Poor Berlin

For many years, Berlin was the only city that failed to boom—a state of affairs that demands explanation. Its economy stagnated between 1995 and 2005. According to Eurostat data, Berlin’s gross domestic product decreased in this decade from 24,000 to 23,200 euros per capita (see fig. 6.6).37Between 2001 and 2004, it even experienced negative growth of between 1 and 2 percent per year. Unemployment soared, despite extensive job creation schemes and early retirement programs, to 19.2 percent.38 The effects of the seemingly endless transformation crisis could be felt on a number of levels. There was less rush-hour traffic; the newly built inner-city shopping malls were crowded during regular working hours and not at the end of the day; neo-Nazi attacks increased. The population figures reflected the economic trend, stagnating at around 3.4 million—in a city that had dreamt of growing to 5 million during its moment of hubris on becoming the capital of reunified Germany.

What were the reasons for Berlin’s enduring crisis? The first and most important factor lay beyond the city’s control. The double shock therapy—Germany’s unique path of transformation—rendered industry in East Germany, and hence in East Berlin, uncompetitive overnight. Not one of East Berlin’s large combines survived; West Berlin at least held on to its Siemens, BMW, and Schering works. The subsidies for the walled-in West of the city had not been as abruptly withdrawn as those for industry in East Berlin. West Berlin obviously had a stronger lobby in the German government than did the former capital of the GDR. The service sector fared a little better as real wages in East Germany appreciated in value following the currency union in 1990. This prevented consumption from tumbling in the same way as in Warsaw.

Fig. 6.6.  Poor Berlin 1992–2008. Source: Eurostat Regional Statistics (data for 2013): Amt für Statistik Berlin-Brandenburg.

However, the “transformation from below” in Berlin was far weaker than in the Polish, Czech, and Hungarian capitals. Taking the neoliberal view, this can be attributed in part to the generous social benefits afforded to compensate for the bulldozing of the former GDR’s economy. Living on state unemployment support was possible in Berlin in the nineties, but not by any stretch in Warsaw, and difficult in Prague and Budapest. Some observers accused the citizens of the former GDR of lying back in the state’s “safety hammock”—if such a thing ever existed anywhere in the world. But migration statistics tell a different story: around 1.4 million people left the former GDR for West Germany in the first four years after reunification alone.39 This number of labor migrants corresponds almost exactly with the number of self-employed businesses founded in Czechoslovakia in the same period. (The latter country had a population of 15 million in 1990, only slightly smaller than the former GDR). One reason for the high rate of migration was that East Germans—unlike other former Eastern Bloc citizens—enjoyed unlimited freedom of settlement within the European Union including, of course, old West Germany, thanks to German unification.

In this way, the society of the former GDR was deprived of its most commercially active members. The outflow from East to West Germany abated a little in the mid-nineties, but peaked at a record 230,000 in 2001. East Berliners tended to commute to work in West Berlin rather than migrate to West Germany. Unemployment in the districts of the former East Berlin was soon lower than in the western districts. In summary, it seems that West Berliners had greater difficulty adapting to the new economic and social situation than did East Berliners.

The political constellation in reunified Berlin was similar to that in the Federal Republic of Germany as a whole. On local and national levels, Western elites ruled over the East. The grand coalition (between the conservative Christian Democrats and the Social Democrats) in power until 2001 failed to promote Berlin as a business location. Just one major company, Deutsche Bahn (the German railroads), transferred its headquarters to Berlin during the transformation period, and even this state enterprise threatened at one point to relocate to Hamburg due to various conflicts with the Berlin senate. No other large enterprise became established in the city. Schering AG, the only Berlin-based company quoted on DAX, the German stock index, disappeared after it was swallowed by a competitor. The Eastern European offices of international firms relocated to other places, such as Vienna and, more recently, Warsaw.40

Rather than making Berlin more attractive, the state-run regional bank Berliner Landesbank tried to play for much higher stakes. It speculated wildly with real estate, including tens of thousands of communist-built apartment blocks in East Germany. Its misdirected investments and inflated guarantees to investors resulted in multibillion-euro losses and toppled the grand coalition (which was run by exclusively West Berlin players) in 2001. Banking scandals and government bailouts at the taxpayers’ expense were regular features of the postcommunist economy as much as of neoliberalism. The tragedy in the case of Berlin was that, in contrast to the “tunneling” that caused the Czech bank crisis, the squandered money did not flow into industry and thus help indirectly to save jobs. The astronomical sums lost by the Berliner Landesbank, estimated at up to 21.5 billion euros (or €6,000 per inhabitant), including all indemnities and guarantees, was channeled exclusively into speculative ventures.41

It was Berlin’s citizens, especially those employed in the public sector, who bore the brunt. Berlin broke away from the German public sector employers’ association and reduced its employees’ and civil servants’ salaries by up to 10 percent. In 2002, the financial situation was so dismal that the Berlin senate ordered several of the city’s fountains and thousands of its streetlamps to be turned off and the sewers and street drains to be cleaned less regularly. On hot summer days, especially, the stench in some streets was a malodorous sign of the austerity measures. It was not the smell of a healthy investment climate.

