Report Warns East Germany’s Economic Catch-up Is in Danger
A 2026 Bad Saarow forum report warns East Germany’s economic catch-up is at risk, citing weak corporate investment, an aging workforce and low entrepreneurship.
East Germany’s economic catch-up is facing a marked slowdown, according to a report unveiled at the Ostdeutsches Wirtschaftsforum in Bad Saarow. The analysis, prepared with contributions from the Ifo Institute’s Dresden office and researchers at the Halle-based IWH, argues that structural weaknesses—not short-term fiscal measures—are the main obstacle to further convergence. Authors warn that unless investment, innovation and skills levels improve, the gains of recent decades may stall.
Report highlights investment shortfall and stalled convergence
The report finds that average output per capita in the eastern states is about 85 percent of the level in West Germany, but the convergence that previously narrowed this gap has largely stalled. Between 2019 and 2023 corporate investment per worker in the East was roughly 25 percent lower than in the West, a gap the authors say is central to weaker productivity growth. The paper frames the investment deficit as a deep structural problem that simple cyclical stimulus is unlikely to resolve.
Automotive hubs and high-tech islands show uneven progress
The eastern economy contains notable pockets of strength, including the automotive clusters in Saxony and high-technology centers such as “Silicon Saxony,” which accounts for a significant portion of European chip output. These successes coexist with many regions that lag behind, creating a patchwork of highly productive districts and broadly weaker neighbouring areas. The coexistence of world-class firms and undercapitalized SMEs underscores the uneven nature of the catch-up process.
Innovation gap reflected in patents and R&D staffing
The study highlights a persistent innovation deficit: patent filings per capita in eastern federal states stagnate at roughly one-fifth of the western levels in some comparisons. A key factor is firm size and structure, since about three quarters of business R&D staff work in companies with at least 500 employees—entities that are scarcer in the East. Lower business expenditure on research and development therefore translates directly into fewer innovations originating from eastern firms.
Demographic decline and lower shares of academics amplify risks
Population ageing and out-migration of younger workers exert additional pressure on the eastern labour market, with the decline in working-age population proceeding faster in states such as Saxony-Anhalt and Thuringia. The report notes that eastern states have a comparatively low share of employees with academic qualifications, limiting the availability of high-skilled labour needed for productivity-intensive industries. Authors argue that higher skilled immigration would help, but they caution that current trends do not indicate a near-term surge in qualified arrivals.
Capital scarcity, ownership patterns and entrepreneurship shortfall
Analysts trace part of the capital shortfall to an historic gap in entrepreneur wealth: real estate, business equity and capital-market assets are less prevalent in the East, constraining firms’ ability to self-finance growth. The region’s business landscape is also more fragmented and smaller on average, with fewer multigenerational, owner-managed firms that accumulate sizable capital reserves. Complementing these structural capital issues, the study documents a notably lower propensity for entrepreneurship among eastern residents, even among cohorts born after 1980.
Policy proposals face limits posed by long-term legacies
The authors set out a range of policy responses, including incentives to boost firm investment, targeted support for R&D and measures to attract and retain skilled workers, as well as programmes to strengthen venture capital and founder networks. Yet the report is cautious about the speed and scope of expected results, arguing that many behavioural and institutional legacies from the post-reunification transition are deeply rooted. Policymakers are therefore urged to combine short- and long-term instruments while recognising that shifting risk aversion and ownership patterns is a multigenerational task.
The Bad Saarow findings place the emphasis on structural reform rather than temporary fiscal fixes, calling for sustained effort to expand capital formation, lift the innovation base and address demographic and skills shortfalls. Without such measures, the authors warn, East Germany’s economic catch-up may lose momentum and the regional disparities that persist after more than three decades of reunification could harden.
