was done in the old days.

[vpintheak]

Communism leaves its ugly mark.

[dfwgator]

The "Wall of the Mind" is going to exist in Germany for at least several generations.

[dfwgator]

You beat me to it, about the "wall of the mind" I don't think East Germans want to go back to the old days, it's just that the education system and value systems that they were indoctrinated with leave them at a disadvantage to their Western counterparts.

[FreedomSurge]

Expell the Turks. Have East Germans fill the jobs. Give cash incentives for Germans to have babies. How hard is that?

[Jhensy]

My mom's a West Berliner, and for the last 12 years, she and everyone else have been saying that they should rebuild the wall, twice as high this time.

And don't get her started on the Turks.