Germany's Municipalities Face Financial Crisis

The Centro mall is the one place the city of Oberhausen is famous for nowadays. The shopping and entertainment center, with its 250 stores and restaurants, sits next to a marina with a promenade and right by Germany's largest Sea Life Aquarium.

The complex was built in the mid-1990s on a site where 32,000 people had previously worked in the steel industry, which was once a cornerstone of Europe's manufacturing base.

"Thanks to the Centro, we've created almost as many jobs again, but they're all in the service sector, where people don't earn as much," Oberhausen City Treasurer Apostolos Tsalastras said.

Demise of the Ruhr region

The average income in the city is now among the lowest in Germany: "The gross domestic product we generate here is also one of the lowest nationwide," the treasurer admits.

The Ruhr Valley, in the western state of North Rhine-Westphalia, was shaped by the 19th-century coal-powered industrial revolution, which became vital for Germany's armament production in the two World Wars. After the wars factories were first dismantled and then rebuilt to fuel what was called Germany's economic miracle in the 1950s. A serious crisis began in the 1970s, when inflation and overcapacity saw raw steel production plummet, leading to plant closures and structural unemployment in the region.

There are some remnants of the steel industry in Oberhausen, including a company that builds turbines for ships and power plants. But all of that is small-scale compared to the what it used to be, Tsalastras tells DW.

The structural economic problems since the decline of the coal and steel industries have been taking their toll for a long time. "We have no reserves, no capital investments we can liquidate, no assets we can sell, and so on," Tsalastras said. "We've been saving for 40 years; we've already sold everything: We have nothing left."

Oberhausen ranks among the cities with the highest debt in Germany. "We are in a truly dire situation," Mayor Thorsten Berg, of the center-left Social Democrats (SPD), told DW.

"The major burdens we face are payments to youth welfare and long-term care," Berg said. "The municipalities are expected to pay, but we don't get the money to do so. That's the flaw in the reasoning."

Weak economy, lower revenue

In Germany, decisions made at the federal and state levels force municipalities to, for example, pay the housing costs for welfare recipients or provide social assistance for people with disabilities. In Oberhausen, 50% of expenditures are earmarked for social services.

The costs of long-term care are rising because older people increasingly cannot afford to pay for nursing home care and the city has to step in.

Expenditures for youth welfare have also risen sharply as children and adolescents are increasingly having to be removed from their families because either they or the parents are struggling — often with mental health issues. Oberhausen's treasurer notes that the COVID-19 pandemic has left its mark, but the impact of social media is particularly concerning.

Municipalities feel helpless

Municipalities' largest sources of revenue are the trade tax and the property tax on land and real estate. Added to this is a 15% share of income tax. However, the economic crisis, which has gripped Germany for seven years now, has hit tax revenues.

Tsalastras has been in charge of Oberhauseny's finances since 2010. "We currently have an annual budget of €1.2 billion, and our revenue falls short by about €100 million," the economist reports from his office in City Hall. By the end of 2025, Oberhausen had accumulated €2 billion in debt. A cash injection from the state government of North Rhine-Westphalia brought it down to €800 million.

Cultural programs have long been subject to budget cuts. The renowned theater in Oberhausen has to make do with less money every year. Out of necessity, the building's urgently needed renovation is now being carried out while the theater remains open. In the meantime, audience members are required to sit on the stage.

Parking fees have been increased by 50%, and there are more traffic checks to collect fines.

The city administration is also expected to make further cuts, with 5% of jobs set to be scrapped. This will likely result in longer wait times for citizens at government offices.

"Local citizens find this absolutely dreadful, but they know we have no other choice," Tsalastras said.

Cuts to culture and services

How long can Oberhausen continue without making more significant cuts to services? This is the question that a growing number of mayors in Germany are asking themselves as expenditures now exceed revenues in nearly all municipalities.

More and more of Germany's roughly 10,700 municipalities are in debt. By 2025, local governments in Germany had collectively taken on nearly €30 billion ($34 billion) in new debt — a historic record. The existing mountain of debt has now grown to more than €200 billion. According to local government financial projections through 2028, a similarly high level of new debt is expected each year.

AfD stands to gain

"We can forget about all other efforts to safeguard our democracy if we don't ensure that people on the ground see that our state and our democratic system actually work," Berg said, referring to the rise of the far-right Alternative for Germany party (AfD).

It is a warning that has certainly been heard in the state capitals and in Berlin, as well. "The municipalities are in a very precarious financial situation," stated Chancellor Friedrich Merz, of the center-right Christian Democratic Union (CDU), at the end of June. He agreed with the state premiers to reorganize the distribution of public responsibilities. "We have agreed that, starting September 1, we will no longer pass laws that do not provide municipalities — and, where applicable, the states — with the appropriate renumeration," Merz said. "This follows the principle: Whoever commissions the work pays for it."

This applies only to future laws: The services that must already be provided remain in place.

Berg welcomes that decision. "But it only helps us a little, because it doesn't change the fundamental situation. If you want to change that, then the federal government really has to put money on the table," he adds.

One demand is to increase municipalities' share of total national tax revenue. In addition, municipalities are calling for complete debt relief. "I'd say it's a bit like collective bargaining," Berg said. "Those negotiations are often tough, too. So we keep highlighting the plight of the municipalities, and, little by little, things start to move."