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According to this article Berlin seems to be a strange capital city when it comes to debt:

In almost every European country the capital is the engine of the economy. But a new study shows there is one exception to this rule.

The study by the Cologne Institute for Economic Research looked at how severely the income per head in a country would be hit if it had to survive without its capital. The results showed that across Europe, capital cities were the focal points of their countries’ economies.

(..)

If Berlin were cut adrift from the rest of the Bundesrepublik, the average German would become 0.2 percent wealthier.

In 2015, the capital received €3.61 billion in subsidies, the most of any of the German states. The majority of this money came from wealthy Bavaria, which paid €5.45 billion of the total €9.6 billion which rich states gave to poorer ones, ARD reported in March.

I am wondering why this exception?

Question: Why does Berlin have debt issues in opposition to many other European capital cities?

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  • Does anyone have a reference to the original study? I couldn't find it on the mentioned webpage.
    – Basileios
    May 8, 2019 at 18:10
  • I can't read the article, but Rome has also struggled compared to the north of Italy, I'd be surprised if Bern was the most prosperous city in Switzerland, and it probably depends whether you count The Hague or Amsterdam as the capital of the Netherlands.
    – Stuart F
    Oct 1, 2022 at 10:42
  • I note that October 3 is "reunification day" in Germany.
    – ohwilleke
    Oct 3, 2022 at 22:46

4 Answers 4

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During the Cold War, Germany was divided into three parts.

There was the FRG, previously the US, UK and French occupation zones. There was the GDR, formerly the Soviet occupation zone and the Soviet sector of Berlin. And there were the three Western sectors of Berlin, legally not quite part of the FRG and not quite apart from it.

Surface transport to West Berlin went through the GDR, which always complicated things. There were massive tax subsidies to keep West Berlin going as a shining beacon between the Communist lands. Yet industry did not go to West Berlin.

With Reunification, East and West Berlin were reunified as well. The five East German states, the Neue Länder, are still economically weaker than the West German states. Berlin is a mixture between the two.

In addition, there are a couple of "relatively small" issues which add up at the level of a city with 3 or 4 million people.

  • A bank scandal in 2001 cost Berlin billions.
  • Berlin provides "services" like museums, theaters, transportation hubs, and jobs to surrounding municipalities in Brandenburg. People who work in Berlin live in Brandenburg and pay taxes there.
  • Berlin claims that running a capital has costs which are only partly compensated from the Federal budget. Embassies must be guarded. There are more political demonstrations than average.
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    So, economically speaking the wall's effects are still around us. Thanks for quick answer.
    – Alexei
    May 3, 2019 at 14:45
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    @Alexei: The effects will be around for another few decades. Three small details seem missing in the answer. One is that Bonn used to be the capital of West Germany. The next is that there's no reason for a capital city to be the largest or most important -- e.g. Washington DC, Ottawa, Bern, Canberra, Wellington, and many others. The last is that economic activity in the former HRE was spread throughout Germany's territory, in part because it de facto had many "capitals". May 5, 2019 at 6:13
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    Some tidbit I learned at university: The GDR distributed subsidies to cities and regions as loans from the central bank (without any expectation that the money would be payed back). When the banks where privatised after unification, those subsidies were treated as regular loands, and many cities including Berlin suddenly found that they owed private companies large sums. Jul 17, 2020 at 13:15
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To continue what o.m. said, after WWII, the center of German banking was Frankfurt (on the river Main). Also the main stock exchange has been there since long before that. After reunification, banks did not simply move to Berlin simply because became the capital again. The same goes for many other big companies. Consider this map of where Germany's biggest companies are headquartered: https://upload.wikimedia.org/wikipedia/de/7/7b/Hauptsitze_Dax-Unternehmen_%282010%29.png (DAX is the main stock index). Again, companies must have some serious reasons to move. It is not only all of their employees that would have to come along, there is also an ecosystem surrounding them.

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    Is this the reason Berlin lags behind other capital cities? If that's your argument, please elaborate by comparing with other capitals.
    – JJJ
    May 8, 2019 at 13:10
  • Not in Europe, but Washington DC has a similar problem with deficits: New York, Los Angeles are the principal business centres of the US with many big companies based elsewhere in California, Seattle, Chicago, Texas, and other places (although NYC faced its own financial problems in the past).
    – Stuart F
    Oct 1, 2022 at 10:37
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In most European countries, the capital has historically also been the most important city and a place were businesses liked having their headquarters. Look at how London, Paris, Moscow or Rome developed compared to other parts of the country. If there were strong industrial centres outside the capital, these were typically due to natural resources; see e.g. the mining and steel regions in the English Midlands. Sometimes also, cities that relied heavily on trade grew to comparable economic wealth especially in more recent times despite not being the capital (see e.g. the harbour cities of the Netherlands, especially Rotterdam).

