What Germany Got for Its $2 Trillion

BLEAK HOUSE: Halle has struggled to reinvent itself following the decline of its chemical industry. Soviet-era apartment blocks like these in the south of the city are half empty

PHOTO BY THOMAS MEYER / OSTKREUZ FOR TIME

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A third lesson, and perhaps the most pertinent, is that spending so much money in such a short time is bound to be wasteful. "Every village wanted to have the same dog kennel," jokes Klaus F. Zimmermann, president of the Berlin-based German Institute for Economic Research (known by its German acronym, DIW). East Germany today has a number of promising industries and state-of-the-art roads and railways, but it also has superfluous airports, oversized water-treatment plants and a collection of heavily subsidized industrial white elephants, all built at the taxpayers' expense. "Floodlit sheep meadows," grumbles Reiner Holznagel, managing director of the German Federation of Taxpayers. "In every district you can find projects that make you shake your head." Among the most egregious: the now-bankrupt firm Cargolifter, which tried to build a modern Zeppelin airship with tens of millions of government dollars. (See pictures of the Top 10 scared traders.)

Given the enormous bill for reunification, such failings have inevitably given rise to a debate in Germany about the policy of propping up the east. In 2004, an informal commission headed by Klaus von Dohnanyi, a former mayor of Hamburg, concluded harshly that eastern Germany was still far from being able to stand on its own two feet. One of the commission's key findings was that industrial policy should have been better coordinated and the money invested in a few promising centers, rather than being showered as if from a watering can across the economic landscape. But the fact remains that when the communist state collapsed, the urgent issue at hand was how to integrate 17 million East Germans into a suddenly reunified country, and quickly. Despite some lingering resentment in both east and west, that work is done. In a line policymakers today might take to heart, Zimmerman of the DIW says that the infusion of cash to the east "wasn't a failure. The problem is that the expectations were too high."

You can see just how high expectations became on a quick tour of the Neustadt residential district on the western edge of Halle. Neustadt is a depressing example of Soviet-style urban planning, with row upon row of gray concrete blocks, built in the 1970s to house some of the 40,000 people who worked at the chemical factories that once dominated the local economy. Firms with names such as Buna and Leuna belched pollutants into Halle's air while churning out products whose quality lagged far behind western examples.

Once the Wall fell, those chemical factories were among the first casualties of reunification. Investors such as Dow, Dell, French oil giant Total and Belgian chemical and pharmaceutical firm Solvay moved in, enticed in large part by the subsidies Germany was offering to companies willing to take the obsolete mammoths off its hands. But welcome as the newcomers were, they quickly shuttered the old plants and hired only a fraction of the workers — about 20% of those who had previously toiled at Buna and Leuna. Unemployment soared as high as 30%. People started to leave Halle to find work elsewhere. Neustadt's population fell from 90,000 in 1990 to about 47,000 in 2007, the last year for which figures are available, and some of those depressing apartment blocks have now been knocked down.

Job Search
Why were so many jobs lost? mainly because Halle's local businesses had been rendered uncompetitive by the currency swap and wage increases. That meant economic growth in the east often relied on direct government support, in the form of infrastructure projects, tax breaks for individual investors, direct transfer payments of social benefits for pensioners and the unemployed, and state subsidies for corporate investments.

There's no doubt this public spending produced some results. The U.S. semiconductor firm AMD, for example, was planning to build a new plant in Ireland. In 1995, however, it switched to the Dresden area — once a high-tech region for the whole Soviet bloc — where it now employs about 2,000 people. Similarly, on the edge of Halle's Neustadt, in a brand-new technology center built on the site of the former Soviet army base, Katja Heppe pulls the claws of a snow crab out of a plastic bag. She's 29, a biotechnology researcher who specializes in synthesizing a polymer from crabs' claws — it's used as an ingredient by pharmaceutical and cosmetics companies. Heppe founded her firm three years ago. Up to 50% of the investment in research and development is subsidized, and Heppe says she came to Halle because there's a supportive network in place to help small startups such as hers.

But not all attempts to woo industry through subsidies work so well. While Dresden has managed to reinvent itself as a micro-electronics "cluster," a similar attempt by the town of Frankfurt an der Oder failed. Around eastern Germany, there are numerous examples of industries without real prospects being kept alive artificially, complains Holznagel of the Taxpayers' Federation, citing tilemaking and leather-treatment plants on the Baltic coast. "The subsidies just prolong the death," he says, "but it comes anyway."

Once Bitten
While Germany has learned the lessons of creative destruction the hard way, the government still believes it has a critical role to play in industry. Just this month, the fate of Opel, the German subsidiary of General Motors, has been at the top of the political agenda. Government ministers are refusing to loan the billions the carmaker says it needs to survive — and even imposing conditions on would-be buyers, which include Fiat. (See the 50 worst cars of all time.)

German skepticism about the utility of big government-spending programs endures, bolstering Merkel's determination to resist international pressure to take more decisive action to counter the economic crisis. Among those arguing forcefully against any new stimulus packages is the Taxpayers' Federation. Holznagel says that in the early 1990s his organization kept to itself doubts about the big spending on reunification — it was politically foolish to do otherwise. But now, he says, "the situation is completely different. The danger is always that money is spent neither appropriately nor efficiently."

That assessment may sound admirably prudent. But Germany is in bad shape. In Halle, they're feeling the pinch, again — even if the situation is (remarkably) not quite as bad as it is in west German regions such as the environs of Stuttgart, where almost half a million people have been put on short-term work since last October as auto and machinery factories have slowed production. The east has been somewhat protected because its firms don't export as much as their west German opposite numbers. An unmistakable streak of eastern stoicism helps, too. "I notice that when I'm in the west, the fear of this economic crisis is much greater than in the east," says Halle's Mayor Dagmar Szabados. "We've been steeled by crisis here." That may be true; but as the state of her town proves, being steeled by a crisis is not the same as rebounding from a slump into prosperity. The rest of the world: take note.

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