Inflation and recession: is the east more affected by the crisis?

Thousands of people demonstrate again and again on Mondays in various cities in East Germany. They complain about rising prices and call for a different energy policy. In the West, on the other hand, there is less resistance. Are the people in the East really hit harder by the crisis?

Shortage of gas, expensive fuel, rising prices for bread and butter: there is a mood of crisis almost everywhere in the country, but even more so in the east than in the west. Thousands protest every Monday in Schwerin or Plauen, Gera or Cottbus. And it also seems clear to politicians from right to left: the crisis is hitting the East harder. But is that so?

“From a purely economic point of view, you really can’t say that the East has been dramatically affected much more by the Russia sanctions or by the gas prices,” says economist Oliver Holtemöller from the Leibniz Institute for Economic Research in Halle (IWH). Martin Gornig from the German Institute for Economic Research (DIW) sees it the same way: “The economic facts actually speak against a stronger concern.” Nevertheless, both researchers find the concerns in the East understandable. So it’s worth taking a closer look.

At the end of September, Holtemöller’s IWH Institute concluded from the joint diagnosis by leading economic researchers that the economy in the eastern federal states was even somewhat more stable than in the west. East German production is expected to grow by 1.5 percent this year, slightly more than in Germany as a whole. Next year, the expected decline in economic output of 0.1 percent is expected to be weaker in the east than nationwide (minus 0.4 percent).

DIW expert Gornig explains it like this: “Unlike in the Corona crisis, the energy-intensive industry is now particularly affected, and it is particularly well represented in the west. In the east, the economy tends to be more geared towards services, and that has an impact mitigating the crisis.” Holtemöller also disagrees with the thesis that East Germany is more dependent on exports to Russia. Individual companies maybe, but overall no, says the IWH deputy boss. So everything undramatic?

In politics, people see things differently, and quite unanimously. “The current price development, not only for energy, is particularly threatening for the people in East Germany,” says the federal government’s East Commissioner, Carsten Schneider from the SPD. Union parliamentary group leader Sepp Müller agrees: “The current challenges are affecting the East more.” Left faction leader Dietmar Bartsch sees it the same way and cites four reasons: “Wages and retirement income are about 20 percent lower in the east,” says Bartsch. Energy prices are often more expensive due to higher network charges. Because many people live in rural areas, fuel prices have a greater impact. And companies in the east often have fewer reserves and equity. Private assets are also lower, adds CDU politician Müller.

The East Commissioner Schneider has figures on this: “The average amount of an inheritance in Mecklenburg-Western Pomerania is 52,000 euros, in Bavaria, on the other hand, almost four times as much – namely 176,000 euros.” Economists also admit that the financial ceiling is thinner for many in the East. Klaus-Heiner Röhl from the Cologne Institute for Economic Research sums it up like this: “Even if the economy in the east is more stable, the population there can be more severely affected because incomes are lower.”

Russian gas and oil traditionally supplied the east. The East is also traditionally more dependent on Russian gas and Russian oil, says CDU politician Müller. The Russian gas pipeline Nord Stream ends in Mecklenburg-Western Pomerania, the “Druschba” pipeline carries Russian oil to Leuna and Schwedt. For the PCK refinery in Schwedt in particular, there is still no full replacement for the Russian oil volumes, which will be eliminated at the latest with the oil embargo on January 1, 2023.

“The federal government would deal differently with a refinery of comparable importance in the west than with this refinery, and that’s exactly what we can’t put up with,” said left-wing politician Gregor Gysi a few days ago at a demonstration in Schwedt. He warned of job losses, supply bottlenecks and regionally higher prices. … but the consequences seem manageable.

The economic researchers put that into perspective. Where the gas or oil came from is of little importance “as long as there are functioning networks that can be used to supply all regions,” says DIW expert Gornig. That is the case with gas, while oil is easy to transport and store. The federal government has given extensive employment and income guarantees to Schwedt. It is trying to find alternative oil supplies via Rostock and Gdansk and, if necessary, wants to inject from the national oil reserves. IWH expert Holtemöller considers “jerking for days” to be possible. “But you can’t say that the supply situation with gas or fuel is now fundamentally worse.” Gornig does not rule out short price swings, but higher fuel prices in the east are unlikely in the long term. The crisis is deep everywhere.

One thing is clear: Economic researchers also see a deep energy crisis and the danger of a gas shortage – just from a macroeconomic point of view in East and West alike. However, both recognize that crises bring back bad memories of economic disruption and mass unemployment in East Germans. “People in the East are not more affected by the actual situation, but of course that says nothing about their feelings,” says Holtemöller.

On the other hand, East Germany is also closer to a solution – the energy transition is further along in many places. According to information from the two state governments, Mecklenburg-Western Pomerania and Brandenburg could already supply themselves with 100 percent electricity from renewable energies, and the proportions in Thuringia and Saxony-Anhalt are well above the national average. The crisis could help make expansion even more attractive, says DIW economist Gornig. “And East Germany has great potential there, partly because the population density is lower.” For the same reason, the East has recently attracted large investments, such as Intel in Magdeburg and Tesla in Grünheide. “The crisis hurts,” says Gornig. “But it’s like medicine: what tastes bitter can also help, in this case with structural change.”