There were cultural reasons, too, for the political failure to promote Berlin as a business location. Becoming the German capital went to the local government’s head. Senators often spoke of being a “cosmopolitan city” (Weltstadt), “metropolis” (Metropole), and even “global city” (Weltmetropole)42 during the city parliament’s debates in the nineties. Exhibitions and marketing campaigns likened Berlin to Moscow, Paris, and New York. While commentators remarked on the rise of East German nostalgia (Ostalgie) and warned against idealizing the GDR, policymakers harked back eagerly to Berlin’s Gründerzeit era of the late nineteenth century and 1920s modernism when it came to urban planning. Many new buildings in the old center, east of the Brandenburg Gate, quoted the aesthetic of these historical periods either in their proportions or their façades. The architectural legacy of the GDR, in contrast, was largely deleted in the government district.

A second local (and pan-German) problem was the public’s negative perception of Eastern Europe. It resonated not only in the abbreviated history of Berlin’s Polish market but also in attitudes to the largest group of immigrants arriving in the nineties: ethnic Germans, Russian Jews, and ethnic Russians from the former Soviet Union. True, a section of Berlin’s elite was proud of the city’s multicultural revival, as the active commemoration of the Russian exile culture of the twenties and the acclaim received by Russian migrant author Vladimir Kaminer show. But the prevalent view of Russian economic activity in Berlin was highly skeptical. The composite term Russenmafia put the prejudices in a nutshell.

Berliners showed a striking reluctance to accept migrants from the former Soviet Union as potential investors. It is, then, hardly surprising that Russians in Berlin, though hailing from a range of social backgrounds, tended to stick together in western Charlottenburg and the more affluent neighboring area, Grunewald. In contrast, the founders of the “Polish Losers Club” (Club der polnischen Versager) took premises in the central district of Mitte, using self-irony to promote it. The strategy worked so well that the club was soon being hyped in a wide range of blogs and among partygoers. Evidently foreigners were more favorably received if they acted like social and cultural underdogs.

Although there was no Vladimir Kaminer among them, Russians in Vienna were more easily accepted into the cultural and social life of the city. One distinctive feature of Viennese culture is the many balls that take place in the winter season in prestigious locations such as Hofburg Palace, the Musikverein concert hall, and the State Opera. Viennese Russians even have their own russki bal, which has been a firm fixture of the season for some years. Popular Russian singers and dancers are flown in from Moscow and St. Petersburg for the occasion, which is broadcast live on Russian television. In turn, Moscow started hosting an annual venski bal in 2003. A Vienna-based event agency now organizes Russian balls in cities across Europe, from Baden Baden to Biarritz—another example of economic opportunity arising from Eastern Europe’s opening.

Berlin and Germany were reluctant to seize such opportunities, as shown in the alleged Ukrainian visa scandal. This was caused by the disclosure that, after the 1998 change of government, the German embassy in Kyiv had openhandedly issued visas to Ukrainians—as many as 300,000 in 2001. The German media used the news to inflate stories of immigration problems and other threats emanating from the East; the tabloid press ran hunts for Ukrainian “criminals” and illegal workers. But in terms of passengers, the number amounted to about two airplanes full, the night train from Kyiv and a few coaches, spread over a 365-day period. Nevertheless, the media campaign made waves. The scandal contributed to toppling the Social Democratic–Green government in 2005, after which the visa quota for Ukraine was reduced to around one hundred thousand per year. Other cities welcomed the extra trade with tourists from the East: Warsaw with its markets; Prague, which was especially popular with Russians and Ukrainians; and Vienna’s retail stores on Mariahilfer and Kärntner Strasses. In the pre-Christmas period, especially, buses arrived in Vienna by the dozen from the former Soviet Union. Crucially, the Viennese had come to perceive Ukrainians and other Eastern European visitors as customers rather than intruders.

