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Germany’s north-south split
By Bertrand Benoit in Berlin
Published: September 17 2007 18:38 | Last updated: September 17 2007 18:38
Holzminden, a town of 20,000 souls on the border between Lower Saxony and North Rhine-Westphalia, lies roughly at the centre of northern Germany. Yet Angela Schürzeberg, head of strategic planning for the district, maintains: “We are the east of the west,” as she sifts through a stack of depressing statistical reports.
In economic terms, her statement makes sense. Holzminden, whose slow decline has brought its standard of living close to that of depressed regions in the former Communist east, embodies a trend that is perplexing economists.
As recently as five years ago, a common assumption was that the east, helped by considerable subsidies, would develop and eventually match the living standards of the west. Well into the second year of the country’s robust economic recovery, however, it is catching up, but not in the expected way.
Instead of developing uniformly, eastern Germany is gradually taking on a long-standing feature of the west, with a wealthy and fast-growing south but a struggling north. Meanwhile the west’s own north-south divide, which a decade ago was thought to be vanishing, has instead deepened.
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If the trend persists, the mental map assuming a rich west and poor east – which has shaped policy-making and dictated the flow of domestic development aid since the country’s reunification 17 years ago – could soon be replaced by a new one, cut along a roughly latitudinal line from Cottbus, on the Polish border, to Aachen, Germany’s gateway to the low countries.
“There are still big differences between east and west,” says Peter Kaiser, project manager at Prognos, a Swiss economic consultancy. “But the north-south dichotomy is quite remarkable and very resilient.”
In June, Prognos published the latest edition of its German Future Atlas, the first since 2004, examining the economic prospects of 439 municipalities and districts. The study was a shocking read for politicians and business people in the north.
For a start, as a measure of research and development activity, it showed that more than 51 per cent of patents filed in 2005 and 2006 originated in Bavaria and Baden-Württemberg, Germany’s southernmost states, up from 47 per cent in 2000. Munich and Stuttgart, their respective capitals, were home to 15 per cent of the country’s total corporate research capacity.
The core macroeconomic data tell the same story. The unemployment rate in the southern states of Baden-Württemberg, Bavaria, Rhineland-Palatinate and Hessen last month stood at an average of 6 per cent. North of the Cottbus-Aachen line in North Rhine-Westphalia, Lower Saxony, Schleswig-Holstein, Hamburg and Bremen, it was 9.6 per cent.
The gap is increasing. Out of Germany’s 16 states, the southernmost four last year generated almost half the gross domestic product. Since reunification, their economies have grown by 48 per cent, compared with just 37 per cent for the north’s three largest states.
“The north-south divide has been there for some time,” says Eric Thode of the Bertelsmann foundation, whose study of German regional development published this month matched Mr Kaiser’s findings “What is preoccupying is that the two sides are diverging, not converging.”
In eastern Germany, a clear north-south divide has also emerged. Last month, Saxony and Thuringia in the south had 13.4 per cent unemployment against 15.3 per cent in the region’s four northern states, including Berlin. Saxony’s economy grew by 4.2 per cent last year, faster than any other German state.
Holzminden, just north of the Cottbus-Aachen line, offers sobering insights into the overwhelming power of history, geography and markets in shaping a country’s economic fortunes and the comparatively limited influence of economic policies.
Chain-smoking at his Volkswagen dealership, Michael Vatterott, president of the Holzminden chamber of commerce, is shocked by the Prognos study. Of all western municipalities surveyed, his town scored worst. “I hope this will be a trigger for action, not for despair,” he says. “Bad publicity can easily become a self-fulfilling prophecy.”
With its boarded-up stores, Holzminden’s main shopping street bears witness to the town’s slow descent. In the past four years, despite a high birth rate, the population has dropped by 3.4 per cent. Unemployment is high at 11 per cent, while economic growth from 2001 to 2004 was only half the German average.
The town boasts large and successful employers, including Symrise, a chemicals company, and Stiebel Eltron, which makes heating equipment. Yet the main weakness of the locality lies precisely in its economic monoculture. Holzminden’s employers need engineers and technicians, while Holzminden’s educational facilities train architects and social workers. The result is an unbalanced labour market and massive emigration of the young and well qualified.
“The big employers here have to go elsewhere to find the right people,” says Ms Schürzeberg. “Meanwhile, we are chronically missing about 3,000 jobs.” Michael Birke at Stiebel Eltron says the family-owned company is doing well thanks to its high market share and a booming export business, but he concedes that finding employees has become hard.
