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Cablegate: Hesse Leads Opposition to Agenda 2010 Unemployment

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

UNCLAS FRANKFURT 004560

SIPDIS

DEPARTMENT FOR DRL/IL, EUR/AGS AND EB
DEPT PASS DOL/ILAB (BRUMFIELD)
TREASURY/OASIA FOR MCDOWELL
DEPT PASS FEDERAL RESERVE BOARD FOR ELLEN

E.O. 12958: N/A
TAGS: ELAB PGOV ECON GM
SUBJECT: Hesse Leads Opposition to Agenda 2010 Unemployment
Benefits Reform

REF: A) 2003 FRANKFURT 07909, B) Berlin 1570

1. SUMMARY: Led by Hesse Minister-President Roland Koch
(CDU - Christian Democrat), the conservative-dominated
Bundesrat recently rejected a bill to combine social-welfare
and long-term unemployment benefits, a key element of the
Schroeder government's "Agenda 2010" economic reform
package. Although government and opposition generally agree
on the need to streamline and reduce jobless benefits, Koch
and other conservatives want to give local authorities more
scope to administer unemployment benefits as a wedge to
introduce flexibility into labor markets. The current
deadlock means that local governments, which had expected
the federal government to pay benefits under the planned
reform, may face an additional burden of up to 2.5 billion
euros in 2005. END SUMMARY.

2. On May 14, the CDU-lead majority in the Bundesrat
(Germany's upper house) rejected the "Hartz IV" welfare
reform, which would merge unemployment benefits and social
welfare payments to long-term unemployed (those drawing
benefits for more than 12 months), effectively reducing
payments (ref B). The bill will now go to a mediation
committee. Government and opposition agree on the need for
reform but disagree on the question of turf: Whereas Social
Democrats (SPD) and Greens would put the Federal Employment
Agency in charge, the CDU and Free Democrats (FDP) want to
give cities and counties more authority to administer
benefits. As architect of the so-called "Optionsmodell"
(inspired by the "Wisconsin Works" program), Koch recently
managed to unite other CDU-led states behind his opposition
to the SPD-Green plan, arguing that the government's bill
would merely expand the federal government's reach. Since
cities and counties are subordinate to states, Koch's plan
to put local communities in charge of benefits would tend to
give state governments -- most of which are conservative at
this time -- more influence over the labor market.

3. Other CDU-led states have practical concerns about the
reform, including Saarland -- traditionally a net
beneficiary of social transfer payments -- which originally
supported the SPD-Green model (Ref A) but recently closed
ranks with the opposition. Aide to Saarland Minister-
President Peter Mueller (CDU) Stefan confided that Koch had
lobbied other states heavily on this issue. State Secretary
Josef Hecken (CDU) added that the Saarland CDU is not
looking to hand the Schroeder government a defeat but fears
a debacle if governments appear unable to pay benefits on
January 1. Given the legal and financial uncertainties
connected with the reforms, Saarland had no choice but to
reject the bill. Hecken is hopeful that the sides can still
reach a compromise.

4. Local communities fear the deadlock will cost them
billions of euros. Few believe that the Federal Employment
Agency will be ready to pay benefits on January 1, meaning
that cities and counties (many of which teeter on the edge
of bankruptcy) will have to keep paying welfare to the long-
term unemployed. The spokesman for the Council of Cities in
Hesse, Bernhard Brehl, told us cities could live with a
variety of reforms, but failing to implement reforms by
January 1 would be "the ultimate disaster" -- an additional
2.5 billion euro expense in 2005 for local budgets. Brehl
criticized the Koch plan since it would not support local
authorities who choose to let the Federal Employment Agency
administer benefits. Frankfurt Lord Mayor Petra Roth (CDU)
-- who also serves as head of the German Council of Cities -
- has spoken out in favor of a greater federal role in
fighting long-term unemployment. On May 25, the Federal
Employment Agency announced an agreement with the Council of
Cities and the Federation of Cities/Towns, signaling local
government support for the federal government's approach
over Koch's conservative model.

5. COMMENT: Continued stalemate on reforming long-term
unemployment benefits could be the worst possible outcome --
a defeat for economic reform, a continued drag on growth and
employment, and an unfunded mandate for local governments.
END COMMENT.

BODDE

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