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Still Out In The Cold?

Despite much progress since the fall of the Berlin Wall, there is still a stark disparity between the wealth of old and new Europe. Dominic Swire reports on the new European divide

For decades many believed it would never happen but on 9 November 1989 Europe was rocked to its core by the fall of the Berlin Wall, an event that marked the end of Communism in Germany and central and eastern Europe and laid the foundation for major economic and social reform in a swathe of other countries. "When I travel to other European countries, it doesn't feel like I'm abroad, it feels like I'm still at home," muses recent philosophy graduate Bob Cap as he sips a beer in a noisy Czech pub. Ice hockey plays on the TV and waiters stride purposefully carrying fistfuls of beer as Cap describes how he plans to celebrate his graduation with a round-the-world trip visiting Africa and South America.

Nothing so unusual in that. But just a generation ago the clientele sitting on the same wooden benches would never have dreamed of being able to make such plans. Back then the Cold War meant a Europe divided by an ‘iron curtain' that people were shot for trying to cross. And even if they did, most travel was out of the question because of the cost. Yet over the last 20 years what was once referred to as the Eastern Bloc has been changing, much of it beyond recognition. These days eastern European high streets are virtually indistinguishable to their western counterparts, sporting multinational retail chains selling designer brands, high-class restaurants and numerous travel agents that would gladly help Cap arrange his trip.

The changes can be traced back to 1989 during an autumn of change that saw Communist governments across the region toppling like dominos. First the Polish regime was swept aside, then Hungary opened its borders leading to an exodus of East Germans travelling to the west through Austria. Eventually East Germany caved in and announced that the Wall, which had come to symbolise Cold War division, was to be opened.

"The fall of the Berlin Wall had obvious practical significance in opening the door between the two parts of Germany, but the practical effect was dwarfed by the immense symbolic importance – symbolising not just the opening of borders but, far more powerfully, the collapse of the Communist system that had built the wall," says Nicholas Barr, Professor of Public Economics at the London School of Economics.

One year after the fall of the Wall East and West Germany were reunified. But that was not the end of the story. Rather, it was the start of Germany's mammoth challenge to absorb a state suffering deeply from crumbling infrastructure, poverty, and vastly different living standards. Christoph Limbrunner from West Germany made a backpacking trip through the newly opened part of his country in 1992. He recalls decrepit grey buildings and driving very slowly because of frequent potholes in the road. "It definitely didn't seem like the same country," he recalls. "I remember feeling very glad I was born in the West."

Limbrunner was witnessing signs of a shattered economy. In 1991, East Germany accounted for just 7% of the country's GDP, despite making up about one third of the landmass of the whole country and being home to 25% of the population at the time. Now this figure is closer to 20% as the fall of the Wall led to hundreds of thousands relocating to West Germany, tempted by greater opportunity and wages. Unemployment rocketed, too, hitting over 20% in 2005.

Over the last 20 years around $2tn has been poured into the former East German states to revitalise the region. There has been improvement in transport, communications and the development of some industries, notably green technology. Unemployment has also stabilised at around 13%. However, there is still a striking gap in pay. In 2008 the average worker in the east of the country earned €30,151 per year, just 70% of the West German average of €43,310, according to figures from the German Statistics Office. Experts say it could be decades before full wage convergence is reached.

While the reunification of Germany was, and still is, certainly no small task, it was just a microcosm of the overwhelming challenges faced by Western Europe in the early '90s, which suddenly found an array of countries on its doorstep in dire need of help. In 1993, the nine former communist states that eventually joined the EU (Poland, the Czech Republic, Slovakia, Hungary, Romania, Bulgaria, Estonia, Latvia, and Lithuania) had an average GDP per capita of $1,783, about the same level as the Dominican Republic and Tunisia according to IMF data.

In 1995, all nine central and eastern European (CEE) countries were included for the first time in the annual Economic Freedom of the World report published by Canadian think tank the The Fraser Institute. The report ranks countries according to how easy it is for individuals and businesses to do business in the respective countries. Out of 123 countries all nine ex-communist states were positioned in the bottom half of the table, bar Hungary in 48th position. Romania was fifth from bottom in 119th position.

