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Capital Gains

Berlin is no longer a manufacturing powerhouse but the city is a dream factory for the architects of the New Economy. Boyd Farrow reports

A sunny Saturday in August in Berlin and it seems that the entire city lives in a bubble – oblivious to history and geography. Jacob, a young salesman for Firma, a pared-down unisex boutique on grungy Mulackstraße, has a number tattooed on the underside of his arm; his birth date, he beams. In scrubbed-up Prenzlauer Berg, people throng Maria Bonita, a new eaterie run by an enterprising trio, one Mexican, one Texan and one Australian. Nearby is the German beachhead of a jumping French pizza venture, Pink Flamingo, owned by an American-Italian couple, and serving Spanish specialities. As Nadja Vancauwenberghe, the French-born editor of English-language monthly Exberliner laughs, these days you can walk a hundred metres through the city without hearing one word of German.

Berlin also seems to exist in a bubble in regards to national economic woes, let alone global ones, judging by the relaxed vibe of the artisanal boutiques and semi-professional establishments frothing milchkaffees for the jacketless. And, in a way, it does. While other major cities fret about their rankings as financial hubs being downgraded or their jobs evaporating, Berlin flaunts its outsider status like a facial piercing. Ripped apart by the Cold War – with the West heavily subsidised and the East propped up by a Communist regime – the jobs market in both sides of the city collapsed along with the Wall. The reunified Berlin, once the cradle of German industry, had around 350,000 manufacturing jobs in 1991; today there are less than 100,000. Since 1995 the city's economy has shrunk by a 10th and, at 15%, its unemployment rate is the highest of all large German cities.

Indeed, unlike nervy Frankfurt or credit-crunched London, Berlin is virtually immune to the current financial shakeout and political fallout, having already taken both bullets a decade ago. Through the 1990s Bankgesellschaft Berlin had extended colossal loans to property developers and bundled up property-backed funds for wide-eyed private investors. This frenzied opportunism resulted in a €2bn city government bailout in 2001 which led to the breaking up of the coalition of parties that had run Berlin for years. Moreover, unlike in most major cities there are actually few jobs left in Berlin to be lost; 80% of Berlin's output comes from the service sector and a further 10% from the federal and state government.

Germany's largest city was technically bankrupt three years ago when a constitutional court unexpectedly dismissed a claim for an emergency injection of federal cash. Since then Berlin has had to slash services such as rubbish collections to pay annual interest of €2.4bn on its €60bn debt. Tax revenues barely cover half of its annual €20bn budget. The city's colourful mayor, Klaus Wowereit made headlines in 2003 when he called Berlin "poor but sexy", a slogan now emblazoned on T-shirts in souvenir emporia along Unter den Linden.

And sexy Berlin certainly is. Over the past 10 years, while factories have groaned to a halt, the city has become home to Germany's largest and most dynamic creative cluster, vaulting over Munich, Hamburg and Cologne. A city that boasted 1.7 million industrial jobs before World War Two now has more designers, artists and software programmers than manufacturing jobs. And with its emphasis on film and television, architects, designers, advertising and fashion people, Berlin has overtaken London and New York as the epicentre of cool. The nearby Babelsberg film studios are busier than in the days of Dietrich and Garbo, with Hollywood films, such as Inglourious Basterds and Valkyrie, wooed with generous fiscal incentives, augmenting a flourishing local industry. The music and videogames sectors are both thriving. And this year the Bread & Butter fashion trade show recently "came home" to the city – to the grounds of the former airport, Tempelhof – after a long run in passé Barcelona.

"The fall of the Wall sparked things off," says Ares Kalandides, director at Create Berlin, an urban planning company. "Everyone who came here had the feeling that the creative cake hadn't been shared out yet. Everyone could still grab a piece. And it's the same today: everyone can get involved here and fulfil themselves. Berlin is a brand name. It is added value for every product. As soon as the city's name crops up at a trade fair, people come flocking".

"The city and the lifestyle here are unique," says Amir Kassaei, the Iranian-born chief creative officer at DDB Group, a global advertsing agency network. "Creative people from all over the world get excited about Berlin in a way they're not about any other city. It isn't just the energy, it's the freedom to do anything and be anyone."

But it is not just the special charms of much of Berlin's graffiti-covered industrial carcasses or its fetishised insomnia that appeals to the sort of people who buy Bauhaus-influenced clothing in shops like Firma. It is the low living costs. According to Berlin think tank DIW, around 8,000 "creatives" get by with day jobs and the average annual income for all creatives is €18,000 – more than enough to live on considering rent is only a few hundred euros a month.

"In any other European city you need a good job to have a good life. Here, you just need a job," explains Exberliner's Nadja Vancauwenberghe, who moved here from Moscow seven years ago. "If you only have to find €300 a month for rent it is easy to launch a fashion label within a few days."

