Quotes of the Day
Two more decrepit buildings came down in June in Weinbergweg, a leafy suburb of the dismal industrial city of Halle in the former East Germany. In the 1970s, Halle was the G.D.R.'s center for chemical production and one of its most heavily industrialized cities. But 14 years after East Germany's unification with West Germany, the city's chemical factories are closed, and some 75,000 residents — a quarter of the total — have moved away in search of jobs. So many people have left Halle, in fact, that the city is demolishing scores of vacant apartment blocks.
By almost any measure, Halle is the worst place in Germany, a symbol of what's wrong with the nation. Unemployment is about 20%, twice the national rate, and the average income is just $26,300, Germany's lowest. "It's clear we will never return to the industrial city of the past," says Halle mayor Ingrid Haussler. But the two buildings demolished are actually signs of hope — and of what's starting to go right for Halle and Germany. Once used as Soviet barracks, they were knocked down to make room for a sprawling $365 million science-and-technology center taking shape on the city's western edge. Sixty companies and 19 educational institutions — active in such fields as biotech, nanotech and environmental science — have settled there so far, and 2,500 new jobs have been created. Probiodrug, a biotech start-up that has won acclaim for its research on diabetes and acquired a clutch of lucrative licensing agreements with big pharmaceutical firms, is one of the early tenants. "Halle has a unique situation," says Probiodrug CEO Hans-Ulrich Demuth. "There's a strong university in the field of biosciences and a highly educated and motivated work force here."
Halle has a long way to go before it lifts itself off the bottom of Germany's prosperity list, and one science park does not amount to a new Industrial Revolution. Since unification, Germany has spent on the former East a staggering $1.46 trillion, much of it squandered, but Halle's high-tech development shows that not all of it was wasted. The presence of world-class companies like Probiodrug proves that even the most downtrodden town can shake off years of lethargy and begin a comeback. If Halle can do it, can the rest of Germany be far behind?
As the economy begins to stir from a decade of stagnation that has rattled the nation's self-confidence, Germans are again making ambitious plans for the future. Nobody is predicting a boom, but there are signs that Germany is ready to reassert itself as the economic engine of Europe. The economy is growing again, albeit slowly. The heart of Berlin, cut in two for 28 years by the infamous Wall, is now a showplace. The DZ Bank with its magnificent vaulted roof, the Jewish Museum with its lightning-bolt shape and the Sony Center in Potsdamer Platz with its circus-tent glass roof are all signs of a country bouncing back.
The first indications of a national turnaround are starting to show up in the numbers. The German Institute for Economic Research in Berlin in July revised its GDP growth estimate from 1.4% to 1.8% for this year and from 1.8% to 2.1% for next year. The Germans got a boost as economies in the U.S. and Asia began to grow again, and also from the run-up to E.U. enlargement, as exports to new members in Eastern Europe surged. "Germany remains an export machine that keeps running and running," says Holger Schmieding, an economist at Bank of America. "Despite the strong euro, even Germany is having a modest upswing."
And so the corporate outlook is beginning to brighten. A worldwide survey of 513 business executives by consultant Ernst & Young recently ranked Germany the third most attractive country in which to invest, behind China and the U.S. Deutsche Bank and Dresdner Bank reported healthy profits in the first three months of 2004, after heavy losses for the same period last year, a sign that German banks can succeed by cutting excess retail staff and pruning bad debt. Media companies like Axel Springer, publisher of Bild and Die Welt, are bouncing back from a crippling advertising drought. Companies are winning important labor concessions. Siemens just sealed deals with workers in two of its mobile-phone factories to increase the workweek from 35 to 40 hours — with no increase in pay. And DaimlerChrysler won $600 million in wage concessions from its workers after threatening to move 6,000 Mercedes-Benz factory jobs from a Stuttgart suburb to lower-cost factories in northern Germany and South Africa. Such battles are bitterly divisive, but they may be necessary if Germany is to become competitive again. Longer hours without more pay would boost growth. Yet longer hours with more pay, as some unions will require, would encourage spending, which Germany desperately needs. The recovery can't really blossom until robust exports are matched by a boost in domestic consumption — but Germany's jobless rate, which dropped fractionally in June to 10.5%, has people too spooked to spend.