In the first half of the 20th century, this pattern held true in Germany. While the coal and steel industry was at home primarily in the Ruhr Area (Essen, Duisburg, Dortmund), while Silesia was economically active thanks to the textile industry, and while certain northern trade cities were also economically very important (especially Hamburg), the capital city Berlin was another centre of industry, among the economically most active parts of the country.

Then Germany elected a fascist government that waged war on most of Europe, lost, and was occupied by the winning alliance (Allies). They occupied the country in three, later four zones, dividing the capital equivalently. Unlike Austria, which was in a similar situation but was then allowed to fully reunite in exchange for promising neutrality, Germany remained occupied to varying degrees for 45 years; an offer was made for reunification in exchange for unification and deindustrialisation in the 1950’s but was rejected by the West German government.

Unfortunately for Germany, once the war was over the new geopolitical situation termed the Cold War began, showing that the alliance between the Soviet Union and the western Allies could only hold as long as there was a common enemy to defeat. As neither side wanted to give up their power over Germany while the other retained it, we arrived at the situation o.m. described in their concise answer: Half of Berlin was united with the surrounding Soviet-occupied zone, later the GDR, while the other half was sort-of but not really part of the FRG and under the protection of the western Allies.

A consequence of the new situation in 1945 was a number of companies abandoning their Berlin headquarters and opening new ones in clearly West German cities. Among them names such as Siemens (moved to Munich), AEG (Frankfurt), Loewe (Kronach in Bavaria) and many more. On the other hand, companies that were in the eastern part of Berlin or the surrounding areas of Brandenburg were nationalised by the new Socialist government.

Of course, this also led to non-Berlin parts of Germany becoming economically more powerful. The Ruhr Area retained its coal and steel industry, Hamburg kept its port and trade, Munich – being in the American sector which was seen as preferable by a lot of CEO’s – gained a lot of companies that fled from Berlin or other parts of the East, Frankfurt became home to a lot of private banks in addition to the already existing chemical industry and so on. In the 45 years of separation, these cities were able to develop much more dynamically than Berlin could.

Post-separation and post-reunification, many large companies relocated their headquarters to Berlin or opened up a branch there in typically brand new, shiny buildings. But the shiny headquarters only create very few jobs and the factories remained mostly where they had been. Thus, Berlin has a lot of catch-up to do which is very unusual for a European capital city.

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  • It is also my understanding that Berlin’s local politics are generally anti-business which contributes to the financial troubles? Oct 1, 2022 at 16:43
  • @JonathanReez If politics are a factor in a company choosing where to base its operations, Berlin is up against Dublin or in other words they’ve lost. In my opinion, the local politics are a very small factor in deciding where a company goes especially when (as in Berlin’s case) they aren’t that much different from surrounding places.
    – Jan
    Oct 11, 2022 at 10:16
  • @Jan "anti-business" local politics do not actually prevent businesses from doing all the things that they do that are the reason people are anti-business. It just means people are more annoyed about it. Oct 17, 2022 at 13:44
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I would like to hypothesize that in large parts this can be explained due to the high ratio of public sector jobs over private sector jobs for Berlin as compared to many other German and European cities. In Switzerland a similar situation exists for the capital city Bern. Does anyone have a reference to the original study? I couldn't find it. To me it seems as if not all European cities have been studied.

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    Can you elaborate on the public / private sector jobs? Generally, answers are not supposed to include different questions, but the first part of your answer could be extended with some data / articles.
    – JJJ
    May 4, 2019 at 21:12
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    I'm sorry, but as long as this answer has no data to support this hypothesis, this answer is not very useful to the visitors of this website.
    – Philipp
    May 5, 2019 at 9:41
  • What bothers me is that the article mentioned does not have a reference to the original study. Since I could not comment, I thought I write up an answer. At least I can comment on my own post. But yes, at the moment I can not support my hypothesis with data, that's why I called it a hypothesis. Next time I will try to better follow the rules. Feel free to moderate and remove my answer.
    – Basileios
    May 5, 2019 at 17:17
  • I would appreciate if someone can raise my question as a comment on the question. A reference to an article that doesn't mention the source is not very trustworthy.
    – Basileios
    May 5, 2019 at 17:18

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