Dresden: Rare bright spot in Germany's reconstruction

In 14 years since the fall of the Berlin Wall, subsidies have not brought East Germany up to par with the West, according to a report.

If the restored baroque masterpieces of Dresden's old town recall the glory of this Elbe city's past, the sleek glass firms spreading out around the airport are the temples to its optimistic future.

Chipmakers Infineon and Sunnyvale-based AMD have set up large production facilities in the Eastern German city, as have a growing cluster of high-tech companies that have created jobs and infused the region with a rare sense of hope.

"It's all just starting now, really," says Andreas Poehlmann, an engineer at the chipmaker ZMD in Dresden. The microelectronics company, rehabilitated from the economic rubble of communist East Germany, expects revenues of over $100 million this year.

The east German state of Saxony is one of the few economic success stories to come out of the former German Democratic Republic. By pushing to advance the high-tech industry after the fall of the Berlin Wall, state officials have helped create more than 15,000 jobs. And the more than $1.4 billion in federal and state subsidies invested in "Silicon Saxony" has largely been earned back, according to the Economics Ministry.

In the 14 years since reunification, that has proved to be an exception. A government-commissioned report, recently leaked to the German media, slammed the country's reconstruction program. And now that the European Union has expanded to include much of Eastern Europe, experts foresee serious challenges ahead.

"[The reconstruction] is a disaster, and with this eastern enlargement it will be very difficult," says Dalia Marin, a Munich economist who recently analyzed the effect lower-paid Eastern European workers will have on German labor markets.

In the shared sense of optimism that surrounded reunification, government officials thought it was only a matter of time before the East achieved parity with the West. Money flowed into the former communist country. Nearly $60 billion went into rebuilding roads and railways; more than $35 billion to guarantee jobs at companies that later went bankrupt.

But subsidies have failed to bring the East up to Western standards, and have begun to take a toll on Germany's already stagnating economy. "If we continue to let things run as they have until now, all of Germany will be pulled down," Klaus von Dohnanyi, the former Hamburg mayor who chaired the commission, said in a newspaper interview.

Government investment in rebuilding roads and renovating city centers in the former East was misdirected and failed to lead to any economic growth, according to the 14-member commission. Policies that demanded companies bring the wages in the East up to Western standards without demanding the same of productivity have only chased away investors, say experts. The result is an average unemployment rate of 18.5 percent, twice that in the West, and negative growth rates, all at the cost of an estimated $108 million a year.

"The reconstruction of the East is at least two-thirds responsible for Germany's weak growth," Mr. Dohnanyi said. "If we continue as we have up to now, Germany won't be able to revive itself."

The country's top politicians have been quick to defend their efforts but some government officials have admitted that the distribution of investment money needs to be more efficient in the future.

Economists say the eastward expansion of the EU will pose more problems for the region, making it easier for companies to set up shop in Eastern European countries, where investment climates are friendlier and wages are lower.

"These countries will experience the same thing we experienced in 1990. We won't be the new states anymore, and we'll need to think of something else," says Burkhard Zscheischler of the Saxony Economic Development corporation.

In Dresden, a network of respected institutes and colleges had already made it a technology hub in the German Democratic Republic. But some feared that former state-run companies, such as the precursor to ZMD, would be dissolved with privatization.

Thanks in part to workers' demonstrations, the microelectronics industry in the region has thrived since then. ZMD employs some 400 workers, many of whom come from the surrounding area. "I truly believed it was going to turn around," says Mr. Poehlmann, who received a degree from the Dresden University of Technology and has worked for ZMD since 1979. "Otherwise I wouldn't have stuck around."

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