Sunday, 18 July 2010

How the East Was Lost

Alexander Neubacher and Michael Sauga
Spiegel Online

July 1 marks the 20th anniversary of the introduction of the deutsche mark in East Germany in the runup to full reunification. But the economic benefits that West German politicians promised failed to materialize. What went wrong?
German Interior Minister Thomas de Maizière, 56, is from Bonn, deep in the west of Germany, but his memories of the days between the fall of the Berlin Wall in 1989 and German reunification in 1990 are those of an East German.
Lothar de Maizière, the first and last democratically elected prime minister of East Germany, had asked his cousin whether he wanted a job. Thomas de Maizière agreed, moved into an office on Klosterstrasse in East Berlin and, from then on, sat on the side of the table reserved for East Germans at the negotiations on German reunification.
Thomas de Maizière has often asked himself what went wrong at the time. "Objectively speaking, we didn't have enough time. We were under a great deal of pressure," he says. He compares it to a "sudden political birth."
The emergency delivery happened exactly 20 years ago. Today, as the federal government's commissioner for the "new German states" (as the former East Germany is known), de Maizière's job is to promote the development of eastern Germany. He is the first interior minister and the first West German in a long time to hold the position, but de Maizière downplays his role.
The minister remains reserved in interviews on the subject. And when he does say something, it doesn't sound like what his predecessors said.
He has an aversion to official phrases like "harmonization of living conditions in the east and west." Nor is he keen on the term "Aufbau Ost" ("development of the east"), which German governments have used as shorthand for efforts to promote economic development in the former German Democratic Republic (GDR), as East Germany was officially known. "When people from western Germany come to Potsdam, Dresden or Stralsund," he says, referring to three relatively prosperous eastern German cities, "their first impressions prompt them to ask: 'What still needs to be developed here?'"

Overnight Change
It was 20 years ago that then-Chancellor Helmut Kohl made a lonely decision. The Berlin Wall had come down, and thousands of East German citizens were moving to the West every week. Kohl offered Hans Modrow, the interim communist leader of East Germany at the time, a monetary union for the two Germanys. Experts were annoyed by the proposal, and Karl Otto Pöhl, the then-head of West Germany's central bank, the Bundesbank, warned against it. But Kohl had his way. Money transporters began rolling eastward overnight. The West German deutsche mark was named East Germany's currency on July 1, 1990.
Politically speaking, the monetary union was a success. The people were delighted, because they no longer had to travel to the west to get deutsche marks. But the move had a devastating effect on the economy. Overnight, all pensions, wages and savings of up to 6,000 East German marks were exchanged on a one-to-one basis. This was beneficial for East German citizens but not for businesses, many of which went under when they suddenly found themselves having to compete with the highly modern West German economy.
"Although there was no reasonable political alternative to the fixed exchange rate, it was a bad move economically," says de Maizière. "Instead of one to one, the exchange rate should have been one to three or one to four, to reflect the economic reality, but this would have had the devastating political consequence of further migration."

Lagging Behind the West
Today, the eastern German economy is still in a sorry state, and there are no indications that the situation will change. An estimated €1.3 trillion ($1.6 trillion) have flowed from the former West Germany to the former East Germany over the last 20 years. But what has that money achieved? Historic neighborhoods have been restored, new autobahns built and the telephone network brought up to date, but most of the money was spent on social benefits such as welfare payments. The anticipated economic upswing failed to materialize.
Some eastern cities, like Leipzig, Dresden, Jena and Erfurt, have experienced economic development. The state of Thuringia has a relatively robust auto industry, and there are successful high-tech companies in Saxony. Research institutes and universities are doing well, thanks in part to generous government subsidies.
But the success stories are rare. Most of eastern Germany has turned into an economically depressed region that lags behind the west in all respects:
The per capita economic output in the east is only at 71 percent of the western level, with a disproportionately high share of economic output attributable to the public sector. The economic output generated by the private economy is only at 66 percent of the western level.
To close the gap, the eastern German economy would have to grow more rapidly than in western Germany, but precisely the opposite is the case. Germany's leading economic research institutes expect the economy in eastern Germany to grow by 1.1 percent this year, compared with 1.5 percent in the west.
Since the fall of the Berlin Wall, the population of eastern Germany has declined by almost 2 million people, a trend that is continuing unabated.
The proportion of household income derived from welfare payments is 20 percent higher in the east than in the west.
Of Germany's 100 largest industrial companies and 100 largest service providers, not one has its headquarters in eastern Germany.
Politicians across the political spectrum tend to sugarcoat the meager economic results of reunification. Chancellor Angela Merkel, the leader of the center-right Christian Democratic Union (CDU), is fond of saying that "a great deal has been achieved" in the development of the east. Former Transport Minister Wolfgang Tiefensee of the center-left Social Democratic Party (SPD), who is also a former commissioner in charge of developing eastern Germany, says jubilantly: "We have successfully made it three-quarters of the way."
"We are firmly convinced that the creative forces of the people that have now been unleashed will lead to a new Wirtschaftswunder," then-Chancellor Helmut Kohl proclaimed on June 5, 1990, referring to the "economic miracle" of postwar West Germany. But anyone who travels through eastern Germany today, 20 years later, will encounter failed mega-projects, depopulated downtown areas and many people who haven't had a regular job in two decades.

Neubacher, A. & Sauga, M. (2010) Germany's Disappointing Reunification: How the East Was Lost. [Online],1518,703802,00.html#ref=nlint [16/07/2010]