Has Rebuilding East Germany Failed? | Business| Economy and finance news from a German perspective | DW | 06.04.2004
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Has Rebuilding East Germany Failed?

Germany's attempt to rebuild its once communist East has been an unmitigated disaster and the massive financial transfers from the West endanger the entire nation's economy, according to a government-commissioned report.


Aid to eastern Germany has cost €1.25 trillion over 14 years.

A panel of 13 experts headed by former Hamburg Mayor Klaus von Dohnanyi charged with examining the reconstruction of Germany's eastern states has concluded the estimated €1.25 trillion ($1.54 trillion) in aid has done little to help the economically depressed region.

Perhaps even more worrying, the experts fear the €90 billion spent by the government each year is slowly destroying the economy of western Germany, as growth stagnates and the eastern states fail to revive 14 years after German reunification.

"If things are allowed to continue as they are, all of Germany will be dragged down," von Dohnanyi told the Berliner Zeitung newspaper on Tuesday.

Breaking a public taboo, the report is the first official study to be so openly critical of the government's reconstruction plan for the formerly-communist east ever since German reunification in 1990. It attacks the policies of both the current administration of German Chancellor Gerhard Schröder and his predecessor Helmut Kohl, who oversaw the unification of east and west.

In an interview with DW-Radio, Dohnanyi said it was clear mistakes were being made from the beginning of the reunification process, but that it was politically difficult to challenge the government's course of action at the time. Many economists agree with that sentiment.

"One of the main criticisms has been that wages rose much
too quickly after reunification," Heinz Schmalholz, an economist at the Ifo economic institute's Dresden office, told the Reuters news agency. "But what would people then have done without that? They would of course have migrated to the west where there were higher wages. I don't know whether the politicians would have wanted to take responsibility for that."

EU enlargement feared

The Dohnanyi report comes as Germany tries to recover from a recession and many in the country worry eastern European countries set to join the European Union in May will compete for investment and jobs with low wage and production costs.

"Rebuilding the east is responsible for at least two thirds of Germany's weak growth. As it stands now, Germany cannot revive itself," von Dohnanyi told the Berliner Zeitung.

Aufbau Ost Allee der Kosmonauten Plattenbau

According to the study, chronically high unemployment near 20 percent in the eastern states has led to mass migration of the young and educated, which is exacerbating the region's problems.

Commissioned by the Economy Ministry and the Transport Ministry, which is responsible for eastern reconstruction plans, the report calls for a dramatic restructuring of how aid is allotted in the region. Instead of continuing to distribute subsidies indiscriminately, it suggests concentrating aid on core growth areas. Welfare benefits could be rebundled as wage supplements instead of as entitlements and companies could be given tax breaks to encourage investment.

Funding running out

Transportation Minister Manfred Stolpe on Monday admitted there needed to be changes in the way eastern aid was organized, since much funding would run out completely around 2019. "We have to readjust things anew," he told German radio station MDR Info.

Conservative eastern officials including Saxony's premier Georg Milbradt have called for radically restructuring the region to make it more attractive to businesses. However, plans to make the eastern states a "special economic zone" have not been greeted by all politicians with such enthusiasm.

"That is a completely unrealistic perspective that we should quickly bury," said leader of the Greens Reinhard Bütikofer, according to the Associated Press. Bütikofer and others see major legal difficulties in implementing a special zone, since there would be conflicts with both German and EU labor and tax codes.

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