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Cablegate: Germany's New Coalition Agreement: The Domestic

VZCZCXRO0382
PP RUEHIK
DE RUEHRL #1340/01 2991749
ZNR UUUUU ZZH
P 261749Z OCT 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 5577
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0243
RUEHFT/AMCONSUL FRANKFURT PRIORITY 8294
RUEHHT/AMCONSUL HAMILTON PRIORITY 0006
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0239
RUEHMZ/AMCONSUL MUNICH PRIORITY 2196
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 BERLIN 001340

SENSITIVE

STATE FOR EEB (NELSON), DRL/ILCSR AND EUR/CE (HODGES,
SCHROEDER)
LABOR FOR ILAB (BRUMFIELD)
TREASURY FOR ICN (KOHLER)
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL GM
SUBJECT: GERMANY'S NEW COALITION AGREEMENT: THE DOMESTIC
AGENDA

REF: A. BERLIN 1243
B. BERLIN 1337
C. BERLIN 1167

BERLIN 00001340 001.3 OF 004


1. (SBU) SUMMARY. Germany's recently elected CDU/CSU-FDP
coalition signed a Coalition Agreement -- the document
setting out policy priorities for the next four years -- on
October 24, 2009. The agreement includes several elements --
tax cuts worth around 24 billion euros for individuals and
private firms, opposition to a national minimum wage, and
others -- intended to please pro-business interests. In an
important break with German social tradition, the new
government will also require individuals to bear more of the
burden of paying for healthcare. Likewise of note is the
commitment to maintain nuclear power generating
infrastructure for the time being. In most respects,
however, the coalition agreement does not represent a radical
break with the past. The CDU/CSU apparently tempered many of
the FDP's more radical proposals, such as a complete overhaul
of the tax system (REF A). The balanced budget amendment
further limits the government's room for maneuver, casting
doubt over whether promised tax cuts will ever really
materialize. Chancellor Merkel's choice of political
heavyweight Wolfgang Schaeuble as Finance Minister is a
telling indicator of where the country's real challenges lie.
Schaueble will have his hands full as he balances the need
to boost economic growth with ever-tightening fiscal
constraints. END SUMMARY.

ECONOMIC/GLOBAL AFFAIRS HIGHLIGHTS
----------------------------------

2. (U) Below are highlights of key domestic elements in the
Coalition Agreement between Chancellor Angela Merkel's
Christian Democratic Union (CDU)/Christian Social Union (CSU)
and the Free Democratic Party (FDP) (the "Black-Yellow"
coalition) signed on October 24, 2009 (see REF B for foreign
policy provisions):

MACROECONOMICS/TRADE: There was agreement to promote common
principles for the global economy based on Chancellor
Merkel's "Charter for Sustainable Economic Activity." The
coalition supports a speedy conclusion of the WTO trade
round, and a level-playing field for German producers on
world markets. Aviation, aerospace and maritime industries
are a focus.

TAXATION: The coalition agreed to income tax cuts for
individuals and businesses worth 24 billion euros. Tax
brackets will be simplified, and companies can more easily
deduct interest expenses and losses from their corporate tax
bill. The inheritance tax will be lowered, and it will be
easier to pass on businesses to heirs. The child tax credit
will be raised, as will the tax-free family allowance.
Special sales tax treatment for mail delivery companies will
be abolished, possibly spelling the end of Deutsche Post's
tax-exempt status. It agreed to a reduced Value Added Tax
(VAT) of 7 percent for hotels and restaurants (compared with
the normal 19 percent rate).

BUDGET: There was agreement to implement mid-term targets
associated with Germany's balanced budget amendment
("Schuldenbremse") as of 2011. To this end the coalition
wants to strengthen the cabinet's budgetary powers. It plans
to keep the rise in government spending below the rate of GDP
growth, and prohibit spending on top of existing commitments.
Details on further cuts are outstanding and will likely be
announced along with the FY 2010 budget, currently under
review.