Such resourcefulness is evident in the southern district of Neukölln, a working-class district bustling with immigrants, artists and students. For the last five months cobbled Emser Straße has been home to WOAH, a tiny gallery housed in a former tailor's shop. Supported by an organisation called Zwischennutzungsagentur, which seeks to fill empty premises with creative types who can meet peppercorn rents, WOAH was formed by four expats – British artists Ian Liddle and Simon Knight and Spanish fashion designers Raquel Fernandez and Raquel Hladky – each of whom invested €300 to get started. WOAH alternates between a two-room studio space showcasing some of the city's rawest artistic talent and a boutique selling the collective's hand-crafted clothing line.

Epitomising the successful Berlin start-up is SoundCloud, an online audio platform for music professionals created by two Stockholm entrepreneurs Alexander Ljung and Eric Wahlforss. After a reconnaissance trip to San Francisco, Ljung says the duo chose Berlin "over London , Barcelona and Vienna" because "we just found ourselves in a hub of like-minded people. It wasn't until we set up the company [on Auguststraße, mother lode of the Mitte's art galleries] we realised that compared to other cities it is really cheap – we just wanted to live and work here with the people we met. I get the impression a lot of people come here and end up staying. It is also easy to be a freelancer here compared to in Sweden where you have to create a business, even if you're just one person in your bedroom". Speaking in perfect English, Ljung says he hasn't yet mastered German but that has not been a hindrance.

Mayor Wowereit believes that the creative industries will help fulfil his vision of Berlin thriving as "a really international city, in the middle of Europe, and an intellectual centre." Sitting in his large and low, modern furniture-filled office inside the Rathaus – the oddly Renaissance-styled building which also houses the city's Senate – in April, he said: "This young, dynamic city reminds me of Swinging London. The economy is not that strong but you feel so many things are possible. Young people from all over the world come here, whether for university or to work. The city is reinventing itself every day. With the city restructuring [after reunification] the economic difficulty in Berlin has already taken place. It was painful but we're now starting to come through."

Although Wowereit smiles that he would prefer the city to be "rich and sexy", he believes its youth and diversity, combined with its abundance of cheap property, give it a significant edge over other European capitals.

"Cities like Paris or London are wonderful, of course, but they are far too expensive for creative or young people, for a start. Even in the heart of the city, real estate prices here are really low, which is why Berlin will not be affected by the financial crisis. The huge number of qualified multilingual staff here in Berlin is a big plus too. Then there is the geographical advantage. We are in heart of Europe between East and West. We're only 70km from the Polish border, for example. There are lots of countries that have changed from a planned economy to a mixed economy, and as our city already gone through that process, we are in a good position to benefit," he says.

The mayor will be encouraged by Ernst & Young's just-published 2009 European attractiveness survey, which asserts that as a cluster of education, entrepreneurship and opportunities Berlin is in a far stronger position to rebound from the current malaise than Tokyo, Beijing, Munich and Frankfurt.

While mindful of the fact that Berlin got caught up in the short-lived dotcom boom of the 1990s, when the city had hopes of becoming Germany's high-tech epicentre, Wowereit is determined to tap into universities and research institutes to make Berlin a centre for "new economy" companies such as communications technology and the media. A 2007 report, Talent, Technology, and Tolerance – Where Germany Has A Future, concluded that Berlin has the country's best "starting conditions" to "generate the conditions necessary for economic growth and employment".

The report based its work on the theory of growth potential developed by US economist Richard Florida, author of the seminal 2003 book The Rise of the Creative Class. Florida observed that the values of the emerging creative class would determine where jobs would be created and where future investments would be directed.

In a paper released last month by the EU, in the context of 2009 being European Year of Creativity and Innovation, Florida wrote: "Research has proved time and time again that tolerant communities are more likely to attract coveted high-level human capital and technological innovation than those that are not. Indexes like ‘Gay' and ‘Bohemian' help to quantify a signal of diversity of backgrounds that strengthen the creative process."

Florida adds: "The greatest challenge we face is to expand the structures of the creative economy and harness the creativity of much larger segments of the workforce in the service and manufacturing sectors alike. Economic growth is driven by creativity, so if we want to increase it, we have to utilise the creativity of everyone."

However, as Berlin contemplates the consequences of reunification, and its changing role in the world, division and tolerance appear to be issues once more. Maurice Frank, managing director of Iomauna Media, which publishes Exberliner, notes there is now an interesting dynamic: "It is the new Berliners, who have come from all over Europe and the US, who are keen to preserve the city's grungy spirit and character while big business is hellbent on gentrification." Franks says that prettifying the city is pushing up rents and many people are concerned that this could kill the vibrant mix of cultures: "After all, this is the city's biggest economic and social asset."

Living costs are already rising fast in the Mitte, laments artist Jan Neuffer, who opened his eponymous gallery on Auguststraße seven years ago. "My rent is going to be up in the next few weeks, they tell me. They can get away with it because, even though there is so much building in the south of the city, this area is so desirable. Doesn't anyone know there is a recession on?"