Germany battles to close the east-west economic gap (Feature)

By Andrew McCathie Sep 28, 2010, 6:06 GMT

Berlin - Two decades after a popular uprising swept away the Berlin Wall and paved the way for German unification, the nation is still battling to bridge the economic divide between its two halves.

The mass unemployment that was a feature of East German economic life during the early years of unification has, to an extent, been rolled back.

Large-scale corporate investments have transformed the GDR's traditional industrial heartland and tourism has reshaped the area's long stretch of coastline.

But said Oliver Holtemoeller, chief economist with the Halle-based (IWH) economic institute: 'Even 20 years after the political unity, there are differences between the economic performance and economic structures of east and west Germany.

Productivity and per capita income in eastern Germany is about three quarters of the level in the more wealthy western part of the country.

'It is unlikely, however, that a complete alignment of productivity and income could be achieved in the foreseeable future, said Holtemoeller.

So far the costs of discarding the industrial debris in the east left by four decades of Stalin-style command economics have been staggering.

The western part of the country is already thought to have poured more than 1.3 trillion euros (1.74 trillion dollars) into modernizing the east's antiquated infrastructure and trying to fire up an economic revival. The annual bill for rebuilding the east is estimated at between 70 and 80 billion euros.

Certainly, considerable strides have been made in revamping an economy that was once symbolized by the smoke-belching Trabant car.

As late as the 1980s, bartering was the best way for many in the east to get their hands on to goods like strawberries and being a chimney-sweep was a serious career choice of many people. The high- cost of umbrellas meant that people often had their old ones repaired.

Negligence on the part of the communist regime in East Berlin had also helped to turn vast areas of the region's industrial landscape into a moonscape of pollution and toxic waste.

Now, historic towns and cities along with the region's vast network of castles and manor houses have been restored to their former glory as a result of generous tax breaks aimed at encouraging investment in the region's dilapidated real estate sector.

Amid concerns about global warming and energy supplies, East Germany has also been in vanguard of the development of renewable energy in Europe's biggest economy.

Some analysts expect the East German economy to chalk up a 2.5- per-cent growth rate this year, as the five so-called new states attempt to shake off their latest setback, the world economic crisis.

Crucially, the numbers out of work were down to 11.5 per cent last month after the jobless queues swelled to more than 20 per cent as the region's economy struggled to gain traction in its new post- communist world.

The national German economy might be marking the 20th anniversary of the end of the country's Cold War division with its fastest rate of growth since the wall came down, as second-quarter growth climbed to 2.2 per cent.

Still, those from the east complain that wages and pensions are less than their counterparts in the western part of the country, despite the daily cost of living having been the same in the nation's two halves.

'Twenty years after unification it is not longer possible in many cases to justify the difference in pay between east and west,' said Udo Gebhardt, a union boss in the east German state of Sachsen- Anhalt.

In addition, many economists believe the 'flourishing landscapes' that were promised by former Chancellor Helmut Kohl at unified Germany's first election in 1990 could still be at least another decade away, with the sheer scale of rebuilding the east having been underestimated by many officials.

Even today there are few corporate headquarters located in the east and even less small to medium-sized companies able to mount major business expansions.

This is despite sizeable investments in the east by leading companies such as carmakers Porsche and BWM as well as chipmaker Infineon.

Moreover, the so-called 5.5-per-cent solidarity surcharge that is levied on every German taxpayer and was originally introduced to help foot the bill for unification continues to act as a drag on national economic growth by undercutting private consumption.

The revenue generated by the surcharge might be used for a range purposes these days. But in the last few years it represented a drain on household spending of between 11 and 13 billion euros.

East Germany's battle to leave its economic past behind was compounded by fast-paced globalisation, which began to take off as a key force just as the former communist state was taking its first tentative steps on the world economic stage.