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Cablegate: German State-Level Stimulus Aims to Offset Industrial

VZCZCXYZ0000
OO RUEHWEB

DE RUEHFT #3633/01 3441420
ZNR UUUUU ZZH
O 091420Z DEC 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8922
INFO RUEHC/DEPT OF LABOR WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS FRANKFURT 003633

STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), DRL/ILCSR AND
EUR/AGS
LABOR FOR ILAB(BRUMFIELD)
TREASURY FOR ICN(KOHLER),IMB(MURDEN,MONROE,CARNES) AND OASIA

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EIND GM

SUBJECT: German State-Level Stimulus Aims to Offset Industrial
Slump

REF: (A)BERLIN 1631 (B) BERLIN 1592

ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION

1. SUMMARY: As evidence mounts that Germany has slid into
recession, the Baden-Wuerttemberg state government announced this
week it will provide its own fiscal stimulus package to combat the
coming crisis. Automotive and industrial manufacturers in B-W will
undoubtedly welcome the news, having already seen a sharp decline in
global demand for their products. Business leaders expect numerous
insolvencies and large production cuts in the coming year,
especially among small auto parts manufacturers. Although the
state's package will not be large enough to prevent the downturn, it
may encourage other states or the federal government to provide
their own larger fiscal stimulus packages. END SUMMARY.


State-Level Fiscal Stimulus on the Way
--------------------------------------

2. Baden-Wuerttemberg Minister President Guenther Oettinger
announced this week a 1 billion euro ($1.27 billion) economic
stabilization package to modernize transportation and education
infrastructure in B-W. Oettinger's announcement came as a surprise
because he had just the previous week publicly backed Chancellor
Angela Merkel's opposition to a stimulus package larger than her
now-approved 12 billion euro plan. Oettinger justified his change
of heart by saying that the state's dependence on the automotive
sector makes the crisis more acute in B-W than elsewhere. The CDU's
coalition partner in the state, the Free Democratic Party, would
prefer to see tax cuts, but most parties reacted favorably to the
news.

3. The announcement comes as economic misery has become reality in
Germany's southwest; leading industrial manufacturers have announced
reduced production and profit targets. Baden-Wuerttemberg,
Germany's third largest state in economic size, has consistently
outperformed other states in growth and employment statistics. With
an unemployment rate of only 4%, economic growth rates of 4.4% in
2006 and 2.8% in 2007, and a GDP of 353 billion euros ($448 billion)
in 2007, B-W consistently scored well above the national average in
its economy. Although optimistic prognoses still put economic
growth at 2% for 2008, predictions for 2009 are being revised ever
downward. In the Stuttgart area, the automotive sector accounts for
51% of turnover and employs 121,000 people. As the recession
deepens in Germany, the B-W economy, with its large automotive and
industrial manufacturing sectors, has been hit hard by the global
collapse in demand for industrial products.

Automotive Sector Already in Hard Times
---------------------------------------

4. Stuttgart-based Daimler, manufacturer of Mercedes and Smart
brands, saw a dramatic reduction in sales in October and November,
down 25% from the previous year. Daimler now plans to reduce
production by 80,000-100,000 cars in 2008 and 150,000 in 2009. In
addition to a five-week Christmas break and several days of
production stops in February and March, Daimler will also add a
summer recess in 2009. In addition to cuts in part-time positions,
Daimler announced on December 8 that it will go to a four-day work
week for 20,000 of its 30,000 employees at its largest assembly
plant in Sindelfingen (near Stuttgart). An additional 6,100 workers
at the nearby Rastatt plant will also work only 3 to 4 days a week,
but the firm will resist making job cuts. B-W's other leading auto
manufacturer, Porsche, will also extend production shutdowns over
the holidays and cancel 100 temporary contracts.

5. Daimler chief economist Juergen Mueller predicted to Econ Off
and Econ Spec that the German auto industry would not see a return
to 2006 and 2007 sales levels until 2011 or 2012. Some factors will
have a positive effect on sales, such as the decreasing cost of oil,
lower raw material prices, and the weakening of the euro against
other global currencies, but a global economic downturn will have a
devastating impact on demand. He worried most about small-parts
manufacturers, predicting that 20-25% will slide into bankruptcy
this year, even more should any U.S. auto manufacturers go bankrupt.
Although Daimler faces increased borrowing costs, it stands ready
to reach out to its partners by paying for orders upfront or earlier
than usual. Mueller predicted that the German government may in the
end need to create a stabilization package for the auto parts
industry.


Other Industries See Dark Clouds Ahead
--------------------------------------

6. Suedwestmetall, an employer association representing more than
800,000 employers in the metal and electric industries, sees similar
trends in other industrial sectors. Managing Director Peer-Michael
Dick described the present situation as catastrophic. The speed and
depth of the current downturn surprised industrial manufacturers,
and the recession would affect B-W harder due to its dependence on
industrial output. He expected up to 33,000 bankruptcies among
manufacturers and upwards of 140,000 lay-offs in the state in 2009.

7. Dick criticized the federal government's 12 billion euro
financial stimulus package as totally inadequate and said that if
the German government refused to take action, the auto industry
would need help from the EU. Both he and Daimler's Mueller argued
that a cut in the value-added tax would boost consumption in
Germany. Both parties agreed that this recession would be
particularly tough, as what might have been a normal business cycle
downturn coincided with a financial crisis.

8. COMMENT: The 1 billion euro infrastructure package from the
state government will clearly not be large enough or come quickly
enough to prevent a severe economic recession in B-W. Nevertheless,
the change of heart in the state government shows increasing
acceptance of fiscal stimulus despite the federal government's
intractability and prior state-level commitments to a balanced
budget. As fiscal stimulus gains acceptance at the state level and
poor economic data continues to come in, resistance at the federal
level may also dissipate. END COMMENT.

9. This cable was coordinated with Embassy Berlin.
POWELL

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