This past summer, a gallery around the corner from my office in Berlin held an exhibition organized on an unusual theme: how to shrink the city to match the size of its diminished population. One scheme proposed the demolition of all the interior buildings in Berlin’s unique wafflelike city blocks, composed of buildings and inter-communicating courtyards, or Höfe. Each block would literally be hollowed out, the interior planted with huge gardens. Tongue-in-cheek though it was, the exhibition marked the first time I’d seen a response from Berliners to a question that almost every visitor to the city sooner or later asks: “Where are the people?”

Ever since the Germans made Berlin their capital again, and particularly since the parliament and much of the government moved here three years ago, there has been talk of its being the new “capital of Europe.” But Berlin lacks something we Europeans regard as essential to our great capitals: bustle. London and Paris have it. Rome can have too much of it. But Berlin? There is an area of boutiques, cafés, and restaurants round the Hackescher Markt where the sidewalks can get a little congested. And, at night, there is some movement on nearby Oranienburgerstrasse. But on many a weekday you can walk down the famed Unter den Linden, which has the Brandenburg Gate and the Reichstag at one end and Humboldt University and the Staatsoper at the other, without once having to step out of anyone’s way.

Since the Berlin Wall tumbled in 1989, resurgent Berlin has equipped itself with some wonderful new buildings that express its grand aspirations. Sir Norman Foster put a cap on its somber martial history with the transparent dome he placed over the Reichstag. Daniel Liebeskind’s lightning bolt of a Jewish Museum is there to remind everyone where that martial tradition eventually led. In what is intended as the new center of Berlin, the Cold War wasteland of Potsdamer Platz, the Chicago architect Helmut Jahn has created the Mount Fuji-like Sony Center, which rears up as a symbol of emergence and a promise of exciting—maybe explosive—things to come.

What Berlin lacks is not buildings, but people. The population is smaller now than it was in 1920. The city’s division during the Cold War stripped it of its industries. Siemens, its biggest employer, fled south to Bavaria after World War II. West Berlin in particular was kept going largely on subsidies, and those dwindled after the collapse of communism. A half-million jobs that depended in one way or another on government handouts have since been lost. At the same time, tens of thousands of West Berliners, deprived of access to the countryside when their part of the city was encircled by a hostile East Germany, moved out to the surrounding region of Brandenburg. Every time my wife and I go away, we leave our dog with a couple who were part of that exodus. For the price of their apartment in the city, they bought a house with some land on the outskirts of a village with a medieval church, cobbled streets, and half-timbered houses.

Looked at through a cultural prism, Berlin is the coolest venue in Europe. Looked at another way, it’s a depressed postindustrial town. That’s why it has racked up an enormous public debt that would shame a Third World dictatorship—some $40 billion at last count. Its municipal tax revenues have not been sufficient to pay for the cost of building new infrastructure.

It’s tempting to see in Berlin’s post-reunification predicament a paradigm for the country as a whole. In both cases, the ambition is out of balance with the available resources. Germany, too, aspires to a more prominent role on the international stage, but its economic growth rate since the mid-1990s has been dismal.

Despite—or maybe because of—its warped recent history, Berlin is an unusual and stimulating place to live. One way in which the old West German government tried to keep the city populated was by granting its residents exemption from military service. The result was to make the place catnip for counterculturalists. Left to itself, alternative Berlin might well have dissolved into irrelevance, but then down came the Wall, creating a wholly extraordinary situation, a unique chapter in the history of real estate whose effects can still be read on the face of the city today.

To stop its citizens from fleeing to the West, the communist German Democratic Republic had emptied buildings and cleared land in a vast swath on the eastern side of the Wall. Suddenly, the regime imploded, and while the planners were still busy working out their vision of Berlin as the new capital of Europe, a lot of inventive and enterprising, if unconventional, people occupied the buildings and land the planners were earmarking for more orthodox purposes.

Probably the best-known venture by these latter-day counterculturalists is the Tacheles arts cooperative, which was set up in a huge building on Oranienburgerstrasse that was once a department store. One of the artists told me how for months—if not years—after they occupied the building they were getting free electricity. Such was the chaos that followed the fall of communism that no one could work out where the electricity was coming from or who should be paid.

