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. Last Updated: 07/27/2016

East Germany Struggles to Catch Up

BONN -- Eastern Germany's soaring economic growth rates of recent years are tumbling, raising concern that the region could have to wait another generation or longer to catch up with the prosperous western part of the country.

Bonn's official forecasts for eastern German growth this year were scaled down this week, to a range of 4 percent to 6 percent, from 6.4 percent. Just last year, economists expected average growth of 8 percent during the next few years.

Western German growth forecasts were revised downward to 1 percent from 1.5 percent. Even so, taxpayers in western Germany will still have to subsidize eastern Germany with transfers approaching 160 billion Deutsche marks ($108 billion) this year, economists said.

"The danger is very real that eastern Germany will turn into a Mezzogiorno, into a region permanently blighted by high unemployment and poverty," said analyst Heiner Flassbeck, referring to Italy's economically depressed south.

"It would mean that eastern Germany would permanently depend on subsidies from the west," added Flassbeck, the chief economist at Berlin's German Institute for Economic Research.

After German unification in 1990, the state-run economy of the formerly communist east collapsed, leaving up to a third of the work force unemployed, in retraining or in early retirement.

Many have found new jobs in privatized industry or in the thousands of small companies founded in the past few years. High growth rates -- in 1994 the eastern economy grew by 8.5 percent -- have helped transform the region.

Looking at new buildings shooting up in the cities, Germans in the east could believe Chancellor Helmut Kohl's 1990 campaign promise of "blossoming landscapes."

But now east German unemployment is growing again. At an official rate of 15.9 percent at the end of 1995, it is considerably higher than the west's 8.7 percent.

"Eastern Germany could easily become a part of Germany that would permanently lag behind and permanently cost a lot of money," said Rainer Veit, head of the Germany division of Deutsche Bank Research in Frankfurt.

"The differences in production rates per capita will remain a very long time. It will take until the year 2020 or 2030 for east German production to reach three-quarters of the west German rate," he said.

Only higher transfers of funds from the west could speed up the process but these are out of the question if Bonn wants to meet the budget deficit criteria for European monetary union.

Part of the east's problem is that it has grown much closer to the west and growth rates are linked, said Udo Ludwig, chief economist of the Institute for Economic Research in the eastern city of Halle. Also, the construction boom that buoyed the entire economy is ending.

But the more fundamental problem is that six years after the Berlin Wall came down, companies are not making a profit.

Since 1990, wages have shot up to 73 percent of the west German level, the government report said. But productivity lagged behind at only 54 percent of the western rate last year.

The percentage of loss-making companies has increased in 1995.

Apart from supporting the construction boom, transfers from western Germany paid for social security payments that boosted purchasing power. Only two-thirds of eastern demand was covered by local output, with the rest paid for by transfers from Bonn.

?A Berlin court Wednesday convicted Alexander Schalck-Golodkowski, whose shady hard currency deals kept communist East Germany afloat, for Cold War arms smuggling offenses.

The court gave Schalck, 63, a one-year suspended sentence for arranging the import of 169 guns and 200 night-vision devices worth several million dollars from former West Germany to East Germany in violation of a ban on trade in sensitive materials.

The court found him guilty of contravening Military Government Law No. 53, promulgated by the World War II victors Britain, France and the United States, which governed inter-German trade until unification in 1990.

Schalck headed a secret web of Western firms and contacts as head of East Berlin's shadowy Commercial Coordination Department, raking in billions of Deutsche marks that kept the ailing regime afloat for years.

Schalck, who was colonel in the Stasi secret police, has said the trial amounted to an absurd wish by Cold War victors to punish East German officials for failing to maintain an arms embargo against their own country.