Poverty Shields Berlin from Downturn

At Oliv, a snazzy glass and concrete café in Berlin's trendy Mitte district, Teena Marie is pouring forth full blast from the speakers while a fashion-forward clientele busies itself with sipping cappuccinos. The newspapers are full of impending economic doom. But the hot spot's owner, Hans Thedeck, isn't buying it.

"We don't feel it at all," he said. "It's a lot of theory, this crisis. These financial types, they make crises and they make stimulus packages—it's all very hypothetical. Everything can't always keep growing; you can't have 4 percent growth every year. It just doesn't have that much to do with real life."

At least, not in Berlin it doesn't. For most in the German capital, the financial crisis and the ensuing economic downturn seem unreal, a distant problem affecting other cities far away. The reason? The city wasn't doing terribly well even in the good times. It has become used to a dour economy and didn't have very far to fall.

"Because Berlin has done relatively so poorly for the last 40 years, it can't do much worse," Michael Burda, an economist at the city's Humboldt University, told us.

If anything, the economic difficulties facing other European capitals will lead to Berlin fears that it may lose its coveted place at the bottom of the heap. The city thrives on its grungy, unkempt image, one that Mayor Klaus Wowereit immortalized in his 2003 comment that Berlin is "poor but sexy." Municipal services are kept at a bare minimum, with garbage often blowing down Berlin's wide boulevards and sidewalks left covered with ice and snow until the weather changes.

From an economic perspective, of course, such neglect is the result of Berlin's limited tax revenues. Some 15 percent of city residents are unemployed, a number much lower than it has been in recent years. In some central Berlin districts, the jobless percentage is over 20. Plus, much of the tax revenue the city does generate goes toward serving the city's €60 billion debt.

Indeed, when it comes to the financial crisis, Berlin can rightfully turn up its nose with a "been-there-done-that" sniff. Throughout the 1990s, the Bankgesellschaft Berlin busied itself with handing out questionable loans in the real estate and construction sectors—and then bundling them into funds sold to private investors.

It was, in fact, a practice not unlike that which led to the current finance crisis. The result was largely the same as well. The city government was forced to plug the enormous, multi-billion euro hole that resulted when the house of cards came crashing down at the beginning of this decade.

No Industry, No Industrial MeltdownBut the city has since transformed its commitment to chic poverty into one of its key selling points—and it is one which has so far protected it from the tidal wave of economic bad news. Berlin's lack of industry means it is immune to the shocks being suffered in other parts of the country where auto manufacturers and engineering companies are feeling the full impact of the global economic slowdown.

Clemens Teschendorf, spokesman for the Berlin finance department, says the city's unemployment is bound to rise, but it won't be a big shock to the city's system, because it will affect areas where joblessness is already high. Furthermore, 80 percent of Berlin's economic output comes from the service sector, which doesn't typically react immediately to economic downturns. And a further 10 percent comes from the federal and state government.

"Germany has a large, stable administrative apparatus that runs the country from Berlin. Maybe they'll take pay cuts, too. But there's a service industry devoted to serving these people," said Burda, the Humboldt professor.

And even when it comes to tourism, the outlook isn't entirely bleak. Berlin is the hub for a number of cut-rate airlines like Easy Jet and Air Berlin—exactly the kind of carriers that appear well positioned this year as flyers seek to save money. For those looking for a weekend away, Berlin remains a cheap destination.

"We were behind on the economic upswing, and now we're behind on the downturn," Teschendorf told us.

Pull for Creative PeopleIndeed, about the only part of Berlin's hipster image that might take an immediate hit is its famous art scene. Burda says that Berlin's reputation as a "creative capital" could bring the city real dividends down the road. At the moment, though, the high-end art market is suffering. Whether that will trickle down to the niche occupied by Berlin remains to be seen.

"Berlin has a very strong creative life," said Felix Hoffmann, curator at C/O Berlin, a private photography exhibition space. "But it's hard to say what will happen."

At least one outsider thinks the effect won't be that great at all. "Berlin is now the only place in the world you can go where everyone isn't depressed," said Marc Glimcher, president of PaceWildenstein art galleries in New York. "That's because in Berlin, it's always a recession. That's what being an artist in Berlin is all about—in this evolutionary cycle, they're perfectly adapted for survival."

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