Holzminden’s poor transport infrastructure – it is an hour’s drive from the nearest autobahn – makes it unattractive for new businesses, especially in the fast-growing service industry, which is sorely underrepresented in the district. In a lethal vicious circle, the town’s shrinking population and dwindling public finances make it increasingly difficult to justify – and to afford – the type of infrastructure that would attract employers. “We cannot even get a decent broadband internet connection,” says Andreas Schrader, whose chemicals institute performs product tests for the cosmetics industry, which involve sending and receiving large amounts of electronic data.
For Mr Kaiser, the town lacks an essential ingredient in the recipe for economic success in 21st century Germany. “One decisive advantage of the south is diversification. North Rhine-Westphalia and Lower Saxony all have strong clusters. But Bavaria has clusters of clusters. In fact, it is a bit of a cluster magnet.”
In the south, upper Bavaria and Munich in particular are good examples. Their economic competence spans microelectronics, aerospace, carmaking and financial services. Baden-Württemberg is another, with a panoply of advanced engineering companies along with their constellations of suppliers and service providers.
This offers an important clue to the failure of Germany’s north – whether in the east or in the west – to catch up with the south. “Some regions in the north-east clearly lack the basis for endogenous development,” says Mr Kaiser, “But many others in the north have bright industrial and corporate spots – ‘lighthouses’. The problem is they lack critical mass. The layer is too thin.”
Radebeul, a suburb of Dresden, Saxony’s capital, is south of the line but deep in the east, a town of 30,000 which is the counterpoint to Holzminden, which lies 400km to the north-west.
Sibylle Thomas-Göbelbecker manages the Rolls-Royce dealership, the only one in eastern Germany. She bristles when the word “east” is mentioned. “Everywhere, not just in Germany, east has a negative connotation. East is poor, grey, Communist. But we Saxons are not easterners, we are southerners. We have so much in common with the Bavarians,” she says, listing the love of good beer, an earthy sense of humour and a fondness for baroque architecture.
From her palatial premises on the town’s outskirts, she supplies not only Rolls-Royces but Ferraris, Aston Martins and Maseratis to local nouveaux riches – whom she reckons make up 75 per cent of her client base – and the expatriate millionaires who dwell in the big villas on the hills.
With both a Ferrari and a Maserati in her garage at home, Ms Thomas-Göbelbecker may not be an average Radebeuler, but most of her fellow locals are not doing badly either. At 8.3 per cent, the town has among the lowest unemployment in the east and, rare for an east German town of this size, its population is increasing steadily.
Its economic fabric is more varied and dynamic than Holzminden’s. KBA, which makes printing equipment and employs 2,300 people, is its biggest employer, followed by Vodafone and Deutsche Telekom and a small pharmaceuticals cluster. Largely thanks to business, Radebeul’s tax revenues have risen by 50 per cent since 2001.
In a way, says Bert Wendsche, Radebeul’s mayor, the town has found a route back to its past. Starting at the end of the 19th century, when a first railway link was built, it developed rapidly to become an important centre for the printing and pharmaceuticals industries and popular as a weekend residence – dubbed the “Nice of the north” – for rich Dresden industrialists. It still benefits from its proximity to the Saxon capital, which headed a ranking by economic dynamism of Germany’s 50 largest cities just published by the Wirtschaftswoche weekly – Leipzig, Saxony’s biggest city, was ranked seventh.
Mr Wendsche has worked to attract companies and younger professionals, by investing in transport infrastructure and kindergartens. “I’ve had to fight to make this happen,” he says. “My argument was that we needed to invest first in those things that would bring tax revenue – then maybe we could talk about that new cycling path.”
The renaissance of Saxony is however, a broader tale of history and markets winning over politics. In eastern Germany, the north-south divide goes back to the beginning of the country’s industrialisation (it would have been referred to as Middle Germany at the time, when the east meant the regions of Prussia reaching as far as today’s Kaliningrad). After the second world war, the communist regime of the German Democratic Republic sought to promote a more uniform development, for instance setting up a large denim manufacturer in Rostock and a glass factory in the Lausitz region, both thinly industrialised areas.
Subject again to the laws of the market since reunification, eastern Germany has eased back into its former economic polarity. “Something of Saxony’s industrial tradition was maintained under the GDR. Dresden still had the country’s computer industry, for instance,” says Kurt Geppert, expert in regional development at Berlin’s DIW economic institute. “When western companies went east after reunification, they moved to those places where they could find expertise in their fields. The quality of a labour market is perhaps the most determining factor in such investment decisions.”
Back in the west, history played a determining role too in the rise of Bavaria, Hessen and Baden-Württemberg. The war and the subsequent partition of the country sent Berlin-based businesses on a frantic west- and southward trek.
