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East German town has a new powerhouse role
By Bertrand Benoit in Greifswald

Published: June 29 2007 04:09 | Last updated: June 29 2007 04:09

From a distance, the Lubmin nuclear power station looks like any other industrial relic from Soviet-era East Germany. Its reactors have gone cold and its gutted buildings flake in the sun.

Frenzied activity inside its kilometre-long turbine hall tells a different story, however. Under a ballet of cranes, scores of workers are assembling steel hulls for the nearby shipyards.

Lubmin’s rehabilitation is an example of the quiet investment boom spreading through Germany’s former communist east.

“With costs in eastern Europe going up, the gap between eastern Germany and neighbouring countries has stopped widening,” says Udo Ludwig, senior economist at the IWH research institute in Halle. “Investors are waking up to this.”

The most recent official statistics are from 2005, when investments in the east took a sharp dip. But Mr Ludwig says they should have rebounded by at least 10 per cent last year, exceeding west German rates by a wide margin.

Economic growth in the region topped the west’s rate by 0.6 percentage points last year, he says, the first time this has happened since the early 1990s. Saxony, one of the east’s six states, had gross domestic product growth of 4 per cent, the fastest in the country.

Labour costs that are a third lower than in the west, a more flexible labour market, longer working hours and lower union membership are some of the factors behind this renaissance.

And that workforce is well trained. Potsdam near Berlin has the highest proportion of university graduates in the country.

Add the often superior transport infrastructure, modern and cheap office properties and a dense network of research institutions, and it is no wonder that many east German cities beat their west German counterparts in attracting industrial projects.

Though few German companies advertise the fact, many have been quietly moving functions from west to east, including Lufthansa, BASF and Siemens. Others have adopted two-tier offshoring strategies. Munich-based MTU Aero Engines is investing both in Poland and in Ludwigsfelde, in Brandenburg, eastern Germany.

“We are even seeing evidence of reverse offshoring,” says Solveigh Jäger, east Germany expert at the BDI industry federation. “German foundries, for instance, have been moving back from eastern Europe to eastern Germany.”

With east German industry now operating at close to capacity, the IWH expects capital goods investment to grow more than 5 per cent this and next year.

If all goes according to plan it is Lubmin that will get the biggest investment of all – a €5bn gas pipeline planned by Gasprom of Russia and Germany’s Eon and BASF. The link, scheduled for completion in 2011, will bring gas directly from Siberia’s gas fields to the former power station.

“When the pipeline news broke, the phone wouldn’t stop ringing,” says Dieter Rittscher, managing director of Energiewerke Nord, the state-owned company that is dismantling the nuclear plant and selling its land.

Investors have spent €200m on the site and planning applications are pending for €6.5bn – more than twice the cost of the decommissioning.

Behind the projects, which include two gas and one coal power stations, are investors such as Dong Energy of Denmark, EnBW, part-owned by EDF of France, and Wingas, a joint venture between Gasprom and BASF.

If all these plans come to fruition, Lubmin, which once supplied a tenth of the German Democratic Republic’s electricity, will reclaim its role as a national energy powerhouse.

The pipeline project may have put Greifswald, home to the Lubmin plant, on the map of multinational companies. But even without it, the university town, with its manicured medieval centre and sprinkling of research institutes, would qualify as one of the east’s economic lighthouses.

Prognos, a business consultancy that publishes an annual economic ranking of Germany’s 439 municipalities, ranked Greifswald 101st this year, up from number 325 in 2004. That makes it the nation’s fastest growing town.

“We have the lowest unemployment rate in the entire state of Mecklenburg-Vorpommern,” says Arthur König, Greifswald’s tanned and bearded mayor.

“In fact, our biggest concern is a scarcity of highly qualified workers.”

The same could be said of many of the east’s best-performing cities, where the supply of trained staff is not keeping up with the inflow of investors.

“This combination of persistently high unemployment and skills shortage is the one thing that worries me,” Mr Ludwig says.

“It is only a matter of time before this scarcity pushes wages higher.”

This should satisfy Berlin politicians’ acute sense of social justice, but for a region that is only beginning to reap the economic benefits of lower production costs, it would be bad news indeed.

Copyright The Financial Times Limited 2007