The East German Disaster

Helmut Kohl’s victory on December 2 was among the most decisive in the forty-one-year history of the newly enlarged Bundesrepublik, but there is a fragility about his triumph that the voting statistics do not reveal. Kohl campaigned as the architect of unification and, as the opinion polls suggested, this was the achievement that carried him to victory.¹ But Kohl also ran as the candidate who could best deal with the one big task of unification still remaining: the rehabilitation of the East German economy. Since the two German economies united in July 1990 Kohl has been consistently upbeat about the economic prospects for eastern Germany. “We must,” he said in October, “do everything we can to transform the five new Länder (states) into blooming landscapes within three, four, five years,” and he has never expressed doubt that this could be done.²

It was a measure of Kohl’s strength that many voters were willing to accept these assurances despite the flood of bad economic news from eastern Germany. If one counts as unemployed the workers who are today put in government-subsidized “short work” programs (Kurzarbeit) but who are in fact not working, East German unemployment increased eleven-fold between June and November, and industrial production has been cut in half during the last year. West German businessmen are still reluctant to invest in the former GDR, and East Germans are still leaving for West Germany in large numbers. Now that he has been reelected on a platform of economic optimism, Kohl is under strong pressure to reverse these trends, or risk suffering the fate of a politician who arouses expectations among the voters which he cannot fulfill. The economic problems of the five new eastern Länder are therefore likely to be among Kohl’s chief preoccupations during the lifetime of his new government.

With 40 percent of its work force employed in industry, East Germany is one of the most industrialized regions in Europe. Despite East Germany’s small domestic market of 16 million, the leaders of the East German Communist regime were determined that the GDR’s economy should be comparable to West Germany’s in the diversity and sophistication of its industrial base. East Germany therefore has a considerable variety of manufacturing industries, including mechanical and electrical engineering, optics, electronics, automobiles, chemicals, textiles. Every large East German city is an industrial center. Shipbuilding is concentrated in Rostock, chemicals in Halle, textiles in Chemnitz (formerly Karl Marx Stadt), and engineering in Leipzig, Dresden, Magdeburg, and East Berlin. The industrial heartland of East Germany between Halle, Chemnitz, and Dresden resembles the old Ruhr of the 1930s and such declining Midwestern industrial centers as Youngstown, Ohio, in the vastness and ugliness of its industrial landscape, although its pollution is far worse.

The Honecker regime used to boast that the GDR economy was strong even by Western standards, and some West German politicians accepted such claims, partly it seems out of a sense of national pride, partly in order to keep up friendly relations with the East German leaders. But when the Wall came down and West German entrepreneurs and consultants were able to enter East German factories and look around, they were depressed by what they saw. Herbert Henzler of the McKinsey management consulting company, whose firm advises East German companies and who has himself probably visited more East German factories than any other West German, has estimated that only between 20 and 30 percent of East German companies were even worth considering as candidates for Western investment.³ The West Germans found that the GDR had a huge but mostly obsolescent engineering industry that was adapted to selling in the Soviet market but would not be able to compete elsewhere, and a large but primitive chemicals industry, which was inflicting colossal damage on the environment. The state companies producing consumer goods suffered from the traditional Stalinist bias in favor of heavy industry, and their ouput was often shoddy.

Those weaknesses were revealed to be even worse than had been expected when, at the beginning of July, the two German economies were merged and the West German deutsche mark became the currency of East Germany. Exposed overnight to West German competition, eastern Germany’s loss of industrial production has far exceeded that of Poland, the only other Eastern-bloc economy to have introduced comparable economic reforms. The UN Economic Commission for Europe estimates that during the first nine months of 1990 industrial production in Poland fell by 27 percent.⁴ But by August 1990 East German industrial output was 50 percent below the level of August 1989, and the German Finance Ministry estimates that East German output will fall by another 10 to 15 percent in 1991. Allowing for a conservative 5 percent decline in output between September and December of this year, East German industry may, by the fall of next year, have lost between 65 and 70 percent of its output over a two-year period. East German unemployment has risen from 130,000 in June 1990 to 1.5 million in November, an increase of 270,000 a month.⁵

Kohl’s strategy for reviving the East German economy has always relied on the willingness of West German and foreign companies to invest there—whether in existing East German plants or in creating new factories. The currency union and the establishment of a market economy in East Germany were meant to encourage this investment to take place. As the former economics minister Helmut Haussmann proclaimed this September, “The trough is now full, now the horses must drink.”⁶ Of the two forms of investment anticipated by Kohl and Haussmann, future growth will depend mainly on new industries coming to East Germany. Only a relatively small number of weakened East German companies seem likely to survive the current industrial depression.

