New and old in the eastern city of Dresden
Steffen Uhlmann

BERLIN - Despite considerable efforts, the economic gap between eastern and western Germany is not shrinking fast enough.

While the East is indeed becoming more dynamic, it still lags far behind the West, according to the 2012 statistics compiled by the Initiative for a New Social Market Economy (INSM), which ranks German states for dynamism every year. The latest study shows Eastern Germany is developing faster than the rest of the country. Brandenburg, where taxable capacity rose by 16% between 2007 and 2010 and the number of jobs grew by 5.4%, ranked first. After that came the states of Berlin, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia – all in East Germany – and only then the first West German state, Hamburg.

But this dynamism has not helped the East much. A parallel ranking of the general level of German states by the INSM shows that Eastern German states are far behind, and, worse, losing ground. This jibes with findings by the Halle Institute for Economic Research (IWH), whose 2012 report on the East German economy says that in the first six months of 2012, it grew by only one-half percent while the West German economy grew at more than twice that rate.

According to Udo Ludwig, a IWH economics expert, this shows that the goal of rapid equality between the East and West is unrealistic. "The apparent catching-up during the crisis years was just temporary.”

Along with too few medium-sized and big-sized companies and a concomitant weakness on the innovation and export sides, East Germany has an aging, and dwindling, population. Although there is some growth in areas like Chemnitz, Dresden, Leipzig and Jena, the East German economy overall is not in a position to overcome its weaknesses. This means it will need subsidies well beyond 2019, when the 156-billion-euro Solidarity Pact II expires, if its standard of living is ever to reach the average West German level.

At the end of 2010, more than 65% of West German companies showed an annual turnover of more than 50 million euros, as opposed to less than 45% of companies in the East. While some Eastern industrial sectors, such as the auto industry, have become big players, they are mostly branches of West German companies. With the exception of railroad company Deutsche Bahn, not one large company has its headquarters in East Germany.

Innovation

But some trends are going the other way. Since 2000 the number of innovative firms in East Germany has risen from 3,200 to 4,200. These are the kinds of companies the federal government wants to boost, and to that effect it is backing a program called “Twenty20 – Partnership for Innovation” to the tune of half a billion euros.

Using public money for this is, however, highly controversial after what happened with East German firms in subsidy-driven high-tech sectors. Dresden’s “chip miracle” offers one high-profile example of the possibly fatal consequences of state support. Chip producer Qimonda tried to compete, from Germany with its high labor costs, with its competition in low-labor-cost nations, and failed miserably because its powers of innovation were quite simply not good enough. The same fate probably awaits East Germany’s highly subsidized solar industry, which has not been able to hold on to its former technological advance over Asian competitors.

Those who know East Germany well, like former central banker Edgar Most, have been saying for a long time that German unity needs to be rethought. That would mean for instance redirecting subsidies to education and research. Most also believes that money needs to be spent on incentive programs to encourage the return of the young people who have left East Germany for the West.

It is an approach that appeals to East German states, and new measures have met with success. In 2011, for the first time, more people moved from West Germany to take up new jobs in East Germany than the other way around. That was particularly true for dynamic cities like Leipzig and Dresden, which are recruiting massively to compensate the fact that in aging Germany there are too few highly qualified workers to fill the positions opening up. Small- and medium-sized companies are desperately looking for qualified workers and have trouble finding suitable candidates.

According to economic experts, large West German companies should be encouraged to turn their highly productive East German branches into separate companies so that the East can benefit more readily from the value they create. This could be achieved through tax incentives, says Most. "It would benefit both West and East Germany; net proceeds would stay in the East and transfers of funds from the West could be reduced."

All experts agree that left to its own devices, the East will not catch up with the West, and that new investment will be required. But for that to happen, the East will have to become much more attractive to national and international capital.

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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Angela Merkel at a campaign event of CDU party, Stralsund, Sep 2021

Tobias Kaiser, Virginia Kirst, Martina Meister


-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.

France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

Europe's north-south divide lives on

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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