Germany's unification is a tale of two countries--one that has and one that has not

By JORDAN BONFANTE /MAGDEBURG

he picturesque little city of Zeitz at the edge of the Thuringen Forest in eastern Germany does its best to present a respectable facade to the world, like a homeless person shaving in a railway station washroom. In the evening the spotlights play gracefully on the medieval stone tower of the city hall. And new cream-colored cobblestones have been laid around the 1,000-year-old Romanesque Church of St. Michael, where in 1976 a priest immolated himself to protest against the repressive East German regime. But along Wenden Strasse, the refurbished shopping street, vacant storefronts stand out like missing teeth in an otherwise gleaming smile. Just outside the city center, block after block of "see-through" apartment buildings sit vacant. And a billboard directory of an industrial zone across the Elster River lists no companies; all the spaces are blank.

Zeitz has the dubious distinction of being a "capital" of eastern Germany's unemployment, with the highest rate of joblessness in the country--fully 30%. It has lost 6,000 of its pre-unification population of 40,000, mostly young people gone--with their vitality--to the west. Once home to 22 industrial plants, it now has just 13, employing scarcely a fraction of its old workforce of 21,000. Its fortunes have sunk so low that the city has qualified for a special union-management "Zeitz Jobs Pact" underwritten by the European Union.

"After the age of 45 it's hard to help people here because some big companies don't hire at all over 50," says Zeitz's scrappy mayor, Dieter Kmietczyk, 48, a bearded one-time sugar-beet refinery worker. "We hope to start keeping the young people and maybe get some to come back. But...it's going to take 10 years to bring the city back to life."

That will be in 2008, 18 years after the communist German Democratic Republic's 17 million people reunified with the Federal Republic's 64 million, and a full generation after a new, free and prosperous eastern Germany was supposed to rise from the green valleys and forests east of the Elbe--what Chancellor Helmut Kohl infamously called in 1990 "A flowering landscape."

Zeitz is a sorrowful case study of how wrong Kohl was. Consider any of the major problems besetting Germany today and in every case the east is where the problems either originate, or where they are the most pronounced.

Record high unemployment? It has steadied at 10% in western Germany, but is still rising at more than 20% in the east. The national treasury strapped for cash? That's because $85 billion annually is poured into the east to finance reconstruction and investment. Right-wing extremism on the rise? It's happening mostly in the east--in Potsdam, in Oranienburg, and most of all, perhaps, in Magdeburg.

"Germany is still very much a divided country, and getting more so in some ways," complains Uwe Kuster, a Social Democrat Bundestag M.P. from Magdeburg. "Bringing it together is going to take far longer than anyone expected." Others worry that the east not only may be failing to make progress fast enough but that in some ways it may even be losing ground. "For the first time last year economic growth in the east was lower than in the west, and this year the gap is getting even wider," former Chancellor Helmut Schmidt, publisher of Hamburg's weekly Die Zeit, warned in a recent editorial.

Like a dragging anchor, the six eastern states with their population of 17 million are making Chancellor Helmut Kohl's chances for re-election next September more uncertain than ever before. Because of unemployment his party, the Christian Democratic Union, is even further behind Social Democratic challenger Gerhard Schroder in the east than in the west. A no-end-in-sight financial crunch caused largely--though admittedly not entirely--by payouts to the east has not only cramped household budgets with a continuing "solidarity tax" for the east, but forced wave after wave of public spending cuts.

The eastern burden has even affected Germany's foreign policy and other European countries' destinies. It indirectly helped usher in European Economic and Monetary Union by undermining the sense of fiscal righteousness that led Germany to resist replacing its beloved deutsche mark with the euro. It has also made Germany decidedly more stingy about its contributions to the European Union. "Germany's European policy is becoming more self-interested--more 'British' you might say--because the billions poured into the east have used up the margin of tolerance with which Bonn used to compromise over E.U. agricultural policy, say, or future E.U. budgets," says Franz Josef Meiers of the Germany Foreign Policy Society in Bonn. "Because of the east, Germany's not willing to be the paymaster anymore."

The most punishing eastern problem by far is the 20% unemployment arising from one of the most brutal peacetime industrial dislocations ever experienced in Europe. "Every third job has been lost," Saxony premier Kurt Biedenkopf says. "In the old German Democratic Republic there were 10 million people employed, and now there are 6.4 million employed. That's the real dimension of this collapse." Even today, more than 50% of eastern industrial companies make no profit.