This lack of development was evident on the streets, with some of the most beautiful architecture in Europe decrepit after years of neglect; restaurants with little to offer that often closed at lunchtime due to some bizarre Communist logic; and a dazed and confused population attempting to come to terms with the reality of a market economy.

"Communism was a very bad time. Only the political elite lived the good life," recalls 35-year-old taxi driver Petr Velronec as he sits in his cab round the corner from Prague's old town square. Velronec struggles to make ends meet having to work 12 hours a day to generate a salary of around CZK13,000 (about €500) per month to support a wife and a son. Nevertheless, he says he would never want to go back to the old days. "There was nothing in the shops – no milk, no yoghurt. You could only travel to eastern countries and corruption was rife. You couldn't do anything without paying a bribe."

Since that period the region has experienced a world of change. All nine ex-communist states are now members of NATO, the EU and the borderless Schengen Area. FDI has been pouring into the region, reaching $520m in 2007, up more than 1,600% since 1995, according to figures from UNCTAD.

But, just like Germany, the process of convergence is far from over. A report published earlier this year by Eurostat showed that the 20 poorest EU regions were all in CEE countries, and out of 41 regions judged to exceed 125% of the EU's average GDP per inhabitant, only Prague and Bratislava were from CEE.

Such statistics, especially in the midst of a global financial crisis, have led some to warn of a new, economic divide in Europe. Speaking earlier this year, shortly after the French government announced plans to lend carmakers PSA Peugeot Citroën and Renault €3bn each if they promise not to up sticks and move to cheaper countries in eastern Europe, Czech Prime Minister Mirek Topolánek said: "We do not want any new dividing lines; we do not want a Europe divided along a North-South or an East-West line. Pursuing a beggar-thy-neighbour policy is unacceptable."

The economies of east and west Europe may have yet to converge but whether the progress made is now in reverse is debatable. What's clear is, with the fall of the Wall 20 years ago, central and eastern Europe at least now has a realistic hope of a bright future.

History of The Berlin Wall

12 April 1945 Harry S. Truman replaces Franklin Delano Roosevelt as US president and promptly overrules Churchill's desire to ‘march on Berlin' in order to wrest control from the Russians. This, in effect, cedes control to the Russians and lays the basis for a divided city in East Germany.

18 June 1948 Deutsche Mark replaces Reichsmark in the American, French and British sectors of Berlin, dramatically highlighting the inequalities between east and west and sparking the Berlin Blockade six days later and the airlift that broke it

1957 Erich Mielke becomes chief of the Stasi — the brutal East German security agency, modelled on the Soviet KGB — a post he holds until forced to retire on 7 November 1989. Mielke was a key architect of the Berlin Wall.

Jan—May 1960 Exodus of citizens from East to West Berlin doubles from 10,000 per month to more than 20,000 as living standards plummet in the east.

13 Aug 1961 Soviet-controlled East Berlin closes the border with West Berlin and begins the building of the first Wall — a makeshift construction of barbed wire and fences. The Wall undergoes a number of modifications and reinforcements over its 28-year life.

10 September 1989 Hungary opens its borders with Austria, leading to TV footage of smoke-belching Trabants queuing at the border to leave the Eastern Bloc.

9 October 1989 40th anniversary of the German Democratic Republic and East German general secretary Erich Honecker's last chance to crack down on a crowd of 70,000 at Nikolaikirche in Leipzig, gathered for ‘prayers'. He fails, having lost the support of Russian leader Mikhail Gorbachev the previous week.

17 October 1989 Honecker is sacked and the much less-experienced Egon Krenz replaces him. With hindsight it was the beginning of the end of the regime as it was Krenz's inexperienced politburo that nodded through new travel legislation the day the Wall fell, apparently without realising that a last-minute revision had lifted all restrictions on travel to the West.

8 November 1989 Around 20,000 East Germans pass into Czechoslovakia, while thousands more mass at the border, causing the East German authorities to start revising travel restrictions in Berlin to ease the pressure.

9 November 1989 At 11.30pm, following considerable confusion in the media about the meaning of hastily revised travel restrictions, East Berliners mass at the Bornholmer Straße checkpoint in the north of the city, shoving aside a screen designed to hold them back. With no orders to shoot, commander Lieutenant-Colonel Harald Jäger stands down his guards and surrendered the Wall to the crowd, and Germany begins on its path to reunification.