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When East met West
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October 5, 2000: 11:49 a.m. ET
Hopes of prosperity in 'both' Germanys still a dream, 10 years after unification
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LONDON (CNNfn) - "No one will be worse off as a result of unification," claimed Chancellor Helmut Kohl as he romped to victory in Germany's 1990 general election.
Kohl, the architect of reunification, promised a golden future of prosperity and equality, but 10 years later the country he put back together remains divided. In 2000 however, it's the contrasting standards of economic well-being that split east and west, rather than the political regimes.
East Germany would become a "blossoming landscape", Kohl told the German people as he sought - and won - reelection in the first vote to take place in a united Germany since the 1930s. 
Just a year after the Wall was torn down, Germans were confronting the reality of reuniting states that had developed very differently in the 45 years since they had come under separate systems of government. But Kohl was far from alone in his bullish assessment of a golden future: Both New York-based investment bank Goldman Sachs and the Institut der deutschen Wirtschaft in Cologne predicted economic convergence would be completed by 2010.
The reality has been very different.
"East Germany has been an albatross," Dr. Jeremy Leaman, senior lecturer in Modern European Studies at Loughborough University, told CNNfn.com, calling the financing of reunification "a serious misallocation of resources".
The economy fell off a cliff
Kohl and his team faced a near insurmountable task: bringing the chronically backward, communist-run eastern economy on to level pegging with western Europe's all-powerful West German economic motor.
The reunion didn't bring instant benefits to the eastern part of the country - far from it. The East German economy simply fell off a cliff in 1990 and 1991.
The collapse of a captive domestic market for eastern goods hit companies hard, exacerbated by the conversion of wages in East Germany's currency, the ostmark, into West German Deutsche marks at a ratio of 1:1.
Easterners, handed a pile of money and the open door to the consumer goods they had been denied in the drab communist years, spent like crazy. But they refused to buy eastern goods, demanding western luxury items. This only exacerbated the divide between the economies: while already-doddery firms in the former communist German Democratic Republic saw their orders dry up, western outfits enjoyed a boom.
Leaman calculates a fairer currency exchange ratio on the basis of relative productivity would have been 5 ostmarks for every Deutsche mark. As a result of the switch to an open economy, East German GNP fell by 44.2 percent in 1990 to 1991.
Ever since, the former GDR has lagged far behind.
"It has yet to recover from the catastrophic slump of 1990 and 1991 or to reach the level of output of 1988," Leaman said. "In 1998 east Germany  contained 18 percent of the working population but produced only 9 percent of Gross National Product, only 6 percent of industrial production and supplied only 3 percent of the country's exports."
Initial hopes of a flood of corporate investment into eastern Germany were soon dashed. Although the government pumped in billions in social welfare programs, the industrial base of the country was corroded. The construction industry mushroomed, but few in the western world wanted to acquire East German industrial assets hobbled by liabilities for cleaning up environmental contamination, and reliant on archaic equipment and outmoded production techniques.
The Treuhandanstalt, the body set up to oversee the fire sale of the state-owned industry of the former GDR, recovered only a fraction of the money that had originally been anticipated, as buyers refused to gamble on buying dilapidated assets without a ready market for their products.
Unemployment is a key issue
The inadequacy of eastern Germany's industrial infrastructure is reflected in the two regions' relative unemployment rates: in the west the rate is currently just over 7.2 percent - below the euro zone average of around 9 percent - while in the east the figure is more than 16 percent.
Estimates for convergence now range from 40 years to a century. The eastern German economy is supported to the tune of 140 billion marks ($62.6 billion) per annum, according to Leaman. He says this transfer of funds looks like continuing for the foreseeable future.
"East Germany doesn't bring money into the system. Germany subsidies consumption to the tune of 4 percent of GDP for the east," Leaman added.
In the west the economy motored on steadily throughout the 1990s, expanding by 20 percent by the end of 1998 from its pre-unification level. In the east the economy had shrunk by a similar percentage.
The unified German economy suffered a slight hiccup last year, and recorded growth of only 1.5 percent. That was the lowest in the 11-nation euro-zone, apart from Italy. However, the International Monetary Fund and other forecasters expect growth of more than 2.8 percent this year.
The danger is that the money flowing across the former Iron Curtain is being used as a short-term fix, rather than as an investment to secure the longer term prosperity of the eastern states. Much of the cash still goes to support the welfare system, and with such high unemployment among people in the east, that's expensive.
An even more serious burden is building up for the future
The pension burden
Leaman told CNNfn.com: "Instead of money being spent on infrastructure projects, it has been spent propping up the pension system to the tune of billions of marks."
If nothing is done to reduce the state's pension commitment, "the entire federal budget will be spent on pensions by 2020," according to Philip Middleton, partner and European head of financial sector strategy at consultant KPMG. "This issue is a political hot potato. Politicians are only in office for five-year terms and they believe it's not their problem."
It isn't all doom and gloom. By and large the German people has accepted the stresses and strains brought by unification with equanimity. There have been no large-scale breakdowns of social order, despite concern about increasing violence directed against immigrants and a resurgence of extreme-right political groups.
In addition, the western economy continues to forge ahead, despite occasional bouts of soul-searching over the high cost of doing business in the country because of high wage costs.
A decade on from unification however, it's clear that a long road lies ahead before the formerly separate German states can contribute equally to the reunited whole. 
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