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News : EU Economy Last Updated: Apr 1, 2011 - 8:12 AM

Even at 4 percentage points faster growth Germany's weakest regions would take 45+ years to catch up
By Finfacts Team
Mar 31, 2011 - 1:10 AM

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Even if Germany's weakest regions were to grow a steady 4 percentage points faster than the strongest regions, it would them take more than 45 years to catch up, according to Deutsche Bank Research.

There is an ongoing debate about convergence within the euro single currency area but data from Germany shows that regional disparities narrow at a snail's pace.

In 2009, Prof. Hans Werner Sinn, president of the Ifo Institute for Economic Research at the University of Munich  wrote on almost 20 years of German reunification: "Germany’s political unification has succeeded; its economic unification has not. Twenty years after the fall of the Berlin wall, GDP per capita in the formerly communist area is 69% of that of the former Federal Republic of Germany including West Berlin. This value sounds better than it is, as it is artificially inflated by civil servants’ wages and salaries, which have reached West German levels. East Germany’s privately produced GDP per capita is only about 66% of the West German level. Moreover, a substantial part of the convergence is explained by West Germany’s slow growth and the outmigration from East Germany."

Tobias Just, Deutsche Bank Research economist, says the economic upswing in Germany will continue but probably slow down somewhat in 2011. As in earlier upswing phases, the momentum is unlikely to benefit all regions to the same extent, however. He says a widespread preconception in this context is that the economically strong conurbations will grow even stronger, leaving the weaker regions even further behind. As with many preconceptions, reality proves to be more complicated, and this case is no exception.

Just says that in 2010, German GDP grew by an inflation-adjusted 3.6%, and DBR expects growth in the order of 2.5% for the current year. But Germany is not a homogeneous area and regional dynamics are often more important than national processes. This applies, for instance, to demand for infrastructure services, municipal revenue potential and real estate prices. A look at per-capita GDP data reveals huge differences between Germany‘s economically strongest and weakest districts. In Munich, for example, per-capita GDP came to approx. €85,000 in 2008, while the figure was less than €14,000 in the Southwest Palatinate (no recent data available at district level). All in all, there is an obvious east-west divide even 20 years after German unification. Economic powerhouses such as Munich, Hamburg, the Rhine-Main region, Dusseldorf and the Rhine-Neckar region are all doing considerably better than the more rural regions surrounding them. However, the economist says the performance levels reached initially only reflect different dynamics in the past. They do not necessarily indicate a similar development in the future. So will the gap between the strongest and the weakest regions tend to widen or narrow in the current upswing?

Tobias Just says the question is whether there will be economic convergence between Germany's regions. Will the poorer regions catch up or will the gap widen between the few metropolitan regions and the rest of the republic? He says there is widespread concern that the small number of metropolitan regions will grow faster than all other regions. In fact, the development in east Germany in the late 1990s - - away from very extensive construction activity to considerably lower activity once demand had been met - - was a major but, in the final analysis, transitory curb on the east German economy. During this roughly ten-year adjustment phase, the convergence process had been suspended in many places - -  at least as regards GDP growth. But Just says especially because of the distortions in the construction markets, the development of GDP growth during the years of adjustment is sending misleading signals regarding the convergence process. The growth momentum in the last three years before the financial crisis is likely to be more revealing, as the drag on growth from the recession in construction had been largely overcome during that upswing.

The economist says if average economic growth rates for the years 2006 to 2008 are plotted on a map of German districts, a colourful landscape emerges that bears no resemblance whatsoever to the regional distribution of economic power. At least during the last upswing, the economically most powerful regions were not necessarily the most dynamic ones. In fact, there is even a significantly negative correlation between economic strength and economic momentum to be found for the last upswing phase: there is a trend towards economic convergence between the different regions of Germany. In the current upswing, this effect will probably be less obvious in the statistics. However, this hardly reflects the sudden end of convergence but rather a basis effect: the slump during the economic crisis was particularly steep in southern Germany so the catch-up process will probably be more pronounced there as well.

Nonetheless, Tobias Just  outlines three limitations: First, any comment on economic convergence is a comment on a trend. The dispersion is very high, particularly in economically weak regions. This means there are regions that will even fall behind in relative terms. Demographic developments over the next few decades will probably even exacerbate this trend, if critical turning points are overstepped, i.e. a downward movement accelerates. Second, part of the ongoing convergence process is of course also a reflection of the political intention to increasingly harmonise economic performance. Third, economic convergence moves at a snail’s pace, at best. Even if the weakest regions were to grow a steady 4 percentage points faster than the strongest regions, it would them take more than 45 years to catch up.

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