It is hard to estimate the amount of revenue this cost Berlin. It was certainly a lost opportunity and echoed the city’s response to the bazaars of the nineties. To be sure, small-scale retail trade could not have brought about economic recovery. But it could have helped to alleviate Berlin’s transformation crisis, which lasted from 1995 to 2005. When Mayor Klaus Wowereit famously declared that the city was “poor but sexy,”43 he conveyed a sense that Berliners had resigned themselves to their economic plight.

Looking at Berlin in the lost decade between 1995 and 2005, it is clear that state-sponsored showcase projects, such as the reconstruction of the government district and Potsdamer Platz, did not generate enough growth or wealth to benefit the population at large. Becoming the capital of a major European nation-state brought some advantages, including transfer payments worth tens of billions, but no lasting economic upswing. Vienna, on the other hand, whose importance as a site of East-West mediation diminished with the end of the Cold War, benefited from its status as an international center of the service sector and its tradition as the capital of a multinational empire.

Despite the political and cultural factors that were peculiar to Berlin, the transformation crisis here followed the general pattern in East Germany. Most large industrial enterprises were forced to close; unemployment soared; the transformation from below was less dynamic than in the neighboring countries of East Central Europe. At first, the German government blamed the GDR and the legacy of state socialism for the economic problems. But the further the GDR slipped back into history, the less convincing this accusation seemed. In a historical perspective, the transformation crisis (which, despite some overlap, is distinguishable from the crisis following the collapse of state socialism) was caused by a contradictory combination of neoliberalism with a welfare state, or ordoliberalism. This socioeconomic program, named after the postwar journal ORDO, was practiced in the young FRG, and combined promarket liberalism with a regulatory welfare state. In Germany, this system is known as soziale Marktwirtschaft; that is, social market economy.

The rapid and ruthless opening of the GDR’s economy as it joined the Federal Republic of Germany and the European Commission was, in effect, a particularly radical process of liberalization. Privatization, too, was carried out faster and more relentlessly in the GDR than in any other postcommunist country. As shown by the “return before compensate” (Rückgabe vor Entschädigung) principle applied to communist-expropriated property, private ownership came to be viewed as the apotheosis of the social order—this also tallied with the Washington Consensus and the doctrine of the Chicago School.

However, the economy of the former GDR was not deregulated but “reregulated.” The five new German states were required to adopt the federal, West German administrative order, its complex social security system, employers’ and employees’ associations, collective wage agreements, extensive protection against unfair dismissal, and various other regulations. This extension of West Germany stabilized East Germany in many respects, especially politically. But the fact that West Germany was itself suffering a crisis was fatally overlooked. A number of problems that had loomed on the horizon since the 1980s were now coming to a head: the conundrum of financing the welfare state; the challenge of maintaining the pension system for an aging society; tackling, and not just administrating, unemployment; avoiding standstill caused by corporatist structures; and sustaining Germany’s high rates of pay, relative to the rest of Europe. While wages were lower in the former GDR than in West Germany, they were still many times higher than in the neighboring Czech Republic or Poland. For this reason, East Germany had far less appeal as a business location than the other countries of East Central Europe.

In the 1990s, some political players suggested mitigating the path of rapid adjustment to West German systems by treating the former GDR, or certain regions of East Germany, as a special economic zone. But the proposal was rejected to avoid complications for the old federal states and with EU law. German politics did not want to encourage any intra-German system rivalry, which would have challenged the status quo in West Germany. Gradually, policymakers became convinced that comprehensive reforms were required not only in East Germany but in the entire country. These are considered in greater depth in the chapter on cotransformation.44

It remains to reiterate that the conservative-liberal coalition government led by Helmut Kohl tried to resolve the transformation crisis primarily with money. Around one trillion euros was pumped into East Germany by 2003, far more than the Marshall Plan had cost. By 2013, this amount had risen to between 1.6 and two trillion euros (varying according to the method of calculation applied).45 Some of it was invested in new roads, railroad tracks, telephone lines, and businesses to be privatized, but about two-thirds was spent on social benefits. It would be an oversimplification to define German transformation in the nineties as purely neoliberal, although its origins and key elements were rooted in the ideology. Its social repercussions also deviated from the neoliberal reform pattern. Compared to Poland or the Czech Republic, the losers of transformation were compensated with generous social benefits.

But this strategy of social pacification did not coincide with a sufficient impetus to stimulate social and economic development. The self-employed, who contributed significantly to the upswing in Poland, the Czech Republic, Slovakia, and Hungary, were far more likely to suffer income losses, bankruptcy, and downward social mobility in East Germany. They were up against the West German firms that capitalized most on German reunification. Many of the younger and more enterprising East Germans migrated to the West to escape the depression at home. “Poor Berlin,” then, was an indicator of problems affecting all of reunified Germany.

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