Between the shelves of product catalogues on the wall of a spartan office in an eastern German lighting factory sits a framed quotation, in bold black lettering on silver paper, from Winston Churchill.

For Guenter Errmann, managing director of the Narva Lichtquellen factory near Freiberg, the words of Britain's former prime minister have been an inspiration as he helped salvage the business from the ruins of East German industry.

Some people regard private enterprise as a predatory tiger to be shot, says the Churchill quote in German. Others look upon it as a cow that they can milk. Only a handful see it for what it really is -- the strong horse that pulls the whole cart.

Since the collapse of the economy that produced the Trabant car and the Praktica camera in the early 1990s, Narva has blossomed into one of hundreds of successful manufacturing firms, helping the five former communist federal states expand faster than the west.

At 3.0 percent last year, the states' combined growth rate was the fastest since the post-unification boom in the early 1990s, and higher than the 2.8 percent booked by Europe's biggest economy as a whole.

We knew that our staff were willing and qualified and the machinery was in good working order so we decided we had to try to do something, said Errmann.

Like almost all firms left over from the communist German Democratic Republic, Narva went bust after the currency union between West and East Germany. It was liquidated by the Treuhand Anstalt, the organization charged with picking over the remains of the industry of East Germany after the Berlin Wall fell.

We had scarcely any products or markets, just a great deal of enthusiasm and a will to succeed, Errmann said, pointing to the Churchill quote.


Experts at the IW economic research institute in Halle expect growth in the eastern states to again outpace overall expansion this year, widening the gap to 3.3 percent against 2.6 percent for the wider economy.

But while manufacturing in the east flourishes, Joachim Ragnitz, deputy director at the Ifo institute's branch in Dresden, says there are deep and persistent structural problems that will take many years to address.

At 14.9 percent in July unemployment remains almost twice as high as in western Germany and particularly affects younger people. Emigration and a low birth rate are shrinking the population, social problems are rife and right-wing extremism has been on the rise.

The number of people living in the east has dropped by 12 percent since 1988 and the region still relies on massive transfers from the federal government -- some 1.5 trillion euros ($2.1 trillion) since unification and running at around 90 billion euros annually.

Ragnitz estimates it will take around 30 years before income in the east reaches western levels. The gross annual wage per worker in the so-called new states in the east was 21,340 euros (about $29,400) in 2006 -- well below the level in the old states in the west of 27,615 euros.

That compares with $45,563 in the United States and $44,974 in Britain, according to the OECD's 2007 employment outlook.

Some regions will get there more quickly, but others will never make it, Ragnitz said by telephone, adding that he was more pessimistic than most.

When the business cycle turns down again the impact of the demographic changes will be fully felt, he said.


Recent surveys suggest the perceived divide between east and west remains wide.

A Forsa poll for television station n-tv published earlier this month showed 60 percent of Germans think easterners and westerners are yet to become one Volk, or people.

And the share of easterners who think they are better off now than under communism has fallen to just 31 percent from 66 percent in 1995, n-tv said.

Wolfgang Tiefensee, the Social Democrat (SPD) cabinet minister responsible for the eastern states, believes the services sector could be the key to solving the problems in the labor market in the east.

As many as one million new jobs could be created in the region by 2020, Tiefensee said last month, citing a study he commissioned from the Berlin-based DIW research institute. The unemployment total was 1.28 million in July.

Many companies still see the east as an extended workbench but we have to be able to develop sectors such as research, marketing or advertising, he said.

In Frankfurt an der Oder, about an hour by train towards the Polish border from Berlin, it's difficult to find anyone who shares Tiefensee's optimism.

Grandmother Antje Behrendt had brought her 16-year-old grandson Simon to the local federal labor office branch in the city centre to support him as he tried to get a foothold in the labor market.

The teenager left high school with poor grades but said he was hoping to find a trainee position as a cook or with a manufacturer.

The prospects of him getting a full-time job after that are not good, said his grandmother, 66.

Untidy blond hair flopping into his eyes, Simon Behrendt had other dreams as he waited to see an adviser. The office entrance hall was lined with brochures advertising jobs abroad -- in Britain, France, Spain and the Netherlands.

I'd love to move away from here for a few years, he said. I went to London on a school trip and it was amazing.