Report Highlights Eastern German Economic Successes

Eastern Germany has the highest unemployment rate in the country, the greatest dissatisfaction with the government's reform course, and it's also the center of Monday demonstrations that have been drawing tens of thousands onto the streets to protest labor market reforms. But as a region, it's not as economically hopeless as it may seem. German economic forecasters say the prospects for growth in the East are better than you may think.

Over the weekend, the German newsweekly Der Spiegel published excerpts of an unreleased study by Germany's Reconstruction Loan Corporation (KfW), a state-owned bank that supports small and medium-sized businesses, community investments and other projects designed to aid economic growth. The report found that developments in the east have been much better than they have been represented. The east, the report said, experienced much bigger growth than the west, but that increase had been overshadowed by the collapse of the construction industry. The report said the construction crisis was the only reason that the eastern economy was limping behind.

"The situation is not nearly as bad as it is being presented," Joachim Ragnitz of the Institute for Economic Research in Halle told the Berlin newspaper Tagesspiegel am Sonntag. The economist said that cities like Leipzig, Dresden and Chemnitz have tremendous growth potential in tourism as well as other industries like semiconductor, automobile or heavy machinery production.

3.7 annual growth

According to Der Spiegel, the report stated that from 1992 to 2003, growth in the east increased 3.7 percent annually, compared to an anemic 1.2 percent in the west, if cleansed of the construction industry figures. But the real success story, the report concluded, has been east German industry, which is drumming up greater revenues abroad than domestically. "That means the manufacturing industry in the new states has become absolutely competitive," the report stated.

Major eastern German cities like Dresden have succeeded during the past decade in attracting a number of blue chip companies. In Dresden, for example, Volkswagen and US chipmaker AMD have set up shop. Taken together with their suppliers, plus other high-tech companies, they have created thousands of jobs.

The chief economist at German insurance giant Allianz has also recently been quoted stating that industry has been faring better in the eastern states than the west for some time now. "Now there's a good foundation for a future in which many suppliers and service providers will move into the region and make it more competitive," he said. Heise has also said he believes the gap between eastern and western Germany will close in the coming years. "For that reason, there's going to be a lot more investment here in the coming years."

Artificial growth?

Yet despite success stories like Dresden, the eastern German economy is still saddled with problems. In Germany's western states, joblessness is about 8.5 percent, but in the east that figure is nearly double.

"It's doubtful that eastern Germany is showing a self-sustaining upswing," Thorsten Polleit, chief economist at the British investment bank Barclays Capital told Deutsche Welle. "The economic expansion is, in some regions, largely bolstered by state subsidies. The need for reforms there is immense, especially, if they want to generate lasting jobs and growth."

But other economists, including Marcel Thum of the Ifo Institute for Economic Research in Dresden said structural reforms, including controversial labor market reforms, currently being carried out by the German government would also contribute to the growth of the eastern German economy.

"There are also going to be winners," he told the Web site tagesschau.de, "because people are going to be able to get jobs quicker in the near future." For workers with little training or lacking a higher education, he said new jobs in the service sector would create new opportunities.