Cablegate: Germany Defends Export Model but Examines Ways To

VZCZCXRO5128
PP RUEHIK
DE RUEHRL #1578/01 3480922
ZNR UUUUU ZZH
P 140922Z DEC 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 6047
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0257
RUEHFT/AMCONSUL FRANKFURT PRIORITY 8337
RUEHAG/AMCONSUL HAMBURG PRIORITY 0344
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0251
RUEHMZ/AMCONSUL MUNICH PRIORITY 2217
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 BERLIN 001578

SENSITIVE

STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA
(WHITTINGTON), DRL/ILCSR AND EUR/CE (HODGES, SCHROEDER)
LABOR FOR ILAB (BRUMFIELD)
TREASURY FOR SMART, MEYER, ICN (NORTON), IMB (MURDEN,
MONROE, BEASLEY) AND OASIA
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ELAB ETRD GM PREL
SUBJECT: GERMANY DEFENDS EXPORT MODEL BUT EXAMINES WAYS TO
BOOST CONSUMPTION

BERLIN 00001578 001.3 OF 003

1. (SBU) SUMMARY. In December 7 meetings in Berlin, German
officials expressed a cautious optimism about Germany's
recovery, but stressed that downside risks remain,
particularly weaknesses at state-owned banks
("Landesbanken"). They were also concerned about Greece's
debt position and the threat it could pose to the Eurosystem,
suggesting that Greece might need an IMF program to ensure
fiscal sustainability. Officials defended Germany's
export-led growth model, while reluctantly acknowledging the
need to increase domestic consumption and address the broader
issue of imbalances in the G-20. On G-20 priorities,
financial market regulatory reform and Chancellor Merkel's
Charter for Sustainable Economic Activity top Germany's list.
Economics Ministry officials saw a continuing consultative
role for the G-8. END SUMMARY.

FINANCE MINISTRY: ROLF WENZEL
-----------------------------

2. (SBU) Rolf Wenzel, Director General, Ministry of Finance,
told U.S. Treasury Deputy Assistant Secretary Christopher
Smart, Director for Europe and Eurasia Eric Meyer,
Representative for Europe Matthew Haarsager, and
International Economist Lawrence Norton, that he was
concerned about the UK and Greek budget deficits. He noted
that the European Central Bank (ECB) wanted financial market
support measures to be withdrawn. While the Baltics were "on
track," Bulgaria and Romania needed to address governance and
corruption issues. Wenzel dismissed the notion that
Germany's troubled state-owned banking ("Landesbank") sector
would weigh on the federal government's finances, claiming
they were "someone else's problem" -- namely, that of the
state government and savings bank association owners.

3. (SBU) Wenzel was interested in reforms to financial sector
compensation in the United States, saying they were "high on
the political agenda." On the G-20's balanced growth
framework, he stressed the need to focus more on exchange
rate policy, noting that the IMF recommended an appreciation
of the Chinese renminbi. He argued that German stimulus
spending on construction projects and child credits were
intended to increase domestic consumption, but thought there
was little else the government could do to decrease its
surpluses. Wenzel bristled at the suggestion that Germany
might cut the value-added tax (VAT) rate to boost
consumption, arguing that the consequences would be too dire
on public finances and that most Germans would just save the
money anyway. He likewise rejected the suggestion that
Europe shies away from confronting Ukraine because of its
dependency on Russian gas that traverses the country. Wenzel
said he believed the European Bank for Reconstruction and
Development (EBRD) would remain flexible on shareholder
participation in a temporary capital increase.

ASSOCIATION OF GERMAN BANKS: BERND BRABAENDER
---------------------------------------------

4. (SBU) Bernd Brabaender, Managing Director, Association of
Germany Banks estimated that private German banks had already
written off 90 billion euros in "toxic assets," with another
70 billion euros to come. German banks would likely perform
well in the 4th quarter of 2009 and 1st quarter of 2010, but
do less well thereafter -- much depends on the global
recovery. Of concern is the Landesbank sector, which is full
of "zombie banks." Brabaender saw the Copenhagen climate
talks as a potential boon for Germany, as German firms are on
the "cutting edge" of green technology.

5. (SBU) On banking supervision, Brabaender considered the
recent decision to transfer authority from the regulator
Bafin to the Bundesbank irrelevant and said that the
government needed to pay more attention to EU financial
regulatory reform. He noted that German supervisors were
under pressure not to exacerbate the "credit crunch" by being
too strict. On Tier 1 capital, German private banks are in
good shape, averaging 10 percent, though new rules under

BERLIN 00001578 002.3 OF 003

discussion in the Basel Committee could force them to start
building new capital soon, further restricting credit. He
thought restarting securitization markets could help,
although this would require some sort of government guarantee
and the German public is deeply skeptical. Brabaender
worried about the long-term consequences of Germany's
short-shift ("Kurzarbeit") program, and how productivity
might be hurt.

