In his levelling up speech in July, Boris Johnson drew parallels between the current challenge facing the UK and German reunification. The comparison is appealing – directly after reunification, productivity in former East Germany (including Berlin) was at around 60 per cent of former West Germany, it is now at around 85 per cent.
Although former East Germany has still not fully closed the gap between itself and former West Germany, it now has a GDP per capita higher than many parts of Northern England and Wales and has made great progress on employment and wage growth.
With this in mind, what can Germany teach the UK about levelling up?
Levelling up will require significant long-term funding
Reunification did not come cheap. In total it is estimated that up to €2 trillion was spent on the reunification project between 1990 and 2014. That is the equivalent of around £71 billion every year. For comparison, the UK’s levelling up fund is £4.8 billion in total. Also to date, almost all former East German federal states are still the largest recipients of payments from the financial equalization scheme.
Figure 1 shows the estimated composition of costs in one year, 2003. That year, 45 per cent of the money spent on reunification came in the form of financial transfers through the welfare system (such as pensions or unemployment benefits) to support living standards in former East Germany. Other larger areas of expenditure were infrastructure investments and growth-enhancing policies such as business support.
While not all areas of spending are relevant in the UK context, the sheer amount of money that the German Federal Government spent and the timescale shows a commitment that lasted longer than a single parliamentary term, or a single party’s political agenda.
The key programme “Aufbau Ost” (“Rebuilding East Germany”) was launched with the ambition of only ending once it had successfully created equal living conditions, meaning that it was designed to outlast changes in the political composition of the Federal Government.
Figure 1: Different costs of the reunification in 2003
Source: Halle Institute for Economic Research (IfW) Halle, 2003
Individual policies often had a very long time-span and fitted into overarching strategies that had specific economic goals. As an example, Table 1 shows all the programmes since 1990 which fed into an overarching objective of making former East German cities and towns more attractive places to live, and to prevent demographic decline through younger east Germans leaving for better opportunities in western Germany.
The main programmes had a duration of roughly 20 years, while smaller programmes addressed specific challenges. The Zentrenprogramm between 2008-10 for instance specifically focussed on city and town centres.
If the UK intends to learn lessons from the German experience, then it should first agree on a clear objective – for instance closing the UK’s regional productivity gap. Second, it should establish programmes that have cross-party support and so are independent of changes in Government. Third, it should provide those programmes with sufficient funding.
Table 1: Different programmes dedicated to urban development between 1990-2010
Source: Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), 2010
Comprehensive institutional change can happen in a very short time – if the motivation is there
Former East Germany did not just shift its political economy from communism to the liberal market economy. It also completely transformed its centralised governance structure to a federal system with strong municipal self-government.
The challenges are massive from an institutional perspective and required finding the right personnel and establishing of new ways of working. Despite these barriers, former East Germany underwent comprehensive reform. It re-introduced state governments and gave them expansive powers over taxation and policy areas such as education and health.
Crucially, stronger local government and greater devolution was accomplished by reducing the number of local councils. In 2001, the number of municipalities in former East Germany had dropped by 44 per cent, and by 65 per cent by 2017 (Table 2).
By replacing numerous, weak local authorities with fewer stronger ones, local government in former East Germany was able to play an important role in catching up with western Germany’s prosperity. This reform was backed by un-ringfenced money from the German Unity Fund.
Table 2: Regional reforms (municipality level) in East Germany
||Number of municipalities in 1990
||Number of municipalities in 2001/2003
||Number of municipalities in 2017
Source: Federal Agency for Civic Education (bzp), 2019
The UK’s complicated patchwork of local government is in need of a reform of local government too. Currently, local political leaders have few levers to pull over crucial policy areas such as local transport and planning, which limits their ability to help make levelling up a success.
A common response to proposals to reorganise local government here is to say that it would be too difficult, and that it would serve as a distraction from levelling up. But if the challenge of levelling up is comparable to that of the reunification of Germany, then Germany’s experience shows that it is possible – and necessary.
Cities have to an extent driven economic recovery in former East Germany but they still lag behind their western neighbours
Shortly after the reunification in 1992, all parts of former East Germany lagged behind their western German counterparts on productivity (Figure 2). However large cities such as Leipzig or Dresden outperformed smaller eastern German cities, towns and villages. This is what economists expect to see in well-performing urban and regional economies.
Despite this, however, large cities in eastern Germany still performed worse than smaller places in the western Germany.
Figure 2: GDP per worker in Eastern and Western municipalities
Source: Statistic departments of the federation and the federal states, 2019
Note: Large cities in the West: Stuttgart, Munich, Dusseldorf, Cologne, Essen, Hamburg, Dortmund, Frankfurt. Large cities in the East: Berlin, Leipzig, Dresden.
Note: Productivity data for Mecklenburg-Western Pomerania, Lower Saxony and Saarland are for 2000 instead of 1992.
Since 2019, this picture has partly changed. Figure 2 shows that the gap between other areas in the former East and West has almost closed. But the large cities in the former East still largely trail their western counterparts, and this explains why the former East still trails the West.
This is because the former have struggled to attract in higher-skilled jobs, as shown in Figure 3. Dresden and Leipzig have lower shares of employment in high-value added industries than, for instance Frankfurt or Dusseldorf, which makes them less productive. This has implications not only for the cities themselves but also for the jobs they can offer to people living in nearby towns and villages.
Figure 3: Industrial structure of German and UK large cities (without capitals)
Source: Bundesagentur fuer Arbeit, 2019; ONS 2018.
Yet, despite being less successful than their western neighbours, Leipzig, Dresden and Berlin still perform better than the majority of large UK cities in terms of the shares of high-value added jobs people. This underperformance illustrates why large cities must be at the core of the levelling-up debate in the UK.
Around €2 trillion later, former East Germany has still not been fully levelled up but the gap between East and West has certainly narrowed. UK policymakers should learn lessons from the German experience: the Federal Government’s long-term commitment to the project, the size of funding committed and its support for cities as the necessary creators of economic prosperity for all of former East Germany.