Siemens, now Europe’s largest engineering group, moved to Munich – though it still has a nominal seat in the capital. So did Allianz, the insurance group, while all the big banks vacated Berlin for Frankfurt. This presence in turn attracted large foreign companies when they entered the country and most of them still have their German bases in the south.
These relocations were the initial trigger for the economic rise of southern Germany and especially Bavaria, now home to the country’s most technologically advanced industries. Largely agricultural beforehand, Bavaria did not have to grapple with the decline of heavy industry, unlike the Ruhr further north, which still bears the scars of this restructuring process.
“The second world war was a great boon for Bavaria. The move of modern industry and finance to the south planted the seed that gave the south today’s technological and economic lead. The only carmaker in the north is Volkswagen – and it is the only one that was created by political fiat,” says Mr Geppert.
In egalitarian Germany, the prospect of a country increasingly split between poor north and rich south is an uncomfortable one. It is also awkward for a political class that sees its central role as corrector of the market’s worst excesses. It is, finally, an indictment of the financial mechanisms that have for years channelled money from rich states to poorer ones, particularly those in the east.
However, Mr Thode of the Bertelsmann foundation refuses to accept the notion that a region’s future fortunes are cast in stone: “History plays a role but so do policies,” he says. “The lesson for regional politicians is that they should identify their region’s strengths and not distribute aid thinly over a large quantity of greenfield projects, as has often happened in the east’s least dynamic regions.”
The exceptional Hamburg gains ground in globalisation
Kaiserspeicher A, a disused warehouse at the tip of Hamburg’s historic inner-city port, seems nothing to brag about. Its gutted core surrounded by mounds of earth and its thin brick façade leaning on metal supports, it is as appealing as any other industrial ruin.
Things will look different in 2010, however, when Herzog and de Meuron, the star Swiss architects, lift the veil on the Elbe Philharmonic Hall. With a crested, translucent façade soaring 100 metres above the warehouse shell, it will be a landmark to rival the Sydney Opera House or Bilbao’s Guggenheim museum.
The concert hall, part of a gigantic docklands redevelopment that will increase the size of the city centre by 40 per cent, is the most powerful expression of Hamburg’s renaissance as one of the country’s most dynamic cities and a notable exception in the struggling northern half.
That the Elbe Philharmonic should have found its home in a former cocoa and tea warehouse is also fitting, for Hamburg’s role as Germany’s largest port is at the centre of this new dynamism. “Hamburg is the big winner of globalisation,” says Klaus Schrader, economist at the Institute for the World Economy in nearby Kiel. “The port is clearly the single biggest factor in the city’s booming economy.”
The city-state at the mouth of the Elbe has long been seen as Germany’s “gateway to the world” but soaring international trade and the country’s rise to become the world’s biggest exporter make that description more pertinent today than ever.
With 40,000 employees and 154,000 companies involved in shipping, ship financing and logistics, the modern container terminals north of the city centre are the biggest contributors to Hamburg’s gross domestic product. Nearly 9m containers passed through the docks last year, twice the level of 2001. Based on current trends, the figure could reach 18m by 2015. As transit hub for Scandinavia’s and eastern Europe’s overseas exports, Hamburg plays a pivotal role in the continental economy – one worthy of its past as a leading member of the Hanseatic league of trading cities.
With gross domestic product growth of 3.8 per cent last year, it was the second most dynamic of Germany’s 16 Länder, or states. Since 1991, its economy has grown by 53 per cent, twice as much as that of Berlin. No other state in Germany has created as many jobs since the beginning of the current economic upturn.
Though half as big as the federal capital, it is almost twice as rich. With a yearly disposable income per head of €23,000 ($41,630, £20,820) last year, Hamburg was Germany’s richest state and the fourth largest economic region in the European Union.
The harbour also accounts for the city’s economic structure, which is dominated by the services sector. Yet, like Munich and Stuttgart, it is also a cluster of clusters, with a broad range of activities. Industrial employers include Airbus, which has a large plant in the city, and Lufthansa Technik, the airline’s technical subsidiary. Hamburg is also home to some of the country’s largest publishers – Die Zeit and Der Spiegel weeklies, the Bild tabloid and Financial Times Deutschland, the FT’s sister newspaper, have their headquarters there.
A darker spot is the city’s unemployment rate – at 8.9 per cent last month, it was above the national average, though it is rapidly falling. Another is the failure of its vitality to benefit neighbouring, more rural regions, to the extent that could be expected. “There is definitely more work to be done in this area. Hamburg and [the surrounding state of] Schleswig-Holstein need to co-operate more on economic policy,” says Mr Schrader. “This would benefit the city, too, by lifting some of the strain on its capacity.”
Copyright The Financial Times Limited 2007
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