Germany’s capital: Nearly bust

Date: 19/07/03

Will the federal government bail out the capital?

PROUD capital of the world's third-richest country, the city-state of Berlin is sinking ever deeper into a financial mire. Its debts, already €53 billion ($60 billion) for a population of just 3.4m, are out of control. Unemployment, at 18%, is at its highest since unification. Since the generous federal subsidies that used to be poured into West Berlin were phased out in the mid-1990s, the city's economy has shrunk by nearly 6% while the national economy has grown by 10%. Its dwindling tax revenues now barely cover a third of its outlay. Unless the federal government is willing to bail it out again, it will go bust, say the city's politicians.

With the economic downturn, nearly all Germany's 16 Lander (states), are feeling the pinch. But Berlin is in deeper trouble than any other. It is not as if its authorities have not tried. Since the collapse of a Christian Democrat-led city government two years ago, the ruling “red-red” coalition of Social Democrats and ex-communists has hacked back public spending more ruthlessly and pushed through more radical and painful financial reforms than any other state - despite massive protests.

University funding has been slashed, tuition fees brought in for long-term students, subsidies for housing abolished, urban renewal projects abandoned, charges introduced for school books, kindergarten fees jacked up, 1,450 police jobs axed, swimming pools closed, grants for welfare recipients ended, fountains turned off, arts funding chopped, a freeze imposed on civil-service vacancies, and plans to lop €1 billion off the city's wage bill of €7 billion by 2006 have been approved.

Earlier this month, the city reached a milestone agreement with the trade unions to cut the pay of 70,000 city employees by an average of 10% in return for shorter working hours and a pledge of no compulsory layoffs before 2009. Another 70,000 with BEAMTE (permanent civil servant) status will have their holiday bonuses scrapped and their Christmas bonus, equal to 86% of their monthly pay, replaced by a flat-rate payment of €640.

But all this is still not enough. The city now hopes to balance its books by 2006 - excluding service payments on its debt. The interest alone amounts this year to €2.4 billion, or 11% of the city's total budget, which, it says, is more than it can afford. It wants the federal government either to relieve it of a large hunk of its debt (euro35 billion of it, with luck) or to take over the whole of its interest payments. But the federal government, itself pushed for cash, has refused to help. So the city is to lodge an appeal with the Constitutional Court in September. A ruling is not expected before 2005 - with no cash likely for another year or so after that.

Will the federal government bail out Berlin?