Sunday, Jul. 18, 2004

A Brand New Start?

By CHARLES P. WALLACE

Two more decrepit buildings came down last month 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 reunification with West Germany, its 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 around 20%, twice the national rate, and the average income is just €21,600, Germany's lowest. When the Institute of the German Economy in Cologne surveyed the country in April, Halle finished last on a list of 50 cities on the basis of wealth. "It's clear we will never return to the industrial city of the past," says Halle mayor Ingrid Häussler. "We have to find a completely different orientation."

But the two buildings demolished last month 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 €300 million science and technology park 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 so far settled there, 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-pharma 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 workforce 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 reunification, Germany has spent a staggering €1.2 trillion on the east, 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 stagnation and lethargy and begin a comeback. If Halle can do it, can the rest of Germany be far behind?

The first signs of a national turnaround are starting to show. The German Institute for Economic Research (D.I.W.) in Berlin this month revised its GDP growth estimate from 1.4% to 1.8% for this year and 2.1% for next year. "The turnaround started in the first quarter of this year," says Gustav A. Horn, a D.I.W. economist. "Exports are running very high — it's an export-driven recovery." The Germans got a boost as economies in the U.S. and Asia began to grow again, and 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 consultants 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 Daimler-Chrysler is threatening to eliminate 6,000 Mercedes Benz factory jobs from a Stuttgart suburb and move production to northern Germany and South Africa if unions don't agree to €500 million in labor savings. At least 25,000 Mercedes workers walked off the job around Germany last week to protest the proposals. 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, while 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 but still stood at 10.5%, has people too spooked to spend.

Germany's biggest problem is Zukunftsangst (fear of the future). Zukunftsangst has led to declining membership of 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 it's a drag on the economy. How can Germany break out of its Zukunftsangst? Maybe it needs an F.D.R. — a leader who can persuade people that the only thing they have to fear is fear itself. But it will take more than inspiring rhetoric to make it happen. German industry is gradually being hollowed out by companies moving production further east, to the new E.U. member states and Asia, to avoid strict employment laws and high labor costs. In 1993, for example, Siemens employed 238,000 people in Germany and 153,000 overseas; 10 years later, this was reversed to 167,000 in Germany and 247,000 elsewhere. Some of Chancellor Gerhard Schröder's economic reforms are kicking in — an astounding 6.3 million people (in a population of 83 million) have signed up to work part-time in "mini-jobs" earning up to €400 a month tax-free — but he hasn't solved the big problems. And his reforms haven't helped his party's popularity; the Social Democrats have the lowest support since World War II. Renegade Social Democrats are so angry at Schröder's reforms that on July 4 they laid the cornerstone for a rival leftist party.

If Schröder can't inspire his people, the German media aren't helping either. Germany's deep funk is being analyzed and exacerbated by a rash of magazine covers with headlines like jobs goodbye and the big pension theft; ubiquitous jokes roast the country's leaders and prospects — How do you make a small fortune under Schröder? Start with a big fortune. The best-seller list is filled with gloomy tomes like Germany: Decline of a Superstar.

Before he left office last month, President Johannes Rau lashed out at this culture of complaint. "I don't know of a country where so many people in positions of responsibility take such pleasure in speaking so negatively about their own country," Rau said. "Have we put ourselves down so much that we don't believe in ourselves anymore?" Matthias Horx, director of the Future Institute in Frankfurt, a private think tank, sees a "doomsday" attitude infecting the media. "A blend of hysteria, pessimism, crisis demagogy and catastrophism is overwhelming us," he says. That sort of dire prophecy can be self-fulfilling. But so can optimism.

Since reunification in 1990, the people of the former East Germany have certainly had their confidence tested. The German government gave them €1.2 trillion to build railways, highways, schools and communications networks. But the money did relatively little to create permanent jobs — unemployment is over 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 western Germany's level.

Klaus von Dohnanyi, a former mayor of Hamburg who headed a commission looking at the future of the east, maintains that current assistance — j90 billion a year — has damaged the west, too. "Ninety billion euros is 4% of GNP," Dohnanyi says. "It's money not being spent on west German universities, not being spent on west German streets, not being spent on west German investment in research." Dohnanyi's commission recommended that the government switch to spending on "economic clusters" of expertise to help create jobs. That idea has already 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 to reduce Dresden's unemployment rate to 13.5%. U.S. chipmaker Advanced Micro Devices (AMD) built one factory in Dresden in 1999 and completed another last month. The key was €545 million of federal and state assistance toward the €2 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, just after reunification, there were 4,000 private enterprises in Dresden; now there are 240,000 — 40,000 launched in the last year alone. "We succeeded by building some economic lighthouses," says Mayor Ingolf Rossberg. Dresden is the scene of another dramatic rebirth: the reconstruction of the glorious 18th century Frauenkirche, destroyed by Allied bombers in February 1945. The rebuilding has taken 10 years so far, at a cost of almost €130 million, most of it from 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 Güttler, a classical 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. While 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 workforce 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 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. Over the past 30 years, the birth rate has declined from 2.1 to 1.4 children per woman, while the average life expectancy has grown from 72 to 82 for women and from 66 to 76 for men. "Fewer young people and more old people means 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. That sets up a battle between the generations for control of the nation's purse strings. Klingholz says the only way to solve it is to increase immigration. The government and opposition took a step in that direction with a new immigration law that will allow some 200,000 immigrants — both highly skilled economic migrants and asylum seekers — into the country each year, starting in 2005.

But Germany's greatest challenge will remain what Horst Köhler, the new President, describes as "the uncertainty" felt throughout society. "We need a new spirit of initiative ... to face the major changes sweeping through the world," Köhler said. That spirit of initiative 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 €36 billion a year on DIY 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 €6.3 billion worth of tools, wood and home decorations across Europe 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.

With reporting by Regine Wosnitza/Berlin