East German economy: Catch-up process has been stagnating for years

The East German economy is still lagging behind the West German economy more than three decades after reunification - and the gap has not been narrowing for years. According to calculations by the German Economic Institute (IW), in 2025 the five eastern German states will reach almost 79 percent of the western level, after a good 78 percent in the previous year. The East has caught up significantly since 1991; at that time, according to the IW, it accounted for 51 percent of West Germany's economic power. However, the alignment has stalled for five years. The value has fluctuated between 78 and 79 percent since 2020, and the East has not yet reached the 80 percent mark.

For the IW standard index, which reflects East Germany's economic catch-up process since 1990, the institute takes into account not only economic output per capita but also productivity, capital stock, the proportion of highly qualified people in research and development, labor force participation and the unemployment and self-employment rates.

Research and development problems

The IW experts see deficits primarily in the research area. When it comes to personnel in research and development, the East only has a good 46 percent of the West's level. While the public sector with universities and institutes is doing relatively well, according to the IW, there is a lack of researchers in the economy because there are hardly any large companies.

But the East is also making little progress in other indicators: labor force participation is falling; measured as a percentage of the total population, the East reached almost 89 percent of the West level in 2010 and, according to the IW, in 2025 it will only be a good 85 percent. There is a standstill in investments. When it comes to the value of all machines, factories, roads and buildings per capita - i.e. the capital stock - the East has barely caught up for 15 years. In 2010 it was almost 77 percent of the western level, and in 2025 it was a good 79 percent.

Aging slows down the catch-up process

According to the IW forecast, the population in the east will shrink by more than a fifth by 2045 in a scenario without immigration - significantly more than in the west. The eastern German states are therefore even more dependent on skilled workers from abroad. “The fact that this openness to immigration is in question after the recent election results clouds the outlook,” say the IW experts.

The IW considers maintaining the pension without deductions after 45 years of contributions - supported by several East German Prime Ministers - to be counterproductive. With its population structure, the East is particularly dependent on keeping experienced employees in their jobs for longer.