Differences between the two economies are glaring. With 20% of the population, the east has only 6% of Germany's industrial production and 11% of the Gross Domestic Product. Average wages are 75% of those in the west, but with productivity at just 50%, it means that workers are more expensive. "Labor costs are generally 25% higher," says economist Karl Brenke of the German Institute for Economic Research in Berlin. "That's the problem for new firms, and for potential investors, especially those in competition with foreign firms." A six-year construction binge, meanwhile, is on the wane as buildings and infrastructure near completion. As a result, Brenke, for one, is forecasting 20,000 fewer jobless in western Germany this year, but 150,000 more in the east.

In the bleak city of Magdeburg (pop. 250,000)--which was almost completely destroyed in half an hour of allied carpet-bombing in 1945 and rebuilt in stark blockhouse style under the G.D.R.--labor statistics official Wolfgang Lenze has watched 30,000 citizens depart as the region's uncompetitive chemical and heavy machinery industries collapsed. Even so, last year Lenze disbursed $710 million to 67,000 unemployed. The payments are generous, running at least 57% of past wages for an indefinite period. But that's small consolation for Lenze. "My job is a sad one," he says, "and I fear I will be doing it for a long time."

In his office across town, Bundestag member Kuster worried about the human consequences of such joblessness. "The gap between the employed and unemployed, especially the long-term unemployed, is getting bigger and bigger, and the social consensus is wearing away," says Kuster, a Magdeburg native who before unification worked as a research biochemist. "Before '89, even with all the problems and the shortages, there was at least a good mood among the people who lived in the apartment blocks, a sense of community. Now in a big block of flats, there are the employed and the unemployed--the haves and the have-nots--and they don't want to speak with each other. The result is a breakdown of communication between people."

That social disintegration has also produced the worst manifestation of neo-Nazi and other right-wing extremism since the early '90s. It took the specialized anti-extremist Police for the Protection of the Constitution to suppress the violence. Last year, after a five-year lull, authorities counted more than 5,000 rightwing extremist crimes, a rise of 10% in a year. They range from beatings and arson attacks against Gypsies, Turks or other immigrants to acts of anti-Jewish vandalism. "We have to face the fact that in the eastern states 20 to 50% of youth aged 14 to 25 are embracing extreme-right ideas," says political scientist Hajo Funke of Berlin's Free University. "You have it in the west too, sure, inMannheim, in Munich... But most of it by far is in the east."

The "ideas" are primitive and hate-mongering, based mainly on a nostalgic nationalistic notion of "Germanness" that eastern teenagers in their black biker jackets have only vaguely heard about from their grandparents, and most of all on a ferocious xenophobia that seems aimed at almost everybody. Experts agree that in the east the two main motivations of such hatred are the absence of any democratic underpinning for 57 years of Nazism and Communism, and a growing discontent over the unemployment that accompanied the east's widely advertised new freedom. "Many young people in the east still don't know where their jobs are going to come from, where their opportunities are coming from, where their education is coming from," says Funke. "Discontent gets associated with foreigners."

Consider an industrial center like Furstenwalde on the Spree River near the Polish border. In one incident last February there was an attack against a 17-year-old Yemeni student, Mohammed Al-Thavr, while he was waiting for a bus on the way to his apprenticeship as an artificial limb-maker. A group of neo-Nazis aged 15 to 18 approached, called him names and fired a blank-cartridge gun into the air. Two climbed on the bus behind him. When the bus arrived at the training center, they grabbed Mohammed and beat him. One held him while the other pounded him with his fists. When he fell to the ground, he was repeatedly kicked in the face with their steel-toed army combat boots

"I wasn't surprised about the attack," says Mohammed, whose injured face required extensive surgery. "I'm often harassed and called names. But it was the first time that I was beaten up and I've been afraid ever since. When I see the Glatzen--the 'bald-heads'--I look around for other people so there'll be witnesses if they attack me. Though I'm not sure they'd help me. Nobody came to my rescue when I was beaten up at the school." Such incidents are commonplace in Germany's newspapers. What dominates the front page day after day is the stunning price tag on the crusade to bring the east into the German mainstream.

