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Cablegate: Cdu Stumbles On Welfare Reform As Saarland Jumps

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS FRANKFURT 007909

SIPDIS

DEPT FOR EUR/AGS AND EB

E.O. 12958: N/A
TAGS: PGOV ECON GM
SUBJECT: CDU Stumbles on Welfare Reform as Saarland Jumps
Ship to Endorse Schroeder Govt Plan


SUMMARY
-------

1. The CDU-led Saarland government has rejected a Christian
Democratic proposal for paying unemployment benefits at the
local level. Together with poorer CDU-led states in
eastern Germany, Saarland could give the Schroeder
government a Bundesrat majority on welfare reform -- and
hand a defeat to national CDU leadership. END SUMMARY.

BACKGROUND
----------

2. Currently, the national government pays for the first 12
months of unemployment benefits, and local governments pay
for unemployment and social benefits thereafter. The
Schroeder government will alter the second tier of
unemployment benefits (Arbeitslosengeld II) so that after
12 months, unemployed individuals would receive reduced
benefits (at the same lower level as "Sozialhilfe" social
welfare payments) paid by the federal labor office. The
national CDU leadership criticized the SPD-Green proposal
as a power grab by the national government, and Hesse
Minister-President Roland Koch (CDU) introduced a plan
under which local governments will administer (and pay for)
the new second-tier unemployment benefits.

NEW DEVELOPMENTS
----------------

3. Saarland's State Secretary for Social Affairs Josef
Hecken (CDU) has rejected the CDU/Koch reform plan, calling
it an unfair burden to Saarland and other poorer German
states, particularly in East Germany. Hecken's office told
us that enactment of the "Koch/Merkel plan" (his quote)
would mean Saarland would lose over 100 million euros
annually versus under the current federal revenue sharing
scheme (Laenderfinanzausgleich). In defense of its
position, the Saar government cites a study by Georgetown
University lecturer Bernd Reissert showing that who pays
Arbeitslosengeld II is, in fact, very important. Reissert
describes unemployment benefits as part of a "hidden
revenue compensation scheme" channeling funds (EUR 4
billion net transfer per year) from strong states to those
with lower tax revenue and higher unemployment. Paying
benefits at the local level would potentially eliminate
this regional transfer payment.

4. Hecken recently told Saarland press that the CDU model
represents the "survival of the fittest," a threat to
solidarity and to the public finances and social policies
of Saarland and similar areas. He also criticized a CDU
proposal to alter a similar redistribution scheme among
health insurers (Risikostrukturausgleich Krankenkassen).
Hecken opines that the Schroeder government model likely
will receive a Bundesrat majority (suggesting Saarland will
not/not vote the CDU line on welfare reform).

GIVING SCHROEDER AN ISSUE MAJORITY IN BUNDESRAT
--------------------------------------------- --

5. COMMENT. Reorganizing and reducing welfare payments is a
key element of economic reform. Hecken's announcement,
which was vetted by Saarland M-P Peter Mueller (CDU), is a
wake-up call for the CDU party leadership. Saarland's
rejection of the CDU/Koch proposal has political
significance beyond the issue of welfare reform:

-- It means that Schroeder government likely will obtain a
Bundesrat majority on this issue despite opposition from
the national CDU. While the national CDU leadership
rejected additional talks on the government's reform
agenda, Saxony M-P Georg Milbradt (CDU) said he would
welcome a summit with Schroeder if it would help his state.
The SPD-Green government potentially can use regional
transfer payments to prevail on other economic issues.

-- Welfare reform could become a significant defeat for CDU
chairperson Angela Merkel and for aspiring chancellor-
candidate Koch. Saarland's leadership is angry that Hesse
and Baden-Wuerttemberg dominated CDU policy-making on this
issue. The breakdown of party unity on welfare reform
shows CDU's vulnerability as it tries to govern in both
rich areas (Hesse, Baden-Wuerttemberg) and relatively poor
(Saarland, the new states).

PASI

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