The most informative discussion I have seen of the difficulties facing new industry in East Germany is in Das Deutsche Wagnis (“The German Venture”), the recent book by Klaus von Dohnanyi, the former Social Democratic mayor of Hamburg who is now on the supervisory board of a large engineering company in Leipzig. As chief executive of one of the federal Länder (a status Hamburg was given in recognition of its Hanseatic past), Dohnanyi did much to attract new industry to his city, and his recent experience in Leipzig has made him a discerning observer of the East German economy. (He is also the grandson of the Hungarian composer Ernst von Dohnanyi and his brother is the conductor of the Cleveland Orchestra.) In the autumn of 1986, I attended an election rally in Hamburg where Dohnanyi and Willy Brandt were greeted by a howling audience of anarchists and extreme leftists. Brandt shouted back at them, antagonizing them further; the tall and elegant Dohnanyi coolly reminded his listeners of the importance of free speech and of the price the Germans had paid in the past for ignoring it.

Klaus von Dohnanyi’s analysis of eastern Germany’s economic prospects reflects his sense of the changes within West Germany itself, where during the last thirty years economic power has shifted away from the traditional centers of industry such as the Ruhr, the Saar, and Hamburg, to the southern states of Hesse, Baden-Württemberg, and Bavaria. Today the most dynamic industrial cities in Germany are Stuttgart and Munich. A comparable migration has taken place in the United States, as the industrial Midwest has declined and Southern California and the San Francisco Bay area have prospered. Both migrations have taken place for much the same reasons. The advanced engineering and electronics companies that have the most potential for growth favor cities free of the disadvantages of declining smokestack industries whose workers lack high-tech skills and whose factories and neighborhoods are decaying.

German companies, Dohnanyi says, want to establish branches in places where there are “other enterprises in the same line of work, as well as leading scientific institutions, a high quality of life, and competent and cooperative public administrations”—in short, the qualities that make Silicon Valley more desirable than Gary, Indiana. One big difference between the US and western Germany is that the less favored German regions have been more successful in competing with the newly prosperous regions than their American equivalents such as Cleveland and Detroit. For example, the SPD minister-president of North Rhine Westphalia, Johannes Rau, has cleaned up most of the industrial wasteland of the Ruhr Valley. Hardly a week goes by without Der Spiegel or the magazine supplement of the Frankfurter Allgemeine Zeitung carrying a two-page advertisement portraying the Ruhrgebeit as a rural paradise. Dohnanyi has himself helped to restore Hamburg as one of Europe’s most prosperous cities, and it now has the highest income per person of all the West German Länder. He helped to offset the decline of shipbuilding, for example, by attracting major investment in electronics and aerospace.

With unification the governments of the new East German Länder have to compete for new industry with the advanced industrial regions in the West. As Dohnanyi puts it, “Saxony is pitted against Baden-Württemberg, Sachsen-Anhalt against the Ruhrgebeit, Thuringia against Bavaria, Mecklenburg against Lower Saxony.” In this competition, moreover, politicians of the West German Länder cannot, in Dohnanyi’s view, be expected to be particularly generous:

Anyone who thinks that they will subordinate their own interests in favor of the reconstruction of East Germany does not understand the fierce competitive pressures to which West German politicians are subject. No Bürgermeister or minister-president will improve his chances for reelection by saying that he has given away the chance of a…company or a factory in favor of some city or Länder in eastern Germany.

West German companies will be equally ruthless in choosing where to go:

Patriotism is not a capitalist concept. Western capital will therefore judge eastern Germany as a location without sentimentality, using the same profit and loss calculations which it might apply to all other locations.

Dohnanyi believes that in this rough competition “the advantages of the East German region as a location for industry are not very convincing,” notwithstanding Kohl’s optimism. It is true that Mercedes Benz and Volkswagen will build new factories in eastern Germany, Mercedes at Ludwigsfelde, south of Berlin, VW at Zwickau in Saxony, the center of the East German automobile industry. But most German companies are not following their examples, particularly the large- and medium-sized engineering companies that have been central to the success of the West German economy. Here eastern Germany’s disadvantages as a location for investment are having an effect. Many West German companies are, for example, finding that the East German market is not large enough to justify setting up an entire new factory in the former GDR.

In the words of Franz Steinkühler, president of the Metalworkers Union and the most powerful union leader in Germany:

The business leadership said loudly and clearly that they were going to invest in the east but they hadn’t taken the exact measure of the ex-GDR, a region which after all has only 16 million inhabitants, the equivalent of the population of North Rhine Westphalia. That has dampened their enthusiasm. For North Rhine Westphalia one does not build a new factory, one puts on a third working shift to maximize profits. I now have the impression that all the statements of the business leaders about poor conditions in the ex-GDR are simple ways of disguising their unwillingness to make good their previous commitments.⁷

However these “poor conditions in the ex-GDR” to which Steinkühler refers are all too real. Eastern Germany’s industrial reputation has been badly damaged by such horrors as the chemical plants at Halle and Bitterfeld, where the land and rivers are drenched in poisonous wastes, where pollution turns sunlight a sickly yellow, and thousands of children have developed respiratory diseases.