FINANCIAL MARKETS: The coalition wants the Bundesbank to have
responsibility for banking supervision at the expense of the
bank regulator BaFin. It aims to set stricter capital
requirement rules for banks and eliminate regulatory gaps. It
plans to link compensation more strongly to long-term
performance. The coalition would like to establish
resolution authority to enable the government to restructure

BERLIN 00001340 002.3 OF 004


and wind down large, systemically important companies that
risk failure. It also agreed to create a common venture
capital market and reduce hurdles to the German Real Estate
Investment Trusts (REITs) market. It supports efforts to set
up a European Rating Agency.

EMPLOYMENT/LABOR: The coalition opposes introduction of a
national minimum wage, but advocates a legal ban on "immoral"
wages; i.e., one-third below average wages in a given sector.
Existing job protection rules will remain, but the coalition
wants to facilitate temporary contracts. There was agreement
to improve rules on labor market entry for non-Germans, while
cracking down illegal workers. The coalition agreed to
prolong benefits for the long-term unemployed. It would like
to reform administration of unemployment benefits and
placement services. To keep non-wage labor costs stable, the
coalition will provide around 16 billion euros for the
Federal Labor Agency. The unemployment contribution rate
will increase from 2.8 percent to 3 percent as of 2011. The
agreement also endorses collective bargaining.

PENSIONS: The gradual increase in the retirement age to 67
as of 2012 will remain in place. A government commission is
to examine how to avoid "poverty in retirement." Moreover,
the new government plans to introduce a unified old age
pension system for Eastern and Western Germany.

HEALTH: One of the most controversial discussions in the
coalition negotiations was the argument over who pays for new
healthcare costs. As of 2012, employers' contributions will
be frozen. Individuals will have to pay any additional costs
thereafter, meaning that the burden of healthcare will begin
to shift from business and toward employees. In addition,
employees will have to contribute more to the insurance
scheme for the elderly -- further whittling away at a key
element of Germany's social compact. Meanwhile, the
coalition agreed to inject 4 billion euros into the public
healthcare system and to boost competition. A commission
will work on reform of the health fund. In the future,
insurers will have more leeway to set premium levels.

DEVELOPMENT ASSISTANCE: Donor coordination and improved
efficiency will continue to be guiding principles. There
will be a greater emphasis on private sources of revenue for
development assistance. Coalition partners had previously
ruled out a merger between the Ministry of Foreign Affairs
and Development Ministry.

TRANSPORTATION INFRASTRUCTURE: There was agreement to
accelerate infrastructure expansion, involving greater use of
tolls. The coalition hopes to improve competitive conditions
for the logistics sector, especially in ports and on the
roads. It wants to improve public transportation law and
conditions to spur competition.

AVIATION: The coalition intends to amend the Aviation Law to
ensure that economic, environmental and noise protection
requirements are treated equally for night flights.
Emissions trading for airlines are to ensure competitive
neutrality. There will be a push for Single European Skies,
and a review of the privatization of the German Air Traffic
Service.

RAIL: The coalition agreed to privatize the State Railroad
if conditions permit. Rail infrastructure, stations and
railroad energy systems will remain under state control.
Railroad regulatory authorities will be strengthened to
improve competition. Advantages for railroads over long
distance coach services will be phased out.

BROADBAND: The coalition will pursue implementation of the
broadband strategy announced in February 2009 to expand
access to all households and increase available bandwidth.
The coalition plans to expand e-government, secure net
neutrality and foster energy efficiency in IT usage.

IPR AND COPYRIGHT PROTECTION: There was agreement to reform

BERLIN 00001340 003.3 OF 004


the copyright law to improve protection and facilitate
enforcement. The coalition plans to strengthen the legal
framework for the protection of intellectual property rights
and facilitate access to industrial property rights for
small- and medium-sized companies.

ENERGY: There was agreement that nuclear energy will be
maintained as a bridging technology until renewable energy
can replace it. Work will restart on final storage
facilities for highly radioactive waste. The coalition
agreed to expand renewable energy development, increase
energy efficiency, and incrementally replace conventional
energy sources. The Renewables Law will be amended to
improve efficiency and reduce over-subsidization of solar
energy. A Law on Carbon Capture and Storage (CSS) for high
efficiency coal power plants is envisaged. The market for
pure biofuel will be revitalized. The coalition aims to
formulate foreign energy policies to support international
energy infrastructure projects. It hopes to improve
competitive standards on the domestic energy market. Research
and development will focus on energy efficiency, storage
technology and smart grids. Building insulation is to be
encouraged.

