Berlin Buckles Under Quickly Rising Debt

The statues are majestic, the buildings ornate. It feels as if the campus breathes money. But Humboldt University, with its 193 years of history and 29 Nobel Prize winners, is threatening not to enroll a freshman class next semester because a bankrupt Berlin is again cutting funding for higher education.

This city of “poets and thinkers” makes an economist shudder. Still struggling with the costs of German reunification and a banking scandal, Berlin’s $54-billion debt is expected to rise to about $71 billion over the next three years. Things have gotten so glum that the pickup soccer games in front of the Reichstag are banned because the parks department can’t afford to patch up the grass.

Berlin is representative of the wider problems facing Germany, which has the world’s third-largest economy and is the dominant player in Europe. The nation, with a 10.8% jobless rate and near-zero growth, has tumbled into another recession. Even the staid Frankfurter Allgemeine Zeitung newspaper has resorted to comics to explain the state of affairs: A recent cartoon shows Osama bin Laden urging his followers not to attack Germany because “this country is already kaput.”

Chancellor Gerhard Schroeder is expected to win approval today in a party congress of his Social Democrats for a series of economic reforms that would cautiously begin dismantling the continent’s most generous welfare state. Called Agenda 2010, the plan will reform health and pension systems, weaken labor unions, reduce unemployment benefits and make it easier for workers such as hairdressers and shoemakers to start their own businesses.

“This kind of reform hasn’t been done in years,” said Kai Konrad, an economics professor at Berlin Free University. “It’s not a matter of whether Social Democrats or Christian Democrats have been in power. It’s more of a question that society has not been willing to accept this kind of change.”

But Schroeder -- hinting that he will resign if the measures aren’t approved by Parliament this year -- is up against a shrinking state purse and can no longer burnish the facade of a powerful Germany. The nation’s stock market has lost about $827 billion since 2000, and consumer spending is down. In a world economy that increasingly favors skilled technology workers, Germany lags behind many industrialized countries in its percentage of workers with college degrees and must import thousands of people to fill information technology positions.

Perhaps not surprisingly, social programs are increasingly seen as a costly drag.

Consider the schemes in unemployment benefits. Germany’s official retirement age is 65, but many workers leave their jobs by 59. Seeking to cut high labor costs, companies often nudge older workers into doctors’ offices to be diagnosed with phony medical problems. Workers can begin collecting years of government-funded unemployment benefits comparable to their wages. When they turn 65, they can draw pensions.

Schroeder’s reform package would limit unemployment compensation to 18 months and seek to reduce non-wage labor benefits, such as medical care, which account for 42% of an employer’s gross wage costs.

The reforms, Schroeder said, are “important, perhaps even historic, decisions.” He added: “Not just the Social Democrats, but also society, must realize that tomorrow’s problems cannot be solved with yesterday’s remedies.”

The debate over the reforms has engulfed students, street sweepers, business executives and former chancellors. It has angered labor union members who are finding that high wages and long vacations get squeezed by global markets. For many, the debate centers on deeper questions about German society and the state’s role in protecting the ideals of a utopian way of life in a country attempting to strengthen its role on the world stage.

One of the proposed reforms strikes at the most sacred of German perks: the pension system. Facing a nearly $149-billion deficit over the next four years, the federal government is proposing to raise about $6 billion by forcing nearly 20 million pensioners to pay more for health care. Solving the problems, however, can mean a host of curious political trade-offs. For example, Finance Minister Hans Eichel is proposing to raise the tobacco tax by 33% to offset rising health care costs. The tax increase will be gradual so as not to hurt cigarette sellers. The Frankfurter Allgemeine Zeitung pondered this, concluding: “Political reality sometimes exceeds the bitterest satire. The tobacco tax is now to be phased in in three steps so that cigarette consumption does not suffer.”

Lined by linden trees, and just across from the square where Nazis burned Jewish books in the 1930s, Humboldt University is stately -- and nearly broke. It is like much of German society, a pretty reminder of grander days. Albert Einstein did research here; Karl Marx strolled the grounds, forming thoughts for his socialist paradise. Today’s students face a tight job market and an economy weakened by a bloated welfare state.

“If a German wins a Nobel Prize, he’s always working in the U.S.,” said law student Hartmut Schulze, who lives in Berlin, where the unemployment rate is 18.6%. “Our people leave because of the economy. The whole social system in Germany has to be changed. It’s not working anymore.”

The city of Berlin -- which collects no tuition from college students -- funds Humboldt and two other large universities. Berlin’s huge debt over the last decade has forced it to pare the higher education budget by half to about $1 billion. All this as the number of professors, many of whom retire early under Germany’s generous social system, will decline by 50% at some institutions. Class sizes have ballooned from 20 students to more than 100.

The prospect of more budget cuts is “devastating news,” said Anne-Barbara Ischinger, Humboldt’s vice president for international affairs and public relations. “How do we finance? We have threatened not to accept another freshman class.”

Berlin’s financial crisis -- and to a large extent Germany’s -- began after the Berlin Wall fell in 1989 and the country moved toward reunification. Already reeling from a decline of heavy industry, the city and the country had to absorb a bankrupt East. The problem worsened when the U.S. and other nations, which had provided billions of dollars a year to West Germany to ward off the Soviets, pulled their funding.

The former government of Chancellor Helmut Kohl made some reforms to reduce the welfare state. But like Schroeder’s critics today, Kohl’s detractors said the measures weren’t sweeping enough to keep Germany strong during its transition to a globalized economy. Many Germans are now realizing that their “cradle to grave” social programs may go the way of the zeppelin.

Even students at Humboldt are speaking of what once was unthinkable: paying tuition.

“Some classes have 80 students,” said Kolja Lichy, a history major. “There’s not enough professors. Tutorials stop sometimes because the university can’t afford tutors. That’s quite traumatic for first-year students. Classrooms need to be repaired, not many improvements have been done since the 19th century.”