Capital investment in eastern Germany declines again

Investment activity in the new and old federal states remains uneven: Increases in capital equipment spending in western Germany were offset in 2005 by continuing declines in eastern German capital investment so that the overall result for the year was stagnation. The only bright spot at the moment is plant and equipment spending. Further declines are expected for eastern Germany in the coming years. The reason is the overcapitalisation that was caused by recent investment promotions. Although the capital intensity (ratio of capital stock to labour intensity) in comparison to western Germany rose, capital productivity (ratio of output to capital stock) sank in the past ten years. This was accompanied by a labour productivity (ratio of output to labour input) stagnating at 60% of the western German level. The overcapitalisation has led to an under-utilisation of capacities and without further investment promotion to a weakening of the investment propensity. Nevertheless additional investment promotion is not advisable. Reforms must first of all be implemented on the labour market. Without reforms on the labour market, a further subsidisation of private investments in eastern Germany would be as ineffective as previous measures