CLIMATE: The parties affirmed a 2-degree Celsius global CO2
target and committed to maintaining Germany's leading
position in climate protection. They will continue existing
policies to reduce Germany's emissions by 40 percent of 1990
levels by 2020, but agreed to review (and adjust, if
necessary) the measures. The coalition envisions the
development of a global carbon market, with certain
industries exempt from auctioning. At Copenhagen, they will
call on developing countries to take on their
responsibilities using measurable commitments.

INTERNAL SECURITY/COUNTERTERRORISM: The coalition agreement
provides no new powers for police or security authorities.
There is a heightened emphasis on ensuring data privacy,
however. (REF C) The agreement increases oversight of
security agencies' use of personal data. In particular, a
heightened layer of court approval will be required for
online investigations of terrorism cases. The coalition will
conduct a mid-term review of the recently passed law that
outlaws training at overseas terrorist camps, and
criminalizes activities relating to terrorist attack
preparation and distribution of extremist propaganda. An
evaluation will be performed of all government
security-related databases. The coalition agreement
specifically mentions the ongoing U.S.-EU negotiations over
the Terrorist Finance Tracking Program (SWIFT) and requires
the coalition to work towards a higher level of data
protection (no automatic access, strict limitations on use,
data deletion, clear rules on sharing information with third
countries and legal redress). The agreement also aims to
improve legal protection for victims of trafficking in
persons and forced marriages.

A FEW WORDS ON THE NEW CABINET
------------------------------

3. (SBU) Wolfgang Schaeuble (CDU), the 67-year-old due to
take over the Finance Ministry, is the most experienced
member of the Merkel cabinet, having served as Chancellor
Kohl's chief of staff, negotiator of the German unification
treaty, CDU chairman and twice as Interior Minister.
Confined to a wheel chair since he was shot and severely
wounded during a campaign rally in 1990, Schaueble is not a
close friend of Chancellor Merkel's, especially since she
helped derail his run for President. His extremely tough
negotiating skills and years of government experience,
however, make him a key figure in Merkel's new cabinet.
Schaeuble has already indicated that there will be no
balanced budget within the next four years, and that he is
ready to take Germany deeper into debt in order to boost
growth. At the same time, he has cautioned against assuming
that the proposed 24 billion euro tax cut is a foregone
conclusion. Traditionally, German finance ministers are

BERLIN 00001340 004.3 OF 004


fiscal hawks, and we expect Schaueble to be no exception when
he settles into the job.

4. (SBU) The down-to-earth Rainer Bruederle (FDP) will take
over the Economics Ministry from Germany's most popular
politician, Karl-Theodor zu Guttenberg (CSU), who in turn is
moving over to the Defense Ministry (see SEPTEL). Bruederle
served as Economics Minister of Rhineland Palatinate for 11
years. During that time, he worked closely with regional
industry and did not shy away from using subsidies to promote
the regional economy. Bruederle will play a major role in
trade policy and may be inclined to engage in an active
industrial policy, but his Ministry plays second fiddle to
Finance on economic policy.

5. (SBU) It was surprising that the Development Ministry went
to a Secretary General from the FDP, Dirk Niebel. Niebel
will have big shoes to fill in replacing Heidemarie
Wieczorek-Zeul, who held the office for 11 years and was a
well known, respected expert in international development
assistance. Foreign Minister-designate Guido Westerwelle
will want to make sure that Niebel's Ministry is in sync with
the Foreign Ministry. Niebel is not considered an expert on
development assistance.

COMMENT
-------

6. (SBU) Predictably, given the FDP's robust presence in the
new government, business and industry have reacted positively
to the coalition agreement. While the unions are less than
enthusiastic, few of the elements of the coalition agreement,
if any, mark a radical break with the past on issues of most
importance to them. Given the fragility of Germany's
economic recovery, every new Minister will face difficult
choices. Among those with the most challenging jobs ahead of
him, however, is Finance Minister-designate Wolfgang
Schaeuble. He faces an increasingly dismal fiscal outlook,
but is expected to keep the economy growing. Schaeuble is
not one to shrink from a challenge.
Delawie

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