Germany's biggest problem is Zukunftsangst (fear of the future). Uncertainty has led to declining membership in political parties, an increase in stress-related illness and consumers who cocoon at home rather than go out for a little retail therapy. It has more and more people "going to Balconia"--passing up a traditional holiday for staying home to water the geraniums. And as companies move production farther east, to the new E.U. member states and Asia, to avoid strict employment laws and high labor costs, German industry is gradually being hollowed out. In 1993, for example, Siemens employed 238,000 people in Germany and 153,000 in other countries; 10 years later, these figures were reversed, to 167,000 in Germany and 247,000 elsewhere. Some of Chancellor Gerhard Schroder's economic reforms are kicking in — an astounding 6.3 million people (out of a population of 83 million) have signed up to work part time in "mini-jobs," earning up to $486 a month tax free — but he hasn't solved the big problems.
Eastern Germany continues to be one of them. Since unification in 1990, the people of the former East Germany have certainly had their confidence tested. The German government's $1.46 trillion helped build railways, highways, schools and communications networks. But the money did relatively little to create permanent jobs; unemployment is above 18%, more than double the jobless rate in western Germany. Two-thirds of the funds are used to pay unemployment and retirement benefits to people who never contributed to the system. "Everything was concentrated on social policy," says Joachim Ragnitz, an economist with the Institute for Economic Research in Halle. "There was not a policy to attract foreign investors." Ragnitz warns it could take 20 to 30 years for living standards in eastern Germany to reach the level of those in western Germany.
Klaus von Dohnanyi, a former mayor of Hamburg, headed a commission looking at the future of the former East that recommended the government switch to spending on "economic clusters" of local educational skills to help create jobs. That idea has proved a success in Dresden, where the state government has created a cluster devoted to computer chips. More than 20,000 people now work in the chip sector, helping reduce Dresden's unemployment rate to 13.5%. U.S. chipmaker Advanced Micro Devices (AMD) built a factory there in 1999 and completed another in June. The key was $663 million of federal and state assistance toward the $2.4 billion cost of the facility. But AMD says it wasn't only about money. "The people here are highly motivated, and some have experience of microelectronics from the former East German times," says Hans Deppe, general manager of AMD's Dresden operations. "The Dresden [factory] has proved itself very successful."
In 1991, after unification, there were 4,000 private enterprises in Dresden; now there are 240,000, of which 40,000 were launched in the past year. "We succeeded by building some economic lighthouses," says Mayor Ingolf Rossberg. Dresden is the scene of another dramatic rebirth: the reconstruction of the 18th century Frauenkirche, destroyed by Allied bombers in February 1945. The rebuilding has taken 10 years and $158 million so far, most of it private donations. "There is a feeling — not pride, not entirely joy — but a deep satisfaction linked to the knowledge that all of us have created something lasting," says Ludwig Guttler, a trumpeter who is leading the effort.
Another upbeat promoter of Germany is Wolfgang Grupp, CEO of leisure-clothing company Trigema, Germany's largest T-shirt manufacturer. Although many clothing firms have moved production to cheaper Asian factories, Grupp keeps all 1,200 of his employees in Germany, in the western town of Burladingen. "There is no reason to go abroad," Grupp maintains, saying his German work force allows him to produce orders within 48 hours of receiving them. It's an example of how Germany's high productivity can compete against lower wages abroad. "I need employees who are flexible, well trained and who think while they are working," Grupp says. "I can't get that if I produce in a country thousands of miles away."
At home, one of Germany's biggest dilemmas is how to cope with the economic consequences of an aging population. "You're going to face a problem in the social-security system, because you have fewer people paying in and more people taking money out," says Reiner Klingholz, director of the Berlin Institute for World Population and Global Development. Klingholz says the solution is to increase immigration. A new immigration law will allow some 200,000 immigrants — highly skilled economic migrants and asylum seekers — into the country each year.
But Germany's greatest challenge remains what Horst Kohler, the new President, describes as "the uncertainty" felt throughout society. "We need a new spirit of initiative," Kohler said in May. That spirit may be taking hold. One indication is all the do-it-yourself stores and how-to classes springing up across the country as people adapt to hard times. According to marketing company SevenOne Media, Germans spend $43.7 billion a year on home improvements, double the amount spent in Britain and France. The biggest beneficiary of this trend is OBI, the Home Depot of Europe, whose CEO, Sergio Giroldi, says the company sold $7.6 billion worth of tools, wood and home decorations last year. He expects 10% growth this year. That's a good sign, since Germans still have a lot of work to do if they want to turn their country around.
- Charles P. Wallace