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Cablegate: The Wrong Signal at the Wrong Time:

VZCZCXRO6085
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #2004/01 3060658
ZNR UUUUU ZZH
R 020658Z NOV 07
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC 9671
INFO RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUEHBS/USEU BRUSSELS
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 002004

SIPDIS

STATE FOR DRL/ILCSR AND EUR/AGS; LABOR FOR ILAB
(BRUMFIELD); TREASURY FOR OASIA
USEU FOR PETER CHASE, JULIE NUTTER, BARBARA
MATTHEWS

SENSITIVE BUT UNCLASSIFIED

SIPDIS

E.O. 12356: N/A
TAGS: ELAB ECON EFIN PREL PGOV GM
SUBJECT: THE WRONG SIGNAL AT THE WRONG TIME:
- SPD DEBATES ECONOMIC REFORM

REF: BERLIN 1977 (SPD Conference)

1. (SBU) Summary. No tectonic shift in German
economic policy came out of the SPD convention,
perhaps, but the SPD's labor reforms could mark
the beginning of a rollback in Schroeder's
"Agenda 2010" reforms, a source at the Labor
Ministry told the Embassy. The resolution to
block privatization in particular sent an
undesirable message to investors. Together with
the CDU/CSU, the market-oriented SPD faction
within the government would resist measures that
raised the deficit, and could probably block any
drastic efforts to augment the welfare state, but
in this environment, further structural economic
reform in the Grand Coalition government seemed
unlikely. End Summary.

2. (U) On October 30, EMIN and Labor Specialist
met Dr. Guenther Horzetzky, Director General of
the Policy Planning Division in the Ministry of
Labor and Social Affairs in Berlin. Close to
Labor Minister Muentefering, the dyed-in-the-wool
Social Democrat and long-term union officer is
the "brains" behind many policy initiatives of
the Ministry and remains wedded to Schroeder's
market-oriented reforms, notably in the area of
labor liberalization. He served in the
Chancellery from November 2002 to November 2005
and was of one of many co-authors of Schroeder's
Agenda 2010.

SPD Party Convention
--------------------

3. (SBU) The resolutions at the SPD's recent
convention calling for a partial rollback of
former Chancellor Schroeder's reforms did not
reflect the agenda of the party leadership so
much as a spontaneous shift by the rank and file
back toward the SPD's traditional social
democratic roots, Horzetzky said. He was
uncertain whether the proposal to expand benefits
for older unemployed workers presaged other steps
to roll back Schroeder's progressive programs.
In general, however, the party convention -- by
inter alia adopting resolutions to kill
privatization of the German railway (Deutsche
Bahn), introduce a uniform national minimum wage,
and regulate temporary work had sent a
"disastrous signal to capital markets," in
Horzetzky's view.

No Stopping Extension of Some Benefits
--------------------------------------

4. (U) At first glimpse the positions of the
coalition partners regarding the extension of
benefits for older workers seemed to be not far
apart. Both parties favored extension of
unemployment benefits for over-50 workers - no
heavy lifting required here, with 80 percent
public support for such a move. Horzetzky said
that the SPD leaders will remind Chancellor
Merkel of a similar resolution adopted at the CDU
convention in November last year (which
ironically, the SPD had then opposed on the
grounds that it was a reversal of Agenda 2010).
When it came to details, however, there were
fundamental differences, particularly over how to
finance the extended benefits. The CDU was
strictly opposed to any solution that would
require additional funding from the federal
budget, whereas the SPD wanted to dip into the
current surplus of the federal unemployment
insurance fund (BA).

5. (U) Beneath the surface, there was intense
debate within the SPD itself over where the money
would come from. Officially, the SPD argued that
the 6.5 billion euros ($9.1 billion) surplus

BERLIN 00002004 002 OF 002


could easily take care of the hand-outs, which it
variously estimated at 800 million to 1.1 billion
euros annually. However, on October 30 the BA
warned that this estimate was way too optimistic.
It projected that the new benefits could cost up
to 2.9 billion euros ($4.6 billion) annually.
Costs could climb even higher were the economy to
slow down, and joblessness rise. Privately,
Finance Minister Steinbrueck (SPD), a budget
hawk, was reportedly displeased at the SPD's
direction, yet was forced into silence.

6. (SBU) It could be worse if other SPD
resolutions were to come into law. "By raising
the retirement age to 67 and limiting the
duration of benefits, we (read: Schroeder's Red-
Green government) tried to stop the practice of
early retirement," Horzetzky said. He admitted
that Agenda 2010 was widely perceived as unfair
to people who had paid their unemployment and
social security premiums for decades, but
demographic realities required a pullback. "We
did not explain our intentions well enough" to
the public, he lamented.

Next Steps
----------

7. (SBU) Horzetzky expected tough negotiations
between the coalition parties at forthcoming
meetings of the steering committee, where the
CDU/CSU had announced it would block several of
the SPD proposals. He predicted Labor Minister
Muentefering and Finance Minister Steinbrueck,
with strong CDU/CSU support, would be able to
delay any solution that was not "cost neutral" -
a formulation that was subject to multiple
interpretations. The SPD's call for a national
minimum wage of 7.5 euros (nearly $11) an hour
would go nowhere given stiff opposition from the
CDU/CSU, which argued that it would lead to job
losses. The coalition might agree on the lowest
possible denominator, he said: Merkel would
"grudgingly" agree to extend the minimum wage to
postal workers.

Privatization of Deutsche Bahn
------------------------------

8. (U) In Horzetzky's view, the SPD's opposition
spelled doom to privatization of Deutsche Bahn.
If the SPD's insisted on reserving 51% of the
shares for the government, 25% as "Peoples'
Shares" without voting rights, and only 24% (with
voting rights) for private interests, he said,
strategic investors would be scared away.
Leading CDU politicians have already indicated
they would want to postpone a decision on
privatization of Deutsche Bahn until after the
next federal elections in 2009.

"Mrs. Feel Good" in a Wait-and-See Mode
---------------------------------------

9. (SBU) Horzetzky rejected allegations,
especially in the Western press, that Chancellor
Merkel (whom he jokingly called "Mrs. Feel Good")
had lost her taste for reform, or that she had
shied away from making hard decisions. He said
she was in a very comfortable position, as the
SPD convention had actually played into her
hands, giving her several options. She could
stay with the SPD for the rest of the legislative
term, or she could try to force early elections
(given her high ratings in the polls).
Nonetheless, nothing in Horzetzky's prognosis
indicated we could expect bold new domestic
economic initiatives until after the next
elections.

TIMKEN JR

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