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THE CAPITAL OF BAVARIA IS KNOWN AS A PLACE OF CULTURE AND CHARM. CONTRASTS BLEND WITH EXCEPTIONAL GRACE IN THIS CITY OF COSMOPOLITAN SOPHISTICATION AND FAIRY TALE MAGIC.Fairytale magic and sturdy burgher simplicity, cosmopolitan sophistication and eastern European chic; these qualities and every gradation between mingle and co-exist comfortably in Munich, Bavaria's capital city. It's a place where contrasts blend with exceptional grace and piquancy.

Here, despite warfare's ultimate destruction, 1.3 million Muenchners have reconstructed and are maintaining a wondrous heritage, while enjoying an ambient lifestyle that makes this vast city feel more like a comfortable small town.Munich is not just buildings, monuments and squares, though a deep regard for history, tradition and beauty has led the citizenry to put back everything just as it was before World War II. More importantly, here people seem to live with confidence, style and civility, with eyes wide open and senses alert to the culture and charm that surround them.

"There was in Munich an atmosphere of humanity, of total individalism, of freedom from disguises; an atmosphere of serene sensuousness, of artistry; a mood of vivaciousness, youth and popular enjoyment . . . ." So said author Thomas Mann in 1927. So not a few visitors still say today, nominating Munich their favorite European city.

On the street you can see men in knickers, brightly embroidered vests and Tyrolean hats, women in dirndl skirts and white aprons, perhaps walking the ubiquitous dachshund. (Go to the opera, and you'll see the formal equivalent of the dirndl.)

In the next step you encounter a woman dressed in haute couture, wearing the finely woven sequined knits favored by the elegant shops along Maximilianstrasse. Couturier styles overflow a welter of fashionable streets radiating from Marienplatz to Max-Josephplatz, Residenzstrasse, and on over to Odeonsplatz with its Romanesque statuary.

"The old part of Munich seems to me like a noble rose tree from which new branches shoot forth every year," said Hans Christian Andersen more than 100 years ago. True enough, Munich does radiate out from the central Marienplatz, with a circular street layout suggesting the location of old walls that once surrounded the inner city. A lively pedestrian zone connects much of the downtown area with the Hauptbahnhof, train station and center for the excellent metro system.

Western style eateries and chain stores have invaded this zone, but there is still a fascinating array of small shops featuring arts and crafts, books, clothing, and irresistible food wurst on crisp white rolls, mouthwatering pastries and dozens of chocolate confections. Or buy a festive bouquet, a natural-looking sheaf of flowers wrapped in cellophane and tied at the top with a pouf of curly paper ribbons.

Marienplatz is a mecca for tourists a wide open space that invites idling in outdoor cafes in good weather, or watching the street musicians, dancers, jugglers and assorted entertainers who regularly set up informal shop or participate in the frequent folk festivals that move through the downtown area. Rain or shine, the famed glockenspiel clock on the city hall tower is a major attraction.

That city hall with its heavily ornamented neo-Gothic architecture is a Johnny-come-lately as Munich buildings go, having been erected 1867-74. It's also something of an embarrassment to many Muenchners, who find it pretentious and a flagrant appeal to the visitor's love of Bavarian quaintness and cuteness. More to their taste are the spare, strong lines of the 13th century Alte Rothaus (Old Town Hall) on the east side of Marienplatz.

Traveling away from the center, one finds a similar pattern of ambient neighborhoods, clustered around many platzes (or squares), often with their own trademark Maypoles.

The city is low-built, few buildings going above four or five stories. When the Frauenkirche was built, it was decreed that no building should stand above it a restriction that has been generally observed to this day. Almost everyone lives in flats; and along pleasant residential streets one often sees a diligent hausfrau airing feather comforters or washing already impeccable windows.

Munich dates from a Roman settlement of the fourth to fifth centuries A.D., and over the years the monastery and village surrounding the parish church of St. Peter came to be known as "Munichen," after the monks. The city still bears on its coat of arms the image of a little monk (Muenchner Kindl, the "Munich Child").

In 1158, Duke Heinrich the Lion destroyed the bridge over the River Isar, also the customs house and salt sheds of the bishop of Freising, where the bishop had been profiting from the lucrative salt trade. Heinrich diverted the trade to a bridge and settlement he himself had set up, the pope upheld Heinrich's action, and Munich was founded.

However, Heinrich fell into disfavor, and in 1180 was deprived of his lands, which were then awarded to Otto von Wittelsbach. Thus was founded the house of Wittelsbach, whose descendants ruled Bavaria for 800 years, into the 20th century.

They proved enlightened rulers, many of whom encouraged great art and architecture. Notable among them was Ludwig II, the patron of Wagner, who built beautiful castles. Somewhat of an outpost over the centuries, Munich was a place of refuge for free thinkers and has enjoyed the presence of many fine musicians, artists and philosophers.

