What Germany Got for Its $2 Trillion

In the past year, as the world economy has plunged into recession, governments have pledged to spend as much as $5 trillion of taxpayers' money to ward off a prolonged slump. For the most part, these massive programs are based on little more than theory: nobody advocating them has experienced a downturn as dramatic as this one. But Dagmar Szabados has seen such spending before — she knows what it's like to be on the receiving end of a gigantic fiscal infusion. Szabados, a chemist by training, is the mayor of Halle, a mid-sized town in the middle of what used to be the German Democratic Republic (GDR), the formerly communist eastern part of Germany. Since the Berlin Wall fell, the old GDR has been showered with money. Overall, some $2 trillion has been pumped in — the equivalent of about 4% of Germany's economic output every year.

The injection of demand into the old GDR, of course, took place in a very different environment from today's. Its key purpose was as much political as economic: to create a reunited Germany, with shared values, from the two states that were the legacy of World War II. But as stimulus plans take hold across the world, policymakers would like to know precisely what such largesse can buy. Because of the slump in world trade, and hence in demand for its exports, Germany itself is facing a tremendous slowdown. The government now predicts that its economy will contract by 6% this year, much more than the economies of the U.S. or Britain, and on a par with the baleful prospect for that other exporting powerhouse, Japan. The government of Chancellor Angela Merkel is pumping $108 billion into the economy, but after an intense debate it has resisted international pressure to do more, saying it wanted to evaluate existing plans before adding new ones. But it isn't just officials in Berlin who might spend time in Halle seeing what an injection of money can and can't do to a local economy. Governments from the U.S. to China — anyone who believes that opening the fiscal spigot can stave off disaster, and especially those who think that public spending can polish up rustbelt cities like Detroit or Harbin — would be advised to take some east German lessons. (See pictures of Detroit's decline.)

Spending Big
The good news from Germany is that lots of money buys lots of stuff. Halle today has a new network of fast highways and rail tracks, a renovated historic city center, ultramodern water-treatment plants, a technology center on the site of a former Soviet army base just outside town, and — most needed of all — thousands of solid new jobs in a rebuilt industrial sector that has become home to U.S. firms such as computer maker Dell and Dow Chemical. Mayor Szabados waves to a corner of her office. Leaning up against the wall there are two dozen new shovels, several big trowels and an oversized watering can — all souvenirs from groundbreaking ceremonies around Halle since she took office in 1990, first as deputy mayor and, since 2007, as mayor. "Everything was turned upside down," she recalls. "It was chaos, especially at the beginning, but creative chaos."

Szabados is quick to acknowledge, however, that not all the money has been well spent. There was the housing development built in a hurry in a wooded area south of town that now stands largely empty. "If we'd thought about it properly, we wouldn't have done it," she admits. Then there are the government-sponsored job-creation programs that failed to live up to their name, and the startups that quickly shut down again because they depended more on government subsidies than on a smart business plan. (See pictures of the global financial crisis.)

Halle may be a lot more prosperous than it was 20 years ago, but it's still far from being a happy place. Its population has shrunk dramatically, falling by more than one-quarter to 230,000 since 1990 as young people have left to find jobs elsewhere. Despite the exodus, and a birthrate that has dwindled to almost nothing, the town still has an unemployment rate of about 14%, double that in the old West Germany. And as a new economic crisis strikes — this time a global one — Halle isn't immune. Its economy has crashed in the past six months. Across the region — but especially in places like the town of Eisenach, where a new auto industry has been built up over the past few years — the latest downturn is biting, though local officials stress that at least their position is better now than it was. "We're certainly in a crisis," says Peter Haimann, president of Halle's Chamber of Commerce and Industry, "but we also have much more flexibility to face it."

Money Isn't Everything
In short, Halle has learned that throwing money at an economic meltdown isn't a cure-all. To be sure, some towns in the old GDR have done well. In the Saxon heartland, where the local economy had strong roots going back to before World War II, Dresden has turned itself into a world center for semiconductors, Leipzig has attracted automakers including BMW and Porsche, and Jena has successfully built on the reputation of its optical firm, Carl Zeiss. But for the most part, eastern Germany is still far from resembling the "blossoming landscapes" that former Chancellor Helmut Kohl predicted back in 1990. True, living standards have soared thanks to the cash infusions, giving easterners more than 80% of the purchasing power of their western compatriots. But even two decades on, the region remains substantially less productive than its western counterpart. The former GDR has 20% of Germany's population but one-third of its unemployed.

Germany has learned a second lesson; big spending packages don't work if the economic policies underlying them are miscued. In hindsight, eastern Germany's economic wellbeing was sabotaged at the very beginning of the reunification process by the political decision to exchange its currency for West German marks at the rate of one-to-one. Haimann, of the Halle Chamber of Commerce, thinks that was a crucial error. The true value of the old East German mark was just one-fourth or one-fifth of the West German currency, so when it was swapped in 1990 at parity, the competitiveness of the local economy took a nosedive — compounded by a quick doubling of wages in the east following reunification later that same year. "There was a revaluation by a factor of eight. Which industry anywhere could swallow that?" Haimann asks, pointing out that some of Germany's eastern neighbors, including Poland and the Czech Republic, managed to hang on to many more jobs because they kept their currency cheap.

(See pictures of the dangers of printing money in Germany.)