By Ann Brocklehurst
Originally published Wednesday, April 1, 1992 in the International Herald Tribune
As the costs of unification prove more of a strain on Berlin’s finances than the expense of maintaining a divided city ever did, political and business leaders are counting on a major economic expansion to ease the pressure.
They believe that the German government’s decision to move from Bonn to Berlin will attract business and generate tax revenues in a way that was never possible during the Cold War years. But before the city is able to cut its dependence on federal government funds, it is receiving lavish sums to help it pay for the overhaul of East Berlin’s rotting infrastructure and the merging of its eastern and western halves into one modern city.
Of its total 1992 budget of 41.88 billion Deutsche marks (about $25 billion), Berlin will receive 38 percent in subsidies from the German government, raise 13 percent through new borrowing and generate 26 percent through taxes.
Finance Senator Elmar Pieroth said the debt level, one that would be considered irresponsible under normal circumstances, was unavoidable given the magnitude of the job to be done.
“We have no other choice,” he said in an interview. “We can’t build the Wall back and make the East stay at the level it is today.”
East Berlin’s needs range from sewer equipment to telecommunications systems and include just about everything in between. Both East and West Berlin need housing, efficient power generating and distribution equipment, and better road connections to each other and the rest of Germany.
While it is clear that many improvements have already been made – public transportation runs efficiently between East and West and the phone lines across town are no longer as impossibly busy as they once were – there remains more work to be done than originally estimated. The Berlin and German governments have already begun negotiations to extend payments from the special German Unity Fund beyond the planned cutoff date of 1995. Also being discussed is the timetable for the federal government’s move to Berlin. While Berlin is lobbying for it to take place as soon as possible, the federal government seems to want to postpone both the move and the accompanying bills until the late nineties.
Earlier this year, Bonn even floated a trial balloon, suggesting some ministries should remain where they are.
“The move is more difficult than expected,” said Siemens AG Vice President Joachim Putzmann, chief of the electrical and electronics company’s Berlin administration. While he is optimistic about Berlin’s future, Mr. Putzmann said there are still very few decision-makers in the city and German business needs to see the government back in Berlin before it relocates key people and operations.
The pace of Berlin’s expansion will be partially reflected in the growth of the city’s taxes, which are targeted to triple to 18.5 billion marks in 1995 from 6.09 billion marks in 1990. Mr. Pieroth said 4 billion marks of the increase will come from new economic activity in East Berlin, 3 billion marks from general economic growth and 3 billion marks from the phasing out of the tax breaks granted to West Berlin business before unification, when the West German government compensated companies for the disadvantage of their geographic and economic location in the middle of East Germany.
The loss of the tax breaks is proving to have a variety of effects, often depending on the type of business involved. Retailers, who have been flooded with new customers from Eastern Germany, and producers of consumer goods and foodstuffs, who have found it relatively easy to boost their sales in the newly accessible surrounding markets, will tend not to suffer.
But other companies, such as the pharmaceutical and chemical giant Schering AG, say profits are being hit despite an aggressive sales and marketing push into Central and Eastern Europe. “The structure of the economy in these countries and the lack of hard currency has complicated our plan to increase sales,” said Horst Kramp, a member of Schering’s executive board. “In the short term, we can’t compensate for our higher costs through increased sales so we must save wherever we can.”
Although Schering, the only major German company that currently has its headquarters in Berlin, does not plan to cut either jobs or investment, its rationalization program and comparable cost-cutting at other firms has had a ripple effect on the Berlin economy.
The owner of a small language school who expected business to improve thanks to increased demand from East Berliners keen to learn English has seen any such benefit canceled out as regular corporate customers have cut back on extras.
Small business has also been squeezed by the skyrocketing rates for office rental and the sharply higher costs of land.
ALTHOUGH there have been numerous calls for the government to control the rise of property and rental costs both for business and housing, Mr. Pieroth said Berliners must adapt to the prices, which are no higher than in other West German cities.
Despite the greater influence of market forces in both East and West Berlin’s economic life, neither business leaders or politicians envisage a day when the city will be able to do entirely without government support. Berlin will always need a certain amount of help to pay for its many expensive cultural and educational institutions. As a consequence of its history as a divided city, Berlin has separate museum systems, universities, national theater companies and opera houses. While some of the museum collections can be merged and a few of the smaller theaters privatized, Berlin believes that in its role as Germany’s capital, it is crucial to keep the rest.
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