Pleasantly situated in relatively flat terrain where one has a good view of the Alps on a clear day, Munich is a constantly unfolding feast of distinctive squares and parks, churches, palaces, museums, gardens, memorials, fountains, statues, gates and bridges too numerous to enumerate. Music, dancing and theater abound in dozens of institutions, or in informal outdoor settings.

The following are a few recommended Munich highlights:

Churches: Not of such baroque splendor as those in Salzburg, for example, the interiors of Munich's many churches are more subdued, darker and less showy, though still ornate. Spiritual head of Bavarian Catholicism and a landmark of the town's skyline is the Frauenkirche (Cathedral of Our Lady), built in 1468-88 to hold 20,000 people, though the town only had 13,000 inhabitants at the time.

Not to be missed is St. Johann von Nepomuk (Asamkirche) in Sendlingerstrasse, a little rococo jewel ablaze with gold, orange and rosy tones, abounding in the cupids, roses and gilt filigree that delighted Bavarian artists.

Museums: Chief among the city's art repositories is the Alte Pinakothek, a beautifully laid-out Romanesque hall of many galleries near the University of Munich. It contains most of the Wittlesbach art collection _ works of the old Italian, Dutch and German masters; indeed, almost every name of note for hundreds of years is represented here.

Across a connecting square is the Neue Pinakothek, with masters from the 18th century on; and on the banks of the River Isar stands the giant Deutsches Museum, one of the continent's largest displays of scientific subjects.

On Max-Josephplatz, little more than walls of the Residenz, the Munich palace of the Wittelsbachs, remained after World War II; but an amazing reconstruction from records, plans, pictures and ingenuity gives stirring testimony that a city need not lose its dreams. The Residenz is a magnificent repository of countless treasures, displayed in myriad suites of elegant state rooms. Also in the complex is the Cuvillies Altes Residenztheater, reportedly the most beautiful gem of German secular rococo art.

With artifacts dating back as far as the 6th century and Middle Ages, the beautiful Bavarian National Museum preserves a record of the region's lifestyle in utilitarian, sacred and artistic objects.

Entertainment: Stroll through Schwabing on Leopoldstrasse _ Munich's own Montmartre. Once a suburban village, Schwabing developed into an artists quarter and was gradually surrounded by the city. Reportedly not as stylish as it once was, it nonetheless still abounds in amusing bistros, sidewalk cafes and outdoor art exhibits.

The world-famed Hofbrauhaus, dating back to 1516, features the same distinctive product mandated at that time by royal decree: "Beer here should be made only of barley, hops and water." Tourists throng the house for local color; locals are inclined to shun it.

If you are in Munich during early October, the Oktoberfest is of coursenot to be missed _ a festival to end all festivals, which has its own grounds for traditional parades, carnival, dancing, feasting and drinking the local product.

Many will enjoy seeing the Olympic Grounds, site of 1972 summer games, now the scene of many sporting events, a recreational park and television tower-restaurant.

Central to the arts establishment is the National Theater on Max-Josephplatz, which since its construction in 1818 has been destroyed twice (by fire in 1823 and again in 1944). It was restored each time according to plans of Karl von Fischer, in all its classic glory of gilt, roses and cupids. The theater houses the renowned Bavarian State Opera, one of the world's top companies, also the Munich Ballet.

Palaces and gardens: The River Isar, which bisects the city, becomes a swift, green tide during all-too-frequent rainy weather. It is not taken for granted, for its banks are lined with open spaces and parkways.

Of special charm is the extensive English Gardens, laid out informally with any number of inviting pathways, bicycle trails and woodland glens. Here one can meet friends at the popular Chinese Pagoda with its large beer garden.

Part garden, part museum is the Nymphenburg Palace, a complex of stately buildings branching off from a graceful central villa that fronts on a long canal and pretty lake. Like many great buildings, it was a gift to a woman _ commissioned in 1664 for Henriette Adelaide, upon the birth of an heir.

With other monarchs making additions, Nymphenburg grew to an assortment of grand rooms in high Italian style. A special feature is the Gallery of Beauties, paintings commissioned and collected by Ludwig I. And do not miss the collection of state coaches, so heavily encrusted with gilt, jewels and wood carving that it is a miracle they ever rolled.

Most beautiful among little villas and retreats that sprinkle the extensive formal grounds at the rear is the Amalienburg, a hunting lodge for the wife of elector Karl Albrecht _ justly called "the jewel of German secular rococo." Crowning the design by Cuvillies is the circular banquet hall of mirrors, with silver carvings and blue walls _ surely one of the world's most beautiful rooms. (Had I been a Bavarian queen, I would regularly have chosen to live in the charming, cozy hunting lodges, rather than the windy palaces.)

Dorothy Stowe vacationed in Bavaria last summer.