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Economic promise emerges in east Germany

Eighteen years after a popular uprising swept away the Berlin Wall, the long-promised flourishing landscapes of Germany’s former communist east are finally showing signs of taking shape.

Just over 12 months ago, mass unemployment, the collapse of the key building industry as well as the slow pace of economic convergence with Germany’s more prosperous west and the failure of industrial investment to materialize in many areas threatened to turn large parts of the nation’s eastern half into a new mezzogiorno. Despite federal government support for the region at times hitting an astronomic €100 billion ($144.8 billion) a year, the economic transformation of Germany’s former communist east appeared to have stalled resulting in the region becoming a drag on Europe’s biggest economy.

Instead of the flourishing landscapes in four years that former conservative German Chancellor Helmut Kohl had promised in the months following the fall of the Berlin Wall in November 1989, economists began talking about it taking 30 or 40 years before the east would close the economic gap with the west. But now signs of an economic revival appears to be taking hold with optimism across the region having climbed at one point this year to its highest level since the end of Germany’s post-Second World War divide and economists expecting growth next year in the country’s east to outstrip the west.

As a consequence, it is helping to shore up Germany’s renewed sense of economic vigor after a protracted period of stagnation. „There have been considerable strides compared to the 1990s,” said Udo Ludwig, senior economist at the Institute for Economic Research in the east German city of Halle. Growth in the east, however, is projected to slip back a gear in 2008 in line with a slowing world and European economy. But Germany’s leading economic institutes expect growth in the east to come in at a solid 3.0% this year, outpacing the around 2.0% average for all of Germany with a rebound in industry, notably in machine and engineering equipment helping to power growth in the former communist east.

Apart from the new tourism industry that has emerged along east Germany’s Baltic Sea coastline, a recent raft of high-profile investments in the region by leading companies such as carmakers Porsche AG and BMW AG and chipmaker Infineon AG have also started to pay off. More recently, German corporate giants E.ON AG and BASF AG announced plans to team up with Russia’s Gazprom to launch a €5 billion gas pipeline project bringing gas from Siberia into east Germany by 2011.

This comes amid signs that some German companies have been pulling back from Central and Eastern Europe, where costs have been rising and as a result closing the gap between east Germany and its former Soviet bloc partners. Representing barely 5% of east Germany’s GDP in 1994, the region’s export growth has also surpassed old Germany’s exports increasing last year by 15%. In particular, underpinning east Germany’s export machine has been the rapid-fire growth that has emerged in the region’s neighbors such as the Czech Republic and Poland following their European Union membership three years ago.

At the same time, research institutions and renewable energy companies, notably solar power groups, have been mushrooming across the east, in part drawn to the region by its modern infrastructure and lower labor costs, which are a third of the west German level. Last month unemployment in the east of the country stood at a still hefty 13.6% with a total of 1.16 million out of work. But a decade ago unemployment in the east was hovering around a staggering 20% with the recent strong performance of the German economy and the tough labor market reforms launched by former Social Democrat-led government of Chancellor Gerhard Schroeder helping to shore up the jobs market.

Economists believe the dole queues in the east could shrink next year with the numbers out of work falling below 1 million. This also follows the moves by workers in the east to abandon Germany’s industry-wide collective wage bargaining system and opt for often lower wages through factory-based pay settlements as part of an attempt to head off their companies from collapsing. More than 40% of east German firms are now not part of industry-wide agreements. (monstersandcritics)