Even the less contaminated East German industrial cities like Chemnitz and Magdeburg still have a bleak, postwar feeling about them, with their oppressive smell of brown coal, the dispiriting presence of modern “socialist” public buildings in the town centers, and, beyond them, the grim world of crumbling apartment blocks, decaying factories, and dimly lit streets. The Kohl government is about to undertake the huge task of cleaning up East Germany’s industrial communities; but in Dohnanyi’s view it will be at least a decade before they can reach the standards of even the less prosperous West German cities.⁸

Dohnanyi touches on another obstacle to West German investment in the East, which has grown in importance since he finished his book: the rising uncertainty about the ownership of land and property. West German businesses wanting to buy land or buildings from the state often cannot be sure that these assets won’t eventually be claimed by their former owners. German officials have disclosed that just under half the land and property in East Germany has been claimed by former owners, with a total of more than a million claims. In November, the Financial Times reported that East German municipal governments alone had filed 14,500 claims involving an astonishing 750,000 items of property and land. Two hundred fifty thousand claims have been made by citizens in the land of Thuringia, 150,000 by citizens in Berlin.⁹ The unification treaty between the two German states signed last October was supposed to resolve this problem of disputed property, at least in cases where land and buildings were needed for industrial development. In such cases former owners were to receive financial compensation, but not the return of the property itself. However this clause of the treaty is now being challenged as unconstitutional, and a ruling from the German Supreme Court is not expected until the middle of 1991.¹⁰

The loss of East German production, the failure of foreign investment to replace it, and the rapid rise in unemployment—these three troubling developments are linked to a fourth: the migration (Ubersiedlerstrom) of East German labor, and particularly skilled labor, to West Germany. Of all the market forces unleashed by German economic union, those that lure East German workers westward toward more plentiful jobs at higher wages are among the most powerful. In 1990, for example, the West German economy grew by 4.5 percent and created 800,000 new jobs, while the East German economy contracted by 33 percent, with a loss of 1.1 million jobs.¹¹ This migration is damaging to both economies. In West Germany it overburdens health and social welfare services, adds to the housing shortage, and, by slowing the growth of wages, creates tensions between established and newly arriving workers. For the East German economy emigration is much more damaging. It deprives the region of its skilled labor, leaving the East with an aging and unproductive population. It also undermines its ability to attract new investment, so intensifying the economic inequalities between the two parts of Germany.

The exodus of East Germans through Hungary and Czechoslovakia in the late summer and autumn of 1989 contributed to Honecker’s fall and led directly to the opening of the Wall by his successor, Egon Krenz. Krenz hoped that the opening of the GDR’s borders would reduce the Ubersiedlerstrom, and for a few weeks in November and December 1989 this indeed happened. But in January and February 1990 emigration rose to two thousand a day, forcing Kohl to accelerate the pace of economic and political union. As Kohl said, “We had to move fast or the people in the GDR would have fled.”¹² But despite the establishment of East Germany’s first democratically elected government in March, despite economic union in July, and political union in October, emigration has remained heavy during 1990. Between the beginning of March and the end of September East Germans migrated westward at a rate of just under a thousand a day. At the end of November the Labor Ministry in North Rhine Westphalia estimated that each month between 15,000 and 20,000 East Germans were settling in that one Land. Helmut Kohl’s council of economic advisers estimates that about a thousand people a day will continue to emigrate in 1991.¹³ If East Germans keep moving at this rate eastern Germany will lose between 4 and 5 percent of its work force each year.

Many of the East Germans who left the GDR in the summer and fall of 1989 were still fleeing the oppression of Honecker and the Stasi. By the fall of 1990, with Honecker long out of power, and with unification in prospect, those who are leaving have to be classified as economic migrants looking for a better life. As long as Eastern Germany’s economic decline continues, the Ubersiedlerstrom is likely to continue with it. In a recent Der Spiegel poll 12 percent of those responding said that they definitely or probably were going to emigrate.¹⁴ Among an East German work force of 9.3 million, 12 percent would represent a potential Ubersiedlerstrom of just over a million. After visiting the industrial Länder of Saxony and Sachsen-Anhalt in October I suspect that the potential emigration is even higher, particularly among young skilled workers.

My visit coincided with the Länder elections in eastern Germany, and I was able to talk to several dozen young workers attending campaign rallies for CDU and SPD candidates. Most of the forty-odd workers I interviewed had worked for years in engineering plants turning out machinery for the Soviet market, and their lives had been affected by the East German economic depression. Seven of them had lost their jobs, a dozen were classified as working “short time,” and most of their wages were paid for by the government. The rest still had regular jobs but most said that their companies had fewer orders now because their mainly Soviet customers would soon have to start paying for their machinery in deutsche marks.

