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Cablegate: Germany/Economics - Mixed but Increasingly Worried Messages

Herbert S Traub 12/16/2008 10:02:48 AM From DB/Inbox: Herbert S Traub

Cable
Text:


UNCLAS MUNICH 00396
CXMUN:
ACTION: POL
INFO: PA CONS CG FCS RSO JIS MGT

DISSEMINATION: POL /1
CHARGE: PROG

APPROVED: CG: EGNELSON
DRAFTED: POL: HSTRAUB/HKRUEGE
CLEARED: BERLIN ECON:IKOLLIST, JMR MUN CONS:DC, FCS: IC (SUBS)

VZCZCMZI322
PP RUEHC RUEKJCS RUCPDOC RUEHZG RUCNMEU RUCNFRG
DE RUEHMZ #0396/01 3510756
ZNR UUUUU ZZH
P 160756Z DEC 08
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4594
INFO RUEKJCS/SECDEF WASHDC PRIORITY
RUCPDOC/USDOC WASHDC
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 03 MUNICH 000396

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON GM
SUBJECT: Germany/Economics - Mixed but Increasingly Worried Messages
from Bavaria on the Recession

REF: Berlin 1630

SENSITIVE BUT UNCLASSIFIED

-------
SUMMARY
-------

1. (SBU) Chancellor Merkel, ridiculed by some for her cautious
approach to an economic stimulus package, might be half right and
half wrong, based on analysis of the evolving situation in Germany's
touchstone state, Bavaria. On one hand, the graph from the November
2008 "business sentiment indicators" study for Bavaria (published by
Munich's Institute for Economic Research, IFO) shows an
unprecedented vertical drop from the October figure. Serious
slowdowns in major industries explain the fall. On the other hand,
the IFO graph shows that the same firms' assessment of the current
situation slumped, but not as much as their expectations did.
Anecdotal evidence from leaders in business, trade organizations,
and trade shows confirms that many Bavarian businesses are
increasingly concerned, but not yet desperate about economic
conditions both in Germany and in their life-giving export markets.
The Bavarian government will advance start dates for capital
programs in order to support the economy, which is in recession
after coming off unprecedented highs, as confirmed by the director
of IFO Institute in a public lecture on December 15 (reported
septel). End Summary.

Psychology Accounts for Half of Economic Performance
--------------------------------------------- -------

2. (SBU) Ludwig Erhard, the legendary Bavarian father of German
"Soziale Wirtschaft (Social Economy)," famously pronounced that
"psychology accounts for 50 percent of economic performance."
Juergen Hofmann, a senior official at the Bavarian Economics
Ministry, quoted Erhard as he showed P/E chief and Consulate
Economics Specialist on December 10 an unpublished IFO Institute
survey about the (1) current situation and their (2) expectations.
Firms' assessment of the current situation slumped but not as much
as expectations, which dropped to an unprecedented low level coming
off an historic, exuberant high in mid-2006. Hoffman added that
steep declines in incoming orders were adding to the gloom.
Although Hoffman recalled Erhard's maxim that all these negative
scenarios bore the danger of self-fulfilling prophecies, he
concluded that the government could not ignore the bad signs. He
argued that the German Federal government should take more decisive
fiscal policy measures. Separately, Bavarian Economics Ministry
State Secretary Hessel told the CG on December 11 that Bavaria would
bring forward into the first quarter of 2009 investment spending for
infrastructure and other government projects. This was to support
the Bavarian economy and help it through the upcoming rough period,
which the director of IFO, Professor Hans-Werner Sinn, confirmed in
a public lecture in Munich on December 15 (reported septel).

Bavaria's Giant Global Businesses Have Mixed Reports
--------------------------------------------- -------

3. (SBU) In Bavaria, the news from the largest Bavarian businesses
is mixed. BWM (cars), MAN (trucks), and Infineon (microchips) have
taken unprecedented enforced week-long "vacations" over Christmas,
closing factories to save money due to collapsing sales. Workers
at BMW and MAN are cashing in overtime hours to draw full paychecks,
but relative to Opel, BMW remains in relatively good shape. BMW's
and MAN's actions will postpone layoffs or shortening of the work
week, at least for a while. Infineon, a Munich-headquartered
chipmaker in trouble even before the current crisis, has put its
Regensburg factory on short time work and is considering this
measure for other production sites as well. On the other hand,
EADS (Airbus) has reported an order book with 500 million dollars
worth of contracts. These outstanding orders could keep Airbus busy
for years but these are 65 percent fewer than those that Airbus had
on the books in 2007. There is the concern that substantial numbers
of orders could be cancelled due to the global economy, as China is
reported to be considering.