CHANCELLERY: ANDREAS NICOLIN
----------------------------

6. (SBU) Andreas Nicolin, economic advisor at the
Chancellery, was cautious on Germany's economic outlook,
adding that German banks would have further write downs.
Germany and France need a common line on budget deficits
within the EU to encourage consolidation in countries like
Greece, he said. The IMF could more effectively deal with
Greece than could the EU, where member states are reluctant
to be tough. Nicolin acknowledged that proposed tax cuts --
8.5 billion euros in 2010 and 19 billion in 2011 -- would
complicate Germany's fiscal situation. The hope is, however,
that stronger growth will increase tax revenues. On
imbalances, Nicolin said Germany's export-led growth model
was sustainable, and that the onus was on current account
deficit countries within the Eurozone to "improve
competitiveness."

7. (SBU) Nicolin said Germany reluctantly accepted the G-20's
balanced growth framework. Germany's real priorities in the
G-20, however, are: 1) financial market regulation; and 2)
Merkel's Charter for Sustainable Economic Activity. On the
former, Germany will push for the implementation of agreed
action plans. On the latter, the focus will be on getting an
agreed Charter document by the end of 2010, which he
acknowledged would be very difficult in light of the G-20's
diverse membership. Only after agreeing on a draft, which
would need to be "soft enough" to get buy in from Brazil,
China and India, and "not refer to the acquis of various
international organizations like the OECD," should the
implementation phase begin. The plan is to consult with both
the U.S. and major emerging economies by spring 2010, after
which Germany will put forward its new paper. Nicolin
expressed frustration at the high number of top-level
meetings next year due to the transition from G-8 to G-20
format. He said that Russia, Japan and Italy wanted to keep
the G-8 as a key forum. The G-8's development agenda still
makes sense, but other elements should become more
consultative. (COMMENT: This contradicts recent comments by
Development Ministry (BMZ) officials, who would like
development moved to the G-20.)

ECONOMICS MINISTRY: KNUT BRUENJES
---------------------------------
8. (SBU) Ministry of Economics officials -- including Knut
Bruenjes, Deputy Director General; Helen Winter, Head of
Division, International and European Economic and Monetary
Policy; and Matthias Koehler, Deputy Director, G8 Issues --
focused on exit strategies and worries over Greek bond
spreads. Bruenjes thought that Germany's strong economic
performance would boost other EU economies. He mentioned
changes stemming from ratification of the Lisbon Reform
Treaty, including introduction of majority voting on
intellectual property rights (IPR) and investment issues, as
well as the end of bilateral investment treaties among member
states. He dismissed the notion of altering the German
economy's export orientation, but acknowledged Germany was
looking at ways to boost domestic consumption. One approach
it will not pursue is allowing wage inflation to erode
competitiveness. Winter stressed differences between the
current account surpluses of Germany and China, whose surplus
is linked to currency manipulation. Officials noted concerns
over possible inflationary consequences of U.S. fiscal and
monetary policy.

9. (SBU) Koehler fretted that the transition from G-8 to G-20

BERLIN 00001578 003.3 OF 003

would spell a smaller role for Europe and Germany. The G-8
Heiligendamm Process, which includes China, India and Brazil,
strikes an appropriate balance between involving important
new economic players and the need to keep numbers to a
workable level. The G-8 can continue to be important,
especially on issues like climate and development, and as an
informal preparatory core for G-20 discussions. Finance
Ministers should continue to meet in G-7 format, where
financial market regulation is an appropriate topic. Worried
about trends towards a "G-2" with only the U.S. and China at
the table, Bruenjes proposed that the U.S. and EU establish a
common approach to China. He also said that Russia's customs
union with Belarus and Kazakhstan would raise tariffs on some
German goods and complicate its WTO accession, which the
Russians want to complete in 2010.

COMMENT
-------

10. (SBU) German government interlocutors were on the
defensive when it came to Germany's current account surplus.
There is a high degree of skepticism that Germany can or even
should wean itself off exports or address its high savings
rate. The government claims to be taking steps to increase
domestic consumption via controversial tax cuts totaling 27.5
billion euros. (NOTE: The first installment of the two-year
package, worth 8.5 billion euros, has cleared the Bundestag
(lower house) and appears likely to pass the Bundesrat (upper
house) within days. This initial package would adjust
corporate tax rules, cut tax on hotel stays and increase
child benefits.) It is unclear, however, what effect these
measures will have on domestic consumption. Germany will
have to begin reducing its budget deficit to comply with EU
and constitutional limits by 2013, which could curtail
consumption. It may therefore also be necessary to examine
ways Germany can stoke domestic consumption outside the tax
code.
MURPHY

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