Access to so much space allowed people to experiment in ways that would never otherwise have been possible. At Tacheles, the basement was used for rehearsals by a performer who works with military flamethrowers. The yard at the back once held a “liberated” MiG jet.

It has taken more than a decade for a measure of normality to return to Berlin. Increasingly, unlicensed clubs, galleries, and arts centers are being asked to come up with health certificates and put in fire doors. Warehouse by disused warehouse, courtyard by derelict courtyard, the alternative community is being driven out of the city center. Even the spectacularly trashed Tacheles has been given some much-needed supporting beams, and the ground floor is now home to a bar that verges on being chic.

Yet Berlin is still a very long way from being a typical, staid, prosperous German city. As long as more people leave than move into the city, rents will remain low and young people in particular will be able to launch experiments that would be impossible in London or Paris. Just one example: Berlin, alone in Germany and, so far as I am aware, alone in Europe, has a thriving subculture of unlicensed restaurants. They operate from crumbling premises with short—sometimes, one suspects, nonexistent—leases, and every few months the proprietors have to pack up their pots and pans and move on. There is—or was—one such eatery in Kreuzberg that kept itself so secret you could only get in by climbing through a window. Payment is usually voluntary and discretionary, probably so that the management can claim they were just entertaining friends if the cops ever drop in.

There’s a battle going on for the soul of the city—between shiny new “official” Berlin and shabby old “alternative” Berlin. A lot of people in high places would prefer to wish away the conflict. An informal capital with a cutting-edge feel to it would do more than any number of statesmanlike speeches to allay the fears that inevitably surround reunified Germany. When Bill Clinton came to Berlin during his presidency, the chancellor, Gerhard Schröder, took him out to eat at a noisy restaurant in Prenzlauer Berg, which at that time was the center of countercultural Berlin. It was a remarkable event: the world’s most powerful man dining in a building daubed with graffiti while Secret Service agents stood outside among the gleaming black limos watching kids with nose rings munch “space cake” at sidewalk cafes.

It may just be coincidence, but shortly after that singular meal, Prenzlauer Berg began rapidly to be displaced as the focus of alternative Berlin. As a friend once said, the counterculture is like a soap bubble: “Touch it and it’s gone.”

Nothing could illustrate that better than Berlin’s annual Love Parade, the world’s biggest celebration of dance culture and techno music. It began in 1989, the year the Wall fell. A Berlin DJ, Mathias Roingh, aka “Dr. Motte” (Dr. Moth), drove up the Kur­für­stendamm with a couple of ill-synchronized cassette players blasting out house music. About 150 of his friends and fans followed, turning the event into an impromptu rave. Ten years later, the turnout for the Love Parade had risen to a million and a half. It had outgrown its original venue and was being staged along the wide boulevard that slices through the Tiergarten park in the center of Berlin. The two cars in the original parade had been replaced by giant floats loaded with solid walls of sound equipment. And Dr. Motte had been joined by some of the world’s best DJs. But the thrust of the original project had already been lost. Big corporations were starting to offer big money to get their names on the floats. Turnout for the parade peaked in 2000 and has declined steeply in the last two years. This summer, some of the dancers on the floats were wearing commercial logos.

In the long run, I suspect, something similar will happen to Berlin: The official city will gradually submerge the alternative one. People did not start talking about Berlin as a future capital of Europe because it had become the capital of Europe’s biggest state, or because it was particularly big or busy or beautiful, but because the continent’s center of gravity was expected to shift eastward. This, it was argued, would have two effects: It would give Germany even greater clout by providing it with a huge new sphere of influence in the formerly communist East and it would mean Berlin was the biggest city in the new geographical middle of Europe. Those processes have not even begun. But they will soon, when the first batch of ex-communist states joins the European Union. And already you can begin to glimpse what that could mean for Berlin.

In the new Kanzleramt (Chancellor’s Office), a startlingly grandiose building shaped rather like a gigantic washing machine, the air still carries a whiff of newly laid carpet. Among the first people to tread upon the carpet this summer were the leaders of Austria, Slovakia, Hungary, and the Czech Republic. There had been appalling floods in central Europe, and Chancellor Schröder called an emergency “summit” to which he also summoned the president of the European Union, Romano Prodi. Nobody questioned Schröder’s right to call the meeting, let alone his right to chair it—and nobody stayed away.