Berlin: Hip but Hurting

Can its trendy image save the city?

In the 1920s, the warehouse in Berlin's Friedrichshain-Kreuzberg section served as a giant icebox for millions of eggs. Now, it's getting an even cooler tenant. Universal Music Group is moving all 500 of its German employees from Hamburg to the newly renovated building in Berlin. "We need to have our finger on the pulse of the times, to recognize new trends and attract creative people," says Julia Engel, Universal's project manager for the move. "For all those reasons, Berlin is the only place to be."

But can Europe's coolest city attract enough new investment to turn around its ailing economy? The German capital has revived its pre-World War II reputation as a draw for creative types of all stripes. But thanks to a decade of runaway borrowing and mismanagement, the city is a financial basket case. It can barely maintain the cultural institutions that give Berlin its appeal or provide the services that make it livable. The economic activity generated by one new business will be a drop in the bucket compared with the city's $36 billion debt. The interest alone consumes 10% of the budget. Unemployment is triple that of such cities as Munich.

Paradoxically, just as Berlin is beginning to get an economic jolt from companies eager to cash in on its hip culture, mistakes made after reunification threaten to overwhelm it. In June, the city parliament is expected to approve a new budget that belatedly tries to get spending under control. But even under the most optimistic scenarios, Berlin will run deficits for years. Outright bankruptcy is unlikely only because Germany's federal government and other states would be forced to step in. "I think it is clear to everybody that financial consolidation has to be done much more intensively," says Hubertus Erlen, CEO of Berlin-based drugmaker Schering.

How did Berlin get into this mess? After the wall came down, spending rose 5% a year, while income rose just 2%. City debt quadrupled. Berlin subsidized new housing even though there was a housing surplus. And city-controlled Bankgesellschaft Berlin gave out billions in politically influenced loans, many of them to real estate developers who went bust. The city paid $1.6 billion to rescue the bank last year.

The fiscal crisis led to the ouster last fall of center-right Mayor Eberhard Diepgen. The new mayor, Social Democrat Klaus Wowereit, is seeking reductions in the police force and the court system. He's negotiating with unions to save $450 million a year and is trying to persuade the federal government to take over maintenance of major museums. These measures will hardly make a dent in the deficit. The city's best hope is to prove that it has given up its spendthrift ways. If so, by 2004, the federal government may be willing to help.

Luckily, the statistics don't tell the whole story. The city, cheaper and less uptight than Düsseldorf or Stuttgart, has become a magnet for young people. The federal government offers a recession-resistant source of jobs. Most important, Berlin has a gritty energy that sets it apart from Paris or London. "You really get the feeling something is happening here," says TV talk-show host Maybrit Illner.

The economy could also be picking up. Manufacturing employment, which plunged after reunification, seems to have stabilized. Even amid a national slowdown, Berlin attracts startups. Registrations of new companies exceeded closures by 1,465 in the fourth quarter of 2001, a 70% increase over the year-earlier period. "The streets are crowded with people my age," says Claus Noppeney, 32, a management consultant who moved to Berlin in the fall. "There is no money in the city," he adds, "but the quality of life is very high."

Can hipness translate into growth? Maybe. Software maker SAP is doubling the size of its office in Berlin. CEO Hasso Plattner told reporters in May that Berlin is the best place to read the tenor of the times. If Berlin can leverage its cultural appeal, it could attract enough ad agencies, restaurateurs, and biotech startups to pierce the macroeconomic gloom. If not, it could wind up a city of bureaucrats, unemployed factory workers, and kids on ecstasy. Berlin will be handed a major opportunity in 2004, when Poland and other Central European countries are expected to join the European Union. The German capital is just an hour's drive from the border and could become the gateway to burgeoning new markets. The opportunity is there. Berlin's leaders just need to take advantage of it.

By Jack Ewing in Berlin

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