It’s 20 years since the Berlin Wall came down. And yet the east still lags the west economically. Why? Simon Wilson reports.
How did East Germany collapse?
Pretty peacefully. In October 1989, the Soviet leader Mikhail Gorbachev made it clear to East Germany’s communist rulers that the Soviets would not step in to prop up the German Democratic Republic (GDR) by force.
Its people, encouraged by the example of Poland, and spurred on by the opening of the Austria-Hungary border, staged street demonstrations in their hundreds of thousands to demand free elections and the right to travel. But what very few people realised at the time was that they were pushing at an open door.
What state was the GDR economy in?
It was all but bankrupt – a fact known only to a tiny handful at the top of the communist party, the Socialist Unity Party (SED). Productivity was a third that of West Germany (the Federal Republic), and some three-quarters of national income was being spent on servicing interest on foreign loans.
At a special meeting of the Politburo in early November, economics minister Gunter Mittag warned colleagues that without an injection of at least DM500bn (€250bn), the GDR faced cuts of 30% in its standard of living. However, within months the government had fallen anyway, and within a year the GDR was subsumed into the Federal Republic.
What did that cost?
The total west-east cash transfer over the past 20 years – in other words the ‘cost of reunification’ to the west – is estimated at around €1,400bn. But the ongoing cost has declined from €100bn annually in the 1990s, to €30bn by 2006, and even less today. And the biggest chunk is all but invisible – paid out in the form of pensions and welfare.
But the impact of all that earlier spending is everywhere, with spanking new autobahns, airports and buildings scattered throughout the east. Dresden and Leipzig have been transformed, and Jena has even become a centre for high-tech industries.
Has the economy improved?
No. Not judged by the hugely optimistic expectations of the post-unification era. A survey in 1991 found that 97% of east Germans expected to match living standards in the west within 20 years. Today, however, just 12% think that has happened.
The early 1990s, which saw mass unemployment as state companies were liquidated or privatised, was followed by a huge construction boom and then bust – dragging the eastern states into a prolonged period of low growth. Even today, unemployment in the east remains around twice as high (14%) as it is in the west and the workforce has to some extent voted with its feet.
The past two decades has seen net migration from east to west of about 1.5 million in a population of only 17 million people.
No good news then?
Far from it. GDP per head in the east has risen from 41% of the west’s level in 1991 to 71% today. And disposable income is up from 60% to 80% of the west’s level. In recent years there has been a resurgence of high-tech, high-value investment, as companies move in to take advantage of relatively cheap labour.
So why aren’t east Germans happier?
The problem, as economist Karl Brenke of the DIW institute points out in a recent study, is that eastern Germany has historically always been markedly poorer, and more rural, than the more densely populated west. Given that backdrop, the recent leaps in GDP and productivity in just two decades have been impressive. Not to mention the six-year increase in average life expectancy.
Even so, there are widespread concerns about unbalanced growth within eastern Germany. As cities such as Berlin and Dresden pull ahead, many people in the rest of the region – unskilled workers, the elderly and rural communities – say they feel left behind.
Do they miss the GDR?
‘Ostalgie’ – nostalgia for the GDR – has certainly not died away.
In a poll this year, 50% of east Germans agreed with the statement, “The GDR had more good sides than bad sides.” This strain of thinking is reflected in voting patterns: in the September general election, Die Linke (The ‘Left’ party, which grew out of the remains of the GDR’s ruling SED), won 26%, more than the mainstream SPD. (In western Germany Die Linke got just 8%.) Yet only 10% of east Germans said they would actually prefer to be living in the GDR.
Given the dislocation involved in the collapse of communism, especially for the elderly, this is surprisingly few. By contrast, a recent Czech poll found that 20% of people thought they were better off pre-1989; in Slovakia the figure was 25%; and in Hungary it was higher still, at a hefty 33%.
They were kicking at an already rotten door
Can the east ever catch up with the west?
Economists warn that even some of the east’s apparent successes rest on some fundamental weaknesses, which will be brutally exposed as state aid is reduced, says Bertrand Benoit in the FT.
The second major federal assistance programme for the east, launched in 2004 and worth €156.5bn, is due to run out in 2019. Reported increases in disposable incomes, for example, are “flattered by large welfare benefit payments”.
Then there’s the east’s relative resilience in the face of the global downturn – the Halle Institute estimates that GDP will decline by 1% less than the west. That is little more than a reflection of the fact that east German companies “play little role in world markets”.
So, for all the achievements of the past two decades, economic parity between the two Germanys remains a “distant dream”.