Stalled Progress

German Unity Has a Long Way to Go

Fabrik
Young people have deserted former East Germany in search of better opportunities.
  • Why it matters

    Why it matters

    Germany has been pouring money into the former East since reunification 24 years ago. But the flow has only partially helped to redress the balance between the economies of the former East and West.

  • Facts

    Facts

    • From 1991 to 2005, GDP per employed person in the former East Germany rose by more than 100 percent. Between 2005 and 2013, it rose less than 4 percent.
    • Federal aid to the former East German states is scheduled to end in 2019.
    • The German population is currently 81 million. By 2040, it will be less than 74 million.
  • Audio

    Audio

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Last Friday marked the 24th birthday of the reunification of Germany.  On October 3, 1990, when the German Democratic Republic joined the Federal Republic of Germany, then-Chancellor Helmut Kohl predicted that the run-down former East Germany would become a “blooming landscape.” Economic hopes and expectations from that historic day have only been partially fulfilled.

The government’s latest annual report on German reunification maintains that there is little difference between East and West in terms of quality of life and infrastructure. But the truth is, progress in bringing the two together has come to a standstill.

Between 1991 and 2005, real gross domestic product per employed person rose in the new states of eastern Germany by more than 100 percent. In western Germany it rose less than 10 percent. Between 2005 and 2013, however, growth in both areas was less than 4 percent.

GDP per employed person in the former East is 76.6 percent of that in the West.

For a good while now productivity in eastern Germany has been less than 80 percent of that in the states of western Germany, and wages are stagnating at around 83 percent of those in the former West. The reason for this is that fewer large, highly productive industries operate in the former East. GDP per employed person is 76.6 percent of that in the West. And the output per person, in spite of a drop in population, is only 67 percent.

These differences are due in large part to a massive exodus of young, highly qualified workers from the East, where long-term prospects for growth have darkened considerably.

Comparing economic development between the two parts of the now whole country, however, tells only part of the story. In both areas there are growing differences between individual regions when it comes to job growth and wages.

The “establishment of equivalent living standards,” which is enshrined in German Basic Law, the equivalent of the country’s constitution, will be increasingly harder to achieve if the core of working-age people continues to shrink in eastern Germany. The current drain of young workers from the East alone will reduce the long-term growth potential for Germany’s total economy by half a percentage point from the current 1.4 percent rate.

The government should address the effect that Germany’s aging population will have on growth.

Federal aid to the former East German states is scheduled to end in 2019. Follow-up measures to the current financial equalization scheme must be agreed to in this legislative period. One thing for consideration is that infrastructure in eastern Germany is now far more modern than in the former West. And in many regions of western Germany, for example the northern reaches of the Ruhr district, people are doing no better than in many regions of eastern Germany.

Chancellor Angela Merkel’s governing coalition should recognize that the time has come to move beyond a special status for the new states by standardizing pension rules and reorganizing financial compensation, and effectively, complete the process of German reunification.

The government should also address the effect that Germany’s aging population will have on growth. Based on regulations in effect since 1992, the standard pension in the East is still 7.8 percent less than in the old western states. At the same time, however, in determining eligibility for pensions, eastern wages are weighted more heavily – currently by 18.7 percent. The result is that every euro paid into the social security system in the former East leads to higher pension eligibility than a euro contributed in the West.

It is high time to change these lopsided practices. There should be one pension standard for all of Germany. All pension eligibility earned up to a point should be adapted, so that on an appointed date neither those already receiving a pension nor those still working would have anything given or taken away. After the cutoff date, there would be uniform regulations governing pensions – equal contributions, equal eligibility factors and equal qualifying periods.

We must make better use of the talents and capabilities of our shrinking workforce.

In place of a Solidarity Pact 3 – which like its predecessors (Solidarity Pacts 1 and 2 were funds set up in 1995 and 2001 to boost development in the eastern states) would be devoted exclusively to economic development of eastern Germany – there should instead be a “structural fund” financed by a solidarity surcharge. Its money should be used to support structurally weak areas throughout Germany.

Reducing differences between East and West should be achieved by reorganizing the financial equalization scheme between the federal government and the states. It should be based on federal cooperation, not competition.

The measures undertaken between 2003 and 2005 in the Agenda 2010, the set of major welfare and labor reforms carried out under former Chancellor Gerhard Schröder, were the right and important responses to problems at that time, especially the inflexible labor market and unsustainable pension system. A “Growth Pact 2020” must focus on providing answers to the fundamental future problem of how an older population will slow economic growth.

This does not require more labor market reforms or reduced benefits in the social security system. What is needed, however, is an improvement in how German businesses compete around the world, by upgrading and extending the IT infrastructure and stimulating technical progress in production innovation. And finally, we must make better use of the talents and capabilities of our shrinking workforce through smarter policies on families and education.

On the 50th anniversary of reunification in 2040, Germany will no longer have 81 million people, but probably less than 74 million. The population will be significantly older and sicker. There will be more need for income redistribution in the welfare state.

As a consequence, it makes more sense to give special support to those regions that contribute greatly to the country’s overall economic performance. In concrete terms, this means giving less precedence to underdeveloped areas and investing more in economic power centers – regardless of whether they are located in Germany’s East, West, North or South.

 

To contact the author at: info@handelsblatt-research.com

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