Most of the workers I talked to seemed very well informed about conditions in West Germany and the prospects that would be open to them there. The West German TV programs they see every day work against the interests of the Kohl government just as they worked against Honecker’s. The Communist regime’s efforts to create a separate “GDR consciousness” were constantly frustrated by the images of West German prosperity carried into East German living rooms by West German TV. Now the same images lure East German workers westward. Particularly telling are the frequent stories carried by TV and newspapers about young East Germans who left the GDR in the first wave of Ubersiedler last fall and are already enjoying West German comforts; a job paying 2,500 or 3,000 DM a month (two and a half and three times the East German industrial wage) with a good chance for promotion; an apartment in a solid neighborhood of Dortmund or Hanover, with a new VW parked outside; even vacations in France and Spain.

Still, the proportion of young workers who told me they would emigrate was no greater than the 12 percent who gave the same answer in the Der Spiegel poll, although about half of them said they would consider leaving unless their salaries and working conditions improved in eighteen months to two years. Some of the workers in Saxony told me that their wives and families had lived near Dresden and Leipzig for hundreds of years and that they would much prefer to stay there if only they could count on reasonable wages and better prospects. And who or what, I asked, might bring such improvements about? Most of the young men, it turned out, put their hopes in Helmut Kohl, and were ready to vote for him now as they had in the past. In industrial Saxony, the CDU won over 50 percent of the blue-collar vote both in the Länder elections in October and in the Bundestag elections in December.¹⁵

The readiness of blue-collar voters to support a conservative party does not, in my view, represent an endorsement of the free-market principles of the CDU against the more interventionist tradition of the SDP; it reflects instead a conviction that Helmut Kohl will use his power to improve life for East Germans. A young machinist in Leipzig said, “Kohl has told us that he’ll help us, and we believe him. We never trusted Oskar Lafontaine.” Down-to-earth and bürgerlich, with the easy optimism of a salesman, Kohl has managed to convince the East Germans that he can be trusted to make life better. After fifty years of dictatorship, belief in the Führerprinzip is not yet dead in East Germany.

But can Helmut Kohl now fulfill the expectations he has aroused? With East German unemployment climbing toward 25 percent, the rate at which workers are being laid off from collapsing industries far exceeds the capacity of new industries to absorb them. If Klaus von Dohnanyi’s analysis is correct, and the evidence so far supports it, high unemployment may continue for years. To relieve it the German government will have to rely on the kind of public works programs to create jobs that were put into effect during the New Deal in the US. A DM 10 billion ($6.6 billion) program for renovating housing has already been announced, and other labor-intensive programs for improving the environment will follow, for example building new houses, and repairing the road and rail network. David C. Roche of Morgan Stanley International estimates that during the 1990s the German government may spend between DM 130 and DM 160 billion a year (between $87 and $107 billion) to improve roads, rail transport, telecommunications, and other parts of the infrastructure.¹⁶

However the capacity of such expenditures to create new employment in eastern Germany may be quite limited. In April the leading private institute specializing in the East German economy, the Deutsche Institut für Wirtschaftsforschung (DIW), estimated that public and private expenditure could in the short term boost employment in the East German construction industry by 100,000 (in April the DIW was also estimating a loss of one million jobs in industry and mining). ¹⁷ However, economists at the DIW now believe that this estimate was over-optimistic. Investment in housing has declined by 40 percent during 1990 and employment in the construction industry therefore also has fallen. It seems inevitable that eastern Germany will have high levels of unemployment during the early 1990s and that the gap in living standards between the two German economies will not be closed within the five-year period envisaged by Helmut Kohl or, earlier, by Alfred Herrhausen, the president of the Deutsche Bank who was assassinated in November 1989.¹⁸

The Kohl government will not find it easy to head off the Ubersiedlerstrom during these years of continuing economic inequality between the two parts of Germany. The collapse of East German industry will force large numbers of workers to move to public works projects during the early 1990s. Some of these workers may return to industrial employment in the later 1990s, as the damaged infrastructure is renovated and new industrial investment flows in. But many workers may prefer to cut short this public works phase of employment and seek better paying, skilled jobs in western Germany. Working on the railroad or on a polluted site in Halle or Leipzig may have less appeal to young workers today than did comparable jobs in the 1930s. If such disaffection happens on a large enough scale the drastic decline of industry in East Germany would become more and more difficult to reverse. Western industrialists would be encouraged to follow the Ubersiedlerstrom westward, avoiding eastern Germany as a region increasingly barren of population and skills. Despite Kohl’s success and his promise of a bright future for the former GDR, eastern Germany could remain a stagnant and damaged region for years to come.