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Last Updated: Monday, 20 September, 2004, 15:09 GMT 16:09 UK
German unification poses problems
Ben Richardson
BBC News Online business reporter

DaimlerChrysler worker
Europe's one time economic powerhouse has been ailing

The unification of Germany was as bold as it was risky.

After the collapse of the Berlin Wall, political heavyweights including former Chancellor Helmut Kohl pushed hard to merge two very different societies.

In the west, a European powerhouse that had led the region's industrial recovery; in the east, a bloated, state-planned economy that was as wasteful as it was forgiving of inefficiency.

The argument that togetherness would ensure prosperity all but drowned out the doubters who questioned whether the task might prove too difficult and too expensive.

More than a decade later, the merging of the two Germanys into a single economy has proved anything but seamless.

Voting shock

Germany's economy is creaking and regional elections over the weekend have highlighted a growing dissatisfaction among voters.

Unification hasn't been handled very well in terms of the economy
Elga Bartsch, Morgan Stanley

Far-right parties have made gains in once-communist East Germany, underlining the political truth that a grand vision counts for little if the population feel their lives are not getting any better.

"It's a tremendous change and unification hasn't been handled very well in terms of the economy," said Elga Bartsch, an analyst at Morgan Stanley in London.

One key step was the fixing of an exchange rate that swapped one West German Deutsche mark for one East German Ostmark.

Politically it may have been the right thing to do, a noble gesture of partnership, but it created problems that have hampered and hobbled German growth ever since.

Cost base

Almost overnight, workers in east Germany's wheezing factories became too expensive to employ.

Their productivity lagged western peers, and plants lost contracts and were closed.

Anti-Nazi protestor in Germany
Economic inequalities are fuelling a political divide

"It is one of the issues that is at the heart of Germany's economic malaise," said Morgan Stanley's Ms Bartsch. "The problems are still felt to this day."

Eastern Germany's unemployment rate has surged and is now at 18.5%, according to the latest official statistics. In the west, it stands at 8.6%.

The migration of labour that the exchange rate was supposed to eliminate is taking place with many workers heading west in search of jobs.

Others are dependent on state handouts, and are becoming increasingly pessimistic about their prospects.

Cash softener

The German state, meanwhile, has done much - some say too much - to help the east and avoid reneging on its promise to create a more prosperous, united Germany.

Currently about 4% of western Germany's total annual gross domestic product is spent on the former Communist east of the country.

The money goes to fund welfare and pension payments, as well as reconstruction projects. Almost a third of all money spent every year in the east comes from western coffers.

Germany's budget is running a deficit that has bust through European Union limits, drawing censure from Brussels.

The problem facing Chancellor Gerhard Schroeder, analysts say, is how to push through much needed welfare and labour reforms without alienating many people who already feel that their lot is hard enough.

At the same time, he needs to appease those west Germans who want their tax money spent on the regions they live in and see the east as nothing more than an endless drain on limited resources.

Balancing act

This would be tricky enough in times of economic boom. But Germany is only slowly starting to shake off its image as the sick man of Europe.

A report last month showed that German economic growth picked up to 0.5% in the three months to 30 June from the previous quarter. It rose 2% from the same period a year earlier.

At the same time, the cost of labour is dropping. Some of the country's biggest companies, including DaimlerChrysler and Siemens have managed to reach agreement with trade unions over job cuts and changes to working practice.

Small, but important steps, analysts said.

German President Horst Koehler seemed to hint last week that east Germans will just have to get used to lagging their western neighbours.

If the weekend's regional poll results are anything to go by, many of them may be running out of patience.

Far right fuels German angst
20 Sep 04  |  Europe
Germans protest at reform plans
30 Aug 04  |  Business
Schroeder suffers election rout
14 Jun 04  |  Europe

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