The financial cost of rebuilding the east permeates Germany's political life and touches practically every other large financial issue. In Bonn, politicians almost daily refer to the "burden" of eastern payouts. "Without the exceptional burdens Germany has had to carry for the reunification, our debts would be far lower," Kohl said in the Bundestag earlier this month. Taxpayers balk at the "solidarity surtax," amounting to 5.5% of income tax, that raises $22 billion annually but pays scarcely a third of a bill that totals $85 billion a year--nearly 4% of GDP. In all, the Kohl government says $650 billion has been paid since 1991 for privatization incentives, unemployment compensation, subsidies for construction projects and other costs of unity such as Deutsche Telekom's new $28 billion fiber-optic telephone system.

The opposition Social Democrats challenge those figures, accusing Finance Minister Theo Waigel of exaggerating the burden in order to win over eastern voters and to justify the solidarity surtax. "When the government builds the Hanover-to-Berlin six-lane autobahn for Hanover's Expo 2000, that's just normal road construction and Waigel has no business including that under 'transfers to the east,'" complains Jurgen Mory, head of the Public and Transport Workers' Union in Saxony-Anhalt. "We figure the legitimate transfers--the net transfers--actually total about a third of what Waigel claims."

Whatever the total, one of the more recent--and promising--outlays is going toward a zealous invest-in-the-east crusade conducted by a newly formed Industrial Investment Council. The Berlin-based agency provides consultants for investors' planning, cuts red tape, and even structures financial packages to provide investors with incentives of up to 35% of the capital cost of plant and equipment. Most of all, it marshals marketing zeal to overcome foreign commercial prejudices about eastern Germany as a place to do business.

"Unemployment? To me, unemployment of highly skilled workers is actually very good news for an investor," says the agency's optimistic and ebullient chairman, Hans Christoph von Rohr, a former Hamburg and Ruhr Valley manufacturer. "Rolls Royce four years ago wanted to set up a new plant for aircraft engines. It needed 1,000 aeronautical engineers--available ones. Where on earth will you find them? Not in Washington State in Boeing's gravitational field. Not in Toulouse where they're working at Airbus. No, Rolls Royce found them here in the east in three months."

In chasing hot prospects like Airbus Industrie, which is contemplating a plant to assemble its A3XX large airliner in Rostock, Von Rohr stresses two characteristics of the eastern German business environment that, surprisingly, are superior to those of the west. The first is skills. "The one and only positive legacy of the G.D.R.'s communist system was technical training," he says. "The other is the quiet development of a labor flexibility which is not only far greater than in the west, but which some believe could eventually set an example for it." No less than 75% of companies in the east are deviating from national industry-wide labor guidelines.

More important is the system of "hardship clauses" that allow distressed companies to negotiate special agreements to save jobs. Local union leaders report that cooperation for these agreements comes much more readily in eastern localities than at the national level. One company that was saved by such an agreement is the Mibrag open coal mine in Deuben, 100 km south of Leipzig. A whirlwind agreement to impose early retirement and seasonal flexibility saved 1,600 jobs. There are hundreds more such agreements in effect from Rostok in the north to Zwickau in the south.

"Eastern Germany will be the spearhead for change in Germany as whole," German President Roman Herzog declared last October on the strength of such labor deregulation. Perhaps this is so. But when? Unhappily for the moment, some key trends are still headed the wrong direction. Labor official Lenze in Magdeburg is not the only one to foresee more rather than less unemployment in the near term, especially because of declining construction industry.

Can the east make it? Or, more to the point, can the east make it in time--before its problems harden into an embittered socio-economic division between a wealthy west and an impoverished and embittered east. The Mezzogiorno, Italy's chronically underdeveloped south, is often held up as an ominous precedent. "The greatest danger that I fear," warns economist Brenke, "is that over time a 'subsidy mentality' could set in permanently."

The real answers will come not from the economists' graphs but from the spirit of the east's inhabitants. Zeitz's mayor Kmietsczyk says the future lies in the pride, ambition and flexibility of eastern Germany's young people. "The G.D.R. eventually came to an end, just like that, because it did not know how to change," he says. "Now, we know how to change." Germany has a good bet in flexible go-getters like Kmietczyk, whose own municipal pride is so invinsible one would think he was mayor of Munich rather than down-and-out Zeitz. But in the east the race is against time; Kmietczyk and others like him must learn to run as well as to change.

--With Reporting by Alexandra Stiglmayer /Furstenwalde and Nigel Tandy /Schonebeck