Minister for Eastern Germany Sees East-West Economic Gap Closing; Subsidy Program For New Companies Extended to 2020

Minister Rolf Schwanitz represents the interests of the Eastern German states in the German parliament located in Berlin.

While still in office, former Chancellor Kohl raised many expectations by promising the east Germans "flourishing landscapes" following German reunification.

After more than ten years and more than a trillion German marks spent in the five Eastern States of Germany to build road, improve schools and the like, the region has not achieved economic parity with the West. Western Germans are wondering where the money went.

At the same time, eastern Germans have grown to resent the "know it all" attitudes of newly arrived westerners and they are not happy with the lack of progress either.

The man in the middle of all this is Rolf Schwanitz, Minister of State at the Federal Chancellery for Affairs of the New States. German Chancellor Gerhard Schröder has made "Aufbau Ost", or the rebuilding of Eastern Germany, his highest priority and he put Schwanitz in charge of a special Ministry to represent the interests of the Eastern States in the German Parliament.

Schwanitz, who entered office in 1998 and is a member of the Social Democratic Party, has had to grapple with critics who argue that the $6 billion subsidy that have been flowing into the Eastern States each year is actually hurting economic development.

"We have a vital interest that [the East] doesn’t remain a subsidized area for the long term," says Schwanitz. Support for the subsidy program is widespread in Germany. Even conservative politicians such as Saxon Governor Kurt Biedenkopf support continued subsidies for the East. They are needed to make up for 40 years of communist rule, he argues.

"The whole of Germany lost World War II," he says. "All Germans are responsible for the country's subsequent division and the resulting consequences for the East."

At the same time the goal of the program is to create a self-sustaining economy and Schwanitz looks to the day when subsidies will no longer be needed. He points to major benefits for the Eastern German states after the Economic Union (EU) is expanded to include neighboring Poland, the Czech Republic and other eastern countries of Europe.

But for now, he vigorously supports continuation of the "Solidarity Pact" beyond the current deadline of 2004. Payments, he maintains, should continue for another 10 years at the current level of 21 million German marks.

Minister Schwanitz is not concerned about East Germany’s cheap labor pool being hurt by the scheduled inclusion of other Eastern European countries in the European Union.

"When they join the EU, Poland and the Czech Republic won’t necessarily be more attractive to investors than Eastern Germany," predicts Schwanitz. "Eastern Germany is a ‘Target One Region’ in the EU and that means we will continue to receive the same EU support as the new members will. On top of that, Eastern Germany receives national support from its own federal government."

Comparisons of Gross Domestic Product (GDP) growth rates between eastern and western Germany must take into account the drag on the economy that the building sector causes. The problem of surplus vacant housing in the East is one reason continued support is needed. The estimated one million empty apartment units will be one of the major financial hurdles facing the Eastern States in the coming years.

But progress is being made. From 1991 to 1998, according to a 2000 German government report, some 91 billion German marks were spent in the overall area of housing and urban development, 40 billion of which was in eastern Germany. Consequently, differences in per capita housing have narrowed between the eastern and western states.

At present people in eastern Germany have about 35 square meters per person; in western Germany the average is 39 square meters.

Another disappointment has been that major manufactures have not relocated their plants to the East as much as expected to create jobs. Former Chancellor Kohl had assumed that large manufacturing companies in the west would move east out of goodwill or patriotism.

But Kohl later admitted he was wrong in thinking that western German companies would be willing "to leave their own account books to one side for once and to help wherever they can".

True, some firms did come across: Volkswagen to Mosel, Opel to Eisenach in Thuringia, Siemens to Dresden in Saxony, and BASF to Schwarzheide in Brandenburg. After a rough start, the investments by these companies in the east are paying off- both for themselves and for the east German people.

But few can doubt that reunification has caused massive dislocations to the economy of the Eastern States and it is taking more time than most thought to fix it. Of the 30 largest GDR (former communist) combines that were operating in East Germany, which employed roughly one million people in 1990 and grossed just under 200 billion in 1998 German marks, not one survived the shift to the market economy.

In July 2001, the west German car maker BMW announced that it would build a major new facility in Eastern Germany. After careful consideration of over 250 potential locations, BMW selected a location near Leipzig for a new production plant.

This decision, according to Schwanitz, underscores the advantages that the Eastern States are able to offer. This decision also shows that the Eastern States are capable of competing internationally for investments, even against Eastern European locations.

A growing network between industry and science, encouraged by the German government under numerous programs designed to promote innovation, is making an important contribution to the development of locations that can compete internationally for investment.

In eastern Germany various regional centers of economic growth have emerged with large numbers of new and innovative high-tech companies and competence centers such as Berlin-Adlershof, Dresden, Erfurt, Halle/Leipzig, Jena, Rostock, and Frankfurt/Oder. These competence centers are internationally recognized focal points of top-level research, e.g. in the fields of biotech, microelectronics, and surface technology.

In the northeastern state of Mecklenburg-West Pomerania, says Schwanitz, tourism is becoming a big focus of development. Although the agricultural sector has diminished in the past few years, the beach resorts there are now open to westerners and they are rapidly overtaking the tourist activity of resorts in western Germany.

For Eastern Germany as a whole, economic development is taking a new direction. Instead of counting on large manufacturing companies to generate growth, Mr. Schwanitz and other political leaders in eastern Germany are turning to helping small and medium sized enterprises (SME’s) to create new jobs.

"The east German economy today," says Schwanitz, "is based mainly on the almost 530,000 newly established firms, while the number of workers in the manufacturing sector has now stabilized at around 600,000 and is even rising slightly."

"Eastern Germany has made enormous advances in recent years. We now have more than 500,000 small and medium sized enterprises, including a number of larger privately owned businesses that have successfully established themselves in the marketplace. Without a doubt, however, we still need a special policy for ‘Aufbau Ost.’ The interests of eastern Germany must be given special support within the framework of federal policy. That is my job. It touches on all areas of policy, ranging from economic policy and employment policy to issues of social policy."

More than three million new jobs have been created by SME’s and these companies are competing successfully on national and international markets. Economic performance and corporate productivity have increased; wages and pensions have risen. Transport infrastructures have been expanded and modernized in broad areas. Quality of life has improved noticeably.

The situation on the eastern German job market has improved somewhat, but the level of unemployment is more than twice as high as it is in the western states. Progress in building modern, forward-looking economic structures and eliminating unemployment are major challenges that will be addressed under a second German government program to promote recovery in eastern Germany.

Since the reunification of Germany considerable progress has been made in the process of leveling differences in the standard of living between eastern and western Germany. Gross income per member of the workforce in eastern Germany rose from 49 percent of the western level in 1991 to 77 percent in 2000. Net income in the eastern states now amounts to 90 percent of the western level. The narrowing of differences in the standard of living is also evident in the trend shown by family incomes. The level of incomes per household is determined in a representative poll taken once every five years by the Federal Office of Statistics.

According to this poll, western German households had an average disposable income of DM 5448.00 in 1998, whereas eastern German households had DM 4130.00 or 76 percent of the western income level.

On September 24, 2001 the German cabinet approved a draft bill that will continue the subsidy program, with certain modifications, until 2020. Known as "Solidarity II", a total of 306 billion marks are to be provided under the new program with a much stronger focus on encouraging investment from abroad. For U.S. businesses thinking about locating in Europe, this should be interesting news.—