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Last Updated: Friday, 9 September 2005, 07:17 GMT 08:17 UK
Waiting for the East to flourish
By Tim Weber
Business editor, BBC News website, reporting from Jena

It's been 15 years since Germany's reunification, and the once communist east of the country is still in the economic doldrums. But it could be here that the next general election - just a week away - could be decided.

The statistics are bleak.

Germany's 'Aufbau Ost' - the rebuilding of Eastern Germany - has cost an estimated 1.25 trillion euro (843bn, $1,550bn) so far.

Despite the capital injection, the East's unemployment rate is still 18.6% - in many regions it tops 25%. The economy grows by about 5.5% a year, but from a very low base - and that is not enough to create many new jobs.

Population 1989: 16.7m
Population 2004: 15.3m
Unemployment: 18.6%
Germany's new 'Laender'

As a result the East is emptying. Since unification some 1.4 million people have moved to the West, most of them young and well-educated.

Take Halle in Saxony-Anhalt. Once a town of more than 315,000 people and dominated by its chemical industry, it has lost nearly a fifth of its citizens.

It is a far cry from what the "chancellor of unity", Helmut Kohl, promised in July 1990: "In a joint effort we will soon turn [the East German regions] Mecklenburg-Vorpommern and Saxony-Anhalt, Brandenburg, Saxony and Thuringia into flourishing landscapes."

Kohl failed, as did his 1998 replacement, Gerhard Schroeder.

Soon the job might fall to an East German, Angela Merkel, Kohl's successor as party leader of the right-wing CDU and tipped to win the elections on 18 September.

The new East Germany

Of course not all is bad.

Jena street scene
Jena's students and economic success have made it a modern city

These days it is difficult to spot where the West ends and the East begins.

The acrid smell of the East's polluting chemical industry is gone; its industrial ruins have disappeared.

Autobahns are not potholed any more. Grand bourgeois houses, many riddled with World War II bullet holes until 1989, have been restored to their old glory.

Generous subsidies have attracted nearly 2,000 foreign investors including BMW, Volkswagen, General Motors, AMD and Motorola.

But there have also been plenty of spectacular failures, especially in the Brandenburg region around the capital Berlin.

The result is a patchwork economy, where vibrant cities like Jena are neighbours to dreary and shrinking towns like Gera, which could easily double up as background for a movie set in communist East Germany, circa 1984.

"In towns like Gera and [nearby] Altenburg nearly every family has been touched by unemployment," reports Dr Stefan Russwurm, who runs bio technology start-up Sirs-Lab down the road in Jena.

Marx reloaded

These economically depressed areas are turning into breeding grounds for political disaffection, where voters drift towards far-left and far-right parties.

PDS election campaign poster
East Germany's former communists are riding high in the polls

Hans-Juergen Schneider, a 49-year-old trained engineer has been unemployed since January 2004. He has sent out 286 job applications since then, without success.

"The market economy can't solve our problems," he says, "big business is just grabbing the profits without accepting any responsibility."

He is not alone; 73% of East Germans believe that Karl Marx's critique of capitalism is still valid, according to a recent poll by news magazine Der Spiegel.

The PDS, successor to the East German communists and now campaigning as "The Left Party", is expected to get more than 30% of the vote here.

Society of envy

"The people don't see a future, the country's mood is gloomy," warns Gerhard Schade, boss of Jena-based ASI.

Dr Ute Bergner, Vacom founder
Dr Ute Bergner: 'We've turned into a society of envy'

During the past 10 years he has grown his company from a couple of people to 206 employees installing and maintaining heating and air-conditioning systems, fitting kitchens and bathrooms, and more.

However most people in the East are afraid of taking risks, Mr Schade says.

"Entrepreneurs are maligned as nasty exploiters, especially here in Eastern Germany," says Dr Ute Bergner, founder of Vacom, a firm specialising in vacuum technologies.

"We have turned into a society of envy," she says.

The collapse

This is the fallout from the collapse of communism, reverberating around the country 15 years on.

Before the Berlin Wall came down in 1989, the "chemical triangle" Leuna-Halle-Bitterfeld gave employment to 100,000 people - now 10,000 jobs remain.

Seven case studies that show how German companies are beating the slump

Gera once had large textiles and defence industries, and some uranium mining. They have gone, and much the same happened in most other state-owned industries since 1989.

East Germany's industries turned out to be much less competitive and productive than most had assumed.

And East Germans were allowed to swap their currency one-for-one with West German Deutschmarks.

This combined to make most state-owned industries unviable.

Another mistake was the decision to transplant the West's cumbersome bureaucracy.

The biggest mistake was to spread the investments [in East Germany] across the region
Alexander von Witzleben, Jenoptik

"When an investor from abroad comes to Germany, he'll shake his head when he sees all that red tape," says Dr Bergner.

Subsidies are another problem. The region is rife with stories of firms that invested in the East only to pull out as soon as the subsidies stopped flowing.

Some companies were able to compete only on the strength of their subsidies, says ASI's Mr Schade, but quickly went bust once this money was used up.

No focus

But East Germany's biggest problem was a lack of focus.

"The biggest mistake was to spread the investments [in East Germany] across the region. The government made infrastructure investments where they were not needed," says Alexander von Witzleben, boss of Thuringian high-tech company Jenoptik.

ruined house and bus shelter in Gera
Bereft of industry, Gera has failed to develop

It triggered a boom-and-bust in East Germany's construction industry, and wasted money because the investments failed to create self-sustaining industries.

Just look at the number of jobless, says Dr Russwurm of Sirs-Lab.

"Saxony and Thuringia focused their investments on a few industry clusters and small and medium-sized companies. Today they have the lowest rates of unemployment in the East," he says.

His words are echoed by Mr von Witzleben: "Governments should have... waited for the spill-over effects from these areas."

The rebuilding

In West Germany the average working hour costs 28.14 euro; East German companies have to spend a third less, just 17.15 euro, according to Cologne's Institute of German Industry.

Combined with cheaper living costs and a brand-new infrastructure, the East is getting attractive for some investors.

Already a new chemical industry is emerging around Leuna, an automotive industry is re-energising Dresden and Eisenach, while Jena attracts a cluster of firms and know-how in precision engineering, opto-electronics and biotechnology.

Klaus Ullrich of BioCentiv science park
Industry clusters lift a whole region, says BioCentiv's Klaus Ullrich

But it won't happen fast.

High-tech firms are not very staff intensive, but towns like Jena "live from their presence and the local buying power they bring," says Dr Klaus Ullrich of BioCentiv, a science park designed to attract biotech firms to the city.

It will take "a generation to replace the collapsed industries [of Eastern Germany]," says Mr von Witzleben, and "there are regions that haven't made the necessary structural changes yet".

But it may require more than a better industrial policy - people's attitude's also need to change.

Thirteen years ago Vacom's Ute Bergner decided to set up her own company in Jena after working for a Swiss firm for a year.

"I manufacture in Germany because I was born here and I believe in the future of my homeland... our children and grand children want to be able to earn a living too," she says.

Eastern Germany needs many Ute Bergners.

This is the third in a series of reports from Germany; in the run-up to the election we are also looking at the country's economy, its unemployed, and how its companies are trying to beat the slump.

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