Berlin to Remain Broke

It seems as if every week, there is a new expensive museum or monument or refurbished relic opening in Germany's capital.

Amid such lavish spending, it might appear odd to hear Berlin officials complaining over a mountain of debt, even taking the federal government to court for more money.

Berlin officials have long argued they are entitled to federal help with at least 60 percent of their 62-billion-euro ($77 billion) debt under a law that requires transfer payments between German states and the federal government in times of financial need. After all, they have cut costs and sold off assets, they say. And there is precedent -- a 1992 court ruling forced the federal government to help Bremen and Saarland with their debt.

"We cannot climb down from this debt mountain alone," Berlin Mayor Klaus Wowereit told the German Constitutional Court in Karlsruhe. "We have done everything we can and now need federal solidarity. Berlin is a sexy but poor city."

Thursday, however, the court disagreed saying that Berlin failed to qualify for emergency aid under the constitution rules.

"Berlin adorns itself with the slogan 'poor but sexy' but it isn't so poor,'' said presiding judge Winfried Hassemer. "Berlin doesn't have a budget emergency. Significant indicators point only to a budget that is under stress which Berlin can in all probability overcome on its own.''

So what now?

Christian Schmidt of the Berlin-based Industrial Investment Council, an agency that promotes investment in the east, says he was surprised by the court decision and thinks people didn't expect it would be so harsh.

"'Poor but sexy' obviously failed to impress the judges," he said. "Berlin has even tougher times ahead."

Experts say things looks pretty bleak for the city of 3.4 million known for its vibrant arts, academic and cultural life, one in which the tourism and building sectors are growing. That is because the city is burdened by massive debt and interest payments of 2.5 billion euros ($3.1 billion) annually. The city has a very small industrial base and little hope of expanding it. The unemployment rate is the third highest of any of Germany's 16 states, at 17 percent.

Most of the problems date back to the end of World War II when most large companies moved their headquarters to West Germany -- for example, Siemens moved to Munich and the banking industry fled to Frankfurt.

After German reunification in 1990, East German industry collapsed when state subsidies were cut. Also, Berlin failed to stop spending at a rate it was used to, especially when federal payments were slashed in 1995 from almost 8 million euros to 2 million euros.

As a result, since 1991, Berlin's debt has risen nearly six-fold, from 10 billion to 61 billion euros, giving it the highest per capita debt level of any state in Germany. The city has lost about 100,000 industrial jobs since 1990.

"In 15 years, we are going to be showing people from China around and hoping for a euro in tip," said one economic expert. "Wealth is going south and I am not optimistic about Berlin's situation."

Tougher measures needed

The judges said that poor political decision-making led to Berlin's financial situation, something that "federal aid isn't there to remedy."

They wrote that Berlin needs to increase the local commercial tax rate and sell more of its assets, such as the state's 270,000 housing units estimated to be worth about 4 billion euros and the Landesbank Berlin Holding AG, worth 5 billion euros. Reducing wages for its civil servants is another area in need of attention -- Berlin employees are paid 50 percent more than those in Hamburg, for example.

Another issue is cutting subsidies that fund redundancies such as the city's three operas, two zoos and six housing authorities, something that arose because Berlin was divided.

"To reconcile the two cities, well that was a tough thing," said Schmidt. "But it took too long and no one had the guts cut into the meat."

Only way out

Schmidt says, however, that even so, Berlin is in a tough predicament because even if it sold off a lot of its assets, it wouldn't cover the debt. He praises Berlin's finance minister, Theo Sarrazin, for taking some harsh measures such as cutting subsides and 70,000 jobs and has managed to balance the budget for the first time -- Berlin has cut spending by about 11 percent since 1995, the biggest savings made by any state.

The only way out is to focus on Berlin's advantages, its human capital and vibrant cultural life, experts say.

"I cannot image that most industries and sectors that have left Berlin will return," said Dieter Vesper, an economist with the German Institute for Economic Research. "So the only choice Berlin has is to try to develop sectors which are important in the future such as the health industry and the research and education sector, both areas which Berlin already has an advantage. But the only way to do this is to develop better links between these sectors and the business community."

Another area to watch is if the federal government moves more of its people to Berlin as many expect it to do -- currently almost half of all government employees work outside the capital.

Schmidt said he thinks that Berlin will cease to be an independent state in 15 years and instead will merge with Brandenburg, the state that surrounds it.

"That would help stop the rivalry and help lure investors," he said. "It would also trim administrative budgets, help universities to work more collaboratively. There is no quick fix for Berlin but there is no reason why the city can't survive with all it offers."