Small and Medium-Sized Firms Still Relatively Stable?
--------------------------------------------- -------

4. (SBU) One level down, German small and medium-sized companies
(SMEs) think of themselves as more flexible and innovative than
their DAX-listed counterparts in adjusting to tough times, but it
remains to be seen how they can weather the coming storm. Consulate
contacts around the District confirmed to us in the last weeks that
in Bavaria, as in Germany overall, SMEs, which account for the
majority of employment and the vast majority of businesses, would
continue to underpin Bavarian prosperity in the long run. Many
smaller German businesses, which dominate niche markets and pursue
flexibility and innovation as a matter of course, predict they will
be able to steer their operations through the current economic
downturn, albeit with belt tightening.
5. (SBU) Over the past four weeks, AmConsul Munich and Embassy
Berlin representatives discussed the economic crisis with
representatives from the Bavarian Economics Ministry, the Industrie-
und Handelskammer (Industry and Chamber of Commerce), and private
SME businesses in Bavaria. The following three examples illustrate
a business culture that SMEs across Germany embrace and that could
explain, in part, the relative confidence of the Federal and
Bavarian Governments in the longer term health of the German economy
(reftel).

a) Loewe Electronics: Loewe is a medium-sized electronics
manufacturer in Upper Franconia (near Bayreuth) that won business
awards recently after surviving a crash business reform to create an
award-winning flat screen television. At a recent meeting with P/E
chief, Dr. Hans Trunzer, head of the Chamber of Commerce (Industrie-
und Handelskammer) in Bayreuth, Upper Franconia, cited Lowe as a
perfect example of resiliency and reform. Even though Loewe is
publically-traded, Trunzer compared the firm to SMEs in Bavaria and
praised it for its efficient size, flexible management and leaner
operations.

b) Diehl: Another Bavarian business example is Diehl (the
international metal, tool, and defense firm) in Nurnberg, where
Herbert Wust, senior executive manager, told P/E chief in early
November that his business was holding steady, even with decreased
orders from BMW, for whom Dhiel produces a unique gear part.
Although Diehl is not technically an SME because of its size and
multinational reach, Wust described a company that emphasized the
autonomy and flexibility of its constituent parts, run from a home
office and led by a close family team.

c) E-T-A: Bernd Ellenberger of E-T-A (the world market leader for
circuit breakers for equipment protection, located near Nurnberg)
told an Embassy economics specialist on December 4 that ETA is
"still doing fine" although Ellenberger expects a "rough year" in
2009. He confirmed that the company is in good shape because it
was able to increase its capital ratio in past years. It invests
only its own capital, so it does not need help from banks. When
asked about his general impression of other SMEs in the greater
Nurnberg area, Ellenberger said that those which have not found a
specialized market niche might increasingly face credit problems.
While he did not know of a particular case, he speculated that
companies that did not increase their capital ratio during good
times might now face difficulties in repaying credits or getting new
money.

Trade Show Attendance and Sales Predict
Next Economic Cycle
----------------------------------------

6. (SBU) Trade shows "predict the health of the economy like
canaries in a coal mine," Kurt Schraudy, senior executive office for
new technology at Messe (trade fair) Munich, told P/E Chief on
November 10. He confirmed good participation both before and after
the Electronica show in November; it is the main trade fair for the
international electronics industry aimed at business, not consumers.
Exhibitors and visitors told him that they expected an economic
downturn, but they were "reacting with self-confidence." In this
spirit, one businessman we met on the floor of the show said his
company was aggressively seeking new markets, moving in where weaker
competitors had abandoned the field.

Business Visa Applications Holding Steady
-----------------------------------------

7. (SBU) Finally, at the visa window at Consulate General Munich,
the pace of business visa applications has not noticeably changed.
However, a Qimonda employee (electronic component division of
Infineon) confirmed press reports that the company is very unstable,
and that "key employees are jumping ship." In fact, the employee
was in the Consulate to get a B1/B2 visa, because he feared his
valid L-1 visa, issued in the name of Qimonda, might become invalid
if Qimonda ceased to exist.

Comment
-------

8. (SBU) Looking at Bavaria as a microcosm of Germany's economy,
one could come away with the impression that things are serious but
not hopeless. Trade shows, a generally reliable predictor of future
business activity, act like the proverbial "canary in the coal
mine," and, so far, the bird still sings business tunes here.
However, there is ample reason to fear that song could turn into a
swan song. The economic data is becoming increasingly worrisome.
The reactions of major-name German firms, like BMW and MAN cutting
production and idling factories, will have a ripple effect across
the economy as suppliers get trapped in the riptide. On the other
hand, there is ample evidence that many SMEs, which dominate niche
markets or which have conservative and innovation-rich management
styles, will ride out the storm. German SMEs six months down the
road may tell a somewhat different story since they rely heavily on
exports; thus the deeper the global recession, the more they will be
affected despite their gritty determination.

8. (U) Consulate General Munich coordinated this report with
Embassy Berlin. Track Munich reporting at
http://www.intelink.sgov.gov/wiki/Portal:Germ any.

NELSON

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