From Trabant to Bmw: the East Rises Again

Helmut Kohl, the then chancellor, promised 150,000 cheering east Germans in Erfurt's cathedral square in 1990 "blossoming landscapes" when the two Germanys reunited. Weeks later he ensured that his promise became horribly unstuck when he forced through a 1:1 conversion rate for near-worthless east German marks in July's monetary union.

Wage levels and pensions swiftly rose to about 80% of west German levels but the ex-communist east's capital stock was almost bankrupt and, within a year, the labour force had shrunk from 10 million to 6.5 million. There are today more people economically inactive - 7 million - than employed - 6.2 million, in the five new federal states.

Rebuilding the region has so far cost about €1.25 trillion (£860bn). However, one year ago a panel of experts headed by Klaus von Dohnanyi, an adviser on Reconstruction East, the quango overseeing the effort, concluded that it had been an unmitigated disaster and could bring Germany's entire economy to its knees.

Fifteen years on, Kohl's "blossoming landscapes" could finally prove more than the sick joke it became - and not just because of the acres of yellow rape covering Saxon fields. Last week Kohl's successor, Gerhard Schröder, officially opened the world's most innovative car plant for BMW in Leipzig, the "city of heroes" that was the cradle of the peaceful revolution in 1989 that overthrew communism.

The stunning factory, designed by the Iraqi-born British architect Zaha Hadid, employs just over 2,000 workers to produce the new 3-series and will eventually have a workforce of 5,500, with as many working for suppliers. Hardly enough to dent the jobless rate, as Martin Rosenfeld of Halle's economic institute said, in a region where more than 150,000 are unemployed (about 20%) and almost as many applied for the jobs on offer.

The plant cost €1.3bn, offset by €360m in European Union aid. It breaks new ground, in a Germany suffering from the erosion of its industrial base, in the flexibility of its production and working practices. It can be effortlessly adapted to produce other models within weeks. Wages are 20% lower than in BMW's three Bavarian plants but productivity, helped by a basic working week three hours longer and with no overtime pay, is higher.

Schröder hailed it as a beacon for the renewal of manufacturing; Helmut Panke, BMW's chief executive, said the levels of flexibility were the prime reason why Leipzig was chosen over 250 other would-be locations, including scores in neighbouring east European countries where labour costs are a third cheaper.

The rigid German labour market, often cited in Britain as a prime source of the country's stagnation, is breaking up and higher levels of productivity, skills, infrastructure and earnings are attracting inflows of foreign capital and making the country the world's biggest exporter. For Thomas Jurk, Saxony's economics minister, these are attributes strongly rooted in the east where, even under communism, workers were more adaptive and flexible.

BMW executives say these were deciding factors outweighing the draw of, say, Poland or the Czech Republic as alternative locations. Jurk goes further: "People here are very flexible, innovative and prepared to do more for their firm than one expects, and that's right provided they are not abused with lower and lower wages."

In the city Walter, a part-time taxi driver, is annoyed that he can't practise his trade in construction because of cheap Polish labour. But Jurk says: "I know some people are angry and disappointed but in times of globalisation, we should think forward and, as Germans, recognise that it's in our interests that the economies of neighbouring countries grow. In Poland prices are rising rapidly and so will wages, and this fierce competition will abate."

He has a two-pronged strategy for reviving Saxony's economy, which last year had Germany's highest growth at 2.2%, with manufacturing up 13%. One is to promote joint ventures with the cheap-labour Poles and Czechs within a cross-border EU market of 70 million. The other is to foster five "clusters" of growth: micro-electronics, based in the state capital, Dresden, and building on the chip-makers AMD and Infineon; bio-technology; media and communications technology; energy and environment, and cars, with VW, BMW, Porsche and others now hiring 60,000 in the region.

He admits that his overriding goal of creating and retaining jobs is undermined by a shortage of training and the exodus of young people to other parts of Germany and abroad. Saxony's population has fallen by half a million in a decade; the birth rate has fallen by a third.

Much of Saxon and other east German towns have in effect been closed down; some areas are economically dead and the east as a whole cannot expect to be self-sustaining for years. Von Dohnanyi, who favours the "cluster" approach rather than subsidies, admits that "we're not even halfway there". But the mood has become more upbeat and confident, certainly in Leipzig and Dresden, and Germany as a whole may reawaken from its post-unification nightmare.