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What is the future for industry in eastern Germany?

Why is eastern industry still lagging behind western industry more than 30 years after reunification, and what are its prospects? An IG Metall conference in Chemnitz provides answers.
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Luftbild des VW-Werks in Zwickau-Mosel
Highly productive addresses like the VW carmaker in Zwickau-Mosel (center) are rarer in the east than in the west. © euroluftbild.de/bernd clemens

By Michael Rothe

It was a big announcement by German Economics Minister Robert Habeck: 2023 was to be "the year of industrial policy," the Green politician said nine months ago. The first priority is to secure the location and "to create a framework that enables industry to produce here," Habeck said, while criticizing a "desire to conjure up a doom and gloom.

But is the policy living up to its claim? What are the prospects for industry, especially in the east? And what role do regional transformation networks and co-determination play in this? Such questions were discussed on Tuesday at a meeting of the IG Metall in Chemnitz discussed.

Economic power at barely 87 percent of the West

Eastern Germany is still considered a structurally weak region - especially because the economic strength per employee 32 years after reunification is still barely 87 percent of the level in the West, states economist Joachim Ragnitz. At least Brandenburg and Saxony-Anhalt have overtaken Saarland as the weakest western federal state - in contrast to Saxony, says the deputy head of the Ifo Institute in Dresden.

© SZ-Graphics: Gernot Grunwald

Despite the structural weakness, a specific eastern German regional and industrial policy is losing its justification, Ragnitz is 'convinced. Compared with 2015, the eastern economy has grown by almost twelve percent in price-adjusted terms, while in the west it has only grown by a good seven percent. In industry, gross value added has even increased by 18 percent, almost twice as much as in the west.

The main reason for the 30 percent lower industrial productivity in the east: The companies are much smaller than in the west, with an average of 96 to 145 employees. Highly productive chemical industries and carmakers are less common, but less productive food processing and metalworking are more common - and as an extended workbench of western addresses. "You might regret that, but that's the result of the transformation history since 1990, when the first priority was to create employment opportunities but little emphasis was placed on the quality of jobs," Ragnitz says. "Complaining about it doesn't help, because it's no more conceivable today that large corporations could ever relocate headquarters to eastern Germany than it was then."

Entrepreneurs lack capital and the will to grow

According to the expert, there is not only a lack of capital, but also a lack of the entrepreneurs' unconditional will to grow. And: Eastern companies tend to rely on lower prices rather than innovative products, which means lower added value. According to Ragnitz, the stronger growth in the East is also due to special effects from new settlements such as the Car manufacturer Tesla in Brandenburg and of the Solar cell manufacturer Meyer-Burger in Thalheim. The consequences for employment were small, he said; even 10,000 people at Tesla accounted for only 0.9 percent of all employees in Brandenburg.

According to Ragnitz, Germany as a whole is losing its appeal: high energy and labor costs, long approval procedures, poor transport infrastructure. Politicians are getting bogged down in side wars instead of "ensuring the foundations of our prosperity - a strong industry," he complains.

Investments in transport infrastructure and digital technology, education and the immigration of skilled workers are the original tasks of the federal states. "The bad habit that the eastern German states in particular always call first for federal aid" distracts from the responsibility that has been clarified in the Basic Law.

Lack of personnel is the biggest disadvantage of the East

The heavy subsidies for Tesla, Intel and TSMC no longer have anything to do with regional economic development, but with the fact that they wanted to attract them to Germany for political reasons. Ultimately, the politicians have maneuvered themselves into a trap from which there is no escape. However, it is important to "focus more on the quality of the jobs" when providing support. He said that it was more important to strengthen the innovative strength of industrial companies than to promote investment. Instead of funding programs for research and development, technology policy, especially at the state level, should rather facilitate the participation of companies in technological progress generated elsewhere - also via universities and institutes as intermediaries.

For Ragnitz, the biggest disadvantage of the east is the growing staff shortage of ten to 15 percent on average. Since immigrants are not welcome there and low wages are not a lure, automation and digitization must be used to save labor, he says. He is against keeping companies with obsolete business models alive with state aid.

IG Metall: Tax money is not available at zero cost

Carsten Schneider (SPD), the German government's representative for the East, defends the billions in subsidies for the Intel and TSMC chip plants "at a comparable level to the USA with its Inflation Reduction Act". The Minister of State is "nevertheless confident, despite all the problems in the East." Nowhere is there such a high level of foreign direct investment as in Magdeburg and Dresden. Eastern Germany is thus becoming the "heart of the semiconductor industry in the whole of Europe". The goal is to create and maintain good jobs in future-oriented industries.

In view of a "transformation exhaustion" in the new federal states, it is important to "take the people with us," says Wolfgang Lemb. In addition to opportunities, the IG Metall board member also sees risks such as the loss of tradition, as at Waggonbau Niesky, and wrong strategic decisions, as at Eickhoff in Klipphausen near Dresden, a manufacturer of wind power gearboxes. At both addresses, the lights are going out. "Support from taxpayers' money is not available at zero cost, but only in return for collective bargaining agreements, co-determination, location commitments and investment in the green transformation," emphasizes the trade unionist.

"Especially in conflict and crisis situations, works councils make a decisive contribution to the workforce through successful cooperation with the employer," quotes Uwe Jahn, head of the works council at the Forging works GröditzSaxony's Minister President Michael Kretschmer (CDU). The rights of works councils therefore need to be expanded: Co-determination also in economic matters and future issues, Jahn calls for a reform of the Works Constitution Act, including contemporary remuneration of works councils.

East remains a structurally weak region for a long time to come

In Jahn's view, the biggest challenges include the shortage of skilled workers and the availability of affordable electricity, natural gas and hydrogen. "The time is ripe for an industrial electricity price of five cents per kilowatt hour," says the representative of the energy-intensive forging plants with around 700 employees and annual sales of 240 million euros. And he is also thinking of the chemical plants, machinery and plant manufacturers, foundries and the three electric steel mills in the Dresden area.

Economic researcher Ragnitz warns against illusions. The east, he says, has structural deficits that cannot be remedied by politics in the short or medium term. Experience in the West showed that most regions that were considered structurally weak in the 1970s are still in need of support, despite intervention. "It can therefore be assumed that eastern Germany will remain a structurally weak region for a long time to come - despite individual islands of industrial prosperity," he predicted.

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