Economy of Berlin

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The economy of Berlin has been affected through the years by the city's changing political fortunes. Berlin was once a major manufacturing center and the economic and financial hub of Germany. The city suffered economically during the Cold War, when West Berlin was isolated geographically and East Berlin suffered from poor economic decisions made by East Germany’s socialist central planners. Since reunification, the city has relied increasingly on economic activity in the service sectors, but nevertheless accumulated a record state debt.

The Treptowers and the Molecule Men

Berlin was founded at a point where trade routes crossed the River Spree and quickly became a commercial center. During the early modern period, the city prospered from its role as Prussian capital by manufacturing luxury goods for the Prussian court and supplies for the Prussian military.

During the mid-1800s, the Industrial Revolution transformed the city’s economy. Berlin became Germany’s main rail hub and a center of locomotive manufacturing. The city became a leader in the manufacture of other kinds of machinery as well, and developed an important chemical industry sector. Toward the end of the 19th century, Berlin became a world leader in the then cutting-edge sector of electrical equipment manufacturing. As the de facto center of the German Zollverein, or Customs Union, and later the seat of the Reichsbank, Berlin became Germany’s banking and financial center as well.

Berlin suffered from both the German hyperinflation of the 1920s and the Great Depression of the 1930s. The city’s economy revived as a center of weapons production under the Nazis, but it lost a pool of entrepreneurial talent when the Nazis forced Jewish businessmen to sell their holdings and ultimately massacred most who did not flee Germany. World War II severely damaged Berlin’s industrial infrastructure, and Soviet expropriation of machinery and other capital equipment as “war reparations” further damaged Berlin’s industrial base. Soviet restrictions on transport impeded communication with West Germany and ended hopes that Berlin would resume a role as Germany’s financial center; most banks established headquarters in Frankfurt. In East Berlin, socialist central planners rebuilt a manufacturing sector, but one that was not competitive internationally or responsive to market demand. West Berlin’s economy grew increasingly dependent on state subsidies and on its role as an educational and research center.

Berlin’s and Germany’s unification brought the collapse of many of East Berlin’s producers, which could not compete with market-disciplined Western competitors. Massive unemployment was only partly compensated by the growth of jobs in the construction and infrastructural sectors involved in rebuilding and upgrading East Berlin’s infrastructure. The arrival of the federal government in 1999 brought some economic stimulus to Berlin. Berlin’s service sectors have also benefited from improved transportation and communications links to the surrounding region. While some manufacturing remains in the city (Siemens and Schering are headquartered here, for instance), the service sectors have become the city’s economic mainstay. Recently, research and development have gained significance, and Berlin now ranks among the top three innovative regions in the EU (after Baden-Württemberg and the Ile de France region).^[1] However, growth in the research and development sector has not been sufficient to offset job losses, and unemployment remains high, at 16.5% as of October 2006.^[2]