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UNCLAS        BERLIN 01342

SIPDIS
CXBERLIN:
    ACTION: ECON
    INFO:   PAO POL AMB CHRON FAS DCM JIS ECONMIN FCS
CX2BERLN:
    ACTION: ECON
    INFO:   PAO POL AMB CHRON FAS DCM JIS ECONMIN FCS

DISSEMINATION: ECON
CHARGE: PROG

APPROVED: A/DCM:JBAUMAN
DRAFTED: ECON: DJORTBLAD; RMI
CLEARED: POL: MMARTIN

VZCZCRLI749
PP RUEHC RUEATRS RUCNMEM RUCPDOC RUCNMEU RUCNFRG
DE RUEHRL #1342/01 1361444
ZNR UUUUU ZZH
P 161444Z MAY 06
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 3178
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCNMEM/EU MEMBER STATES
RUCPDOC/USDOC WASHDC
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 03 BERLIN 001342 
 
SIPDIS 
 
STATE FOR EUR EUR/AGS, EUR/ERA AND EB/TPP 
PASS TO USTR SDONNELLY, MMOWREY 
 
E.O. 12958: N/A 
TAGS: ETRD ENRG EFIN PGOV ECON PREL EUN GM
SUBJECT: Merkel Previews German EU Presidency Agenda 
 
 
¶1.  SUMMARY:  Chancellor Merkel highlighted energy 
coordination, deregulation, and research investment as key 
priorities for Germany's EU Presidency next year in two 
Berlin speeches on May 9 and May 11.  However, she described 
the politically sensitive issue of the EU Constitution as 
requiring "further reflection," suggesting it would be 
premature to press for it during Germany's early 2007 
Presidency.  But Merkel will activate a measure in the draft 
Constitution to strengthen EU follow up on initiatives.  The 
Chancellor cautioned about further EU enlargement saying the 
EU must make clear to some countries aspiring to full EU 
membership that they would not receive it for "the 
foreseeable future."  She also argued the EU's need for 
economic reform and for addressing energy issues.  EU 
Commission Vice President Guenther Verheugen (SPD), who 
attended the May 9 Forum, supported Merkel's proposals. 
German officials say that 2007 elections and political 
uncertainties in France, the UK, the Netherlands, Italy, and 
Finland complicate Germany's effort to set ambitious goals 
for its presidency. END SUMMARY 
 
¶2.  German ministries have begun internal coordination with 
the Chancellery on themes for Germany's early 2007 EU 
Presidency.  Chancellor Merkel used two major speeches in 
Berlin to outline her views on European integration and to 
give a sneak preview of Germany's agenda for its EU 
presidency in the first half of next year.  Speaking at the 
Europe Forum May 9, an event sponsored by several European 
public media networks, and at the Bundestag on May 11, 
Merkel made further development of the EU's internal market 
the key issue of her presentation.  She made clear that she 
regarded the internal market as both a great historical 
accomplishment and central piece in the EU's ability to take 
on the challenges of a globalized market.  She noted the 
Airbus-Boeing trade dispute and the Commission's challenge 
to Microsoft on competition as issues that member states 
could not tackle without the EU framework. 
 
¶3.  Merkel stressed the importance of the Lisbon economic 
reform process. German officials told us the March 2007 
summit under the German presidency will include a new step 
in the Lisbon reform agenda.  For the first time, the 
Commission will issue a "report card" to member countries on 
needed reforms, based on each country's own reform agendas 
submitted to the Commission since 2005.  Merkel also pledged 
Germany would meet its pledge for funding research and 
development at 3 percent of GDP. 
 
EU INSTITUTIONAL REFORM AND ENLARGEMENT 
 
¶4.  Addressing concern over the EU's future after voter 
setbacks in France and Netherlands last year, Merkel argued 
the "EU was better than its reputation."  She said the EU 
must deliver on promises of growth to renew confidence, 
noting that many in Germany no longer associate the EU with 
a prosperous future.  In surprisingly direct language, 
Merkel also called for setting clear limits for the EU's 
enlargement.  She noted the EU must say to certain countries 
their EU membership is not possible in the foreseeable 
future, although promises already made must be kept. 
 
¶5.  A German Finance Ministry official dealing with the EU 
said Merkel's speech had to accent limits to EU membership 
in order to address the EU institutional crisis created by 
the enlargement to 25 countries.  The official said German 
leaders had mistakenly hailed the enlargement as a success 
without having achieved the EU institutional reforms that 
would enable a larger EU to govern itself.  The EU and 
Germany were now paying the high political price of having 
initiatives like the EU Services Directive and the 
Constitution suffer setbacks.  Anxious voters had balked at 
these steps as part of venting frustration at apparent EU 
drift and at increased economic uncertainty they blame on 
the EU.  He said the enlargement had also significantly 
weakened the Commission.  Squabbles among the now numerous 
Commissioners impeded decisions.  Each new EU member sought 
to assert the importance of his/her Commission portfolio, 
creating roadblocks.  He said prospects for further 
enlargement were damaged by the "antics" of certain new EU 
members. 
 
¶6.  While limiting further EU membership, Merkel also backed 
a more vigorous EU Neighborhood Policy that seeks nearly 
full integration into EU economic structures.  She said the 
Neighborhood Policy needs more political aims, making it 
"more than just a free trade relationship."  With reference 
to Turkey's chances for membership she said,  "those who 
begin the negotiation process for accession together (Turkey 
and Croatia) do not automatically have to enter the EU 
together," an apparent reference to the overwhelming 
rejection of Turkish EU membership by her CDU party. 
 
EU CONSTITUTION 
 
¶7.  Merkel reportedly reduced her ambition to promote the EU 
Constitution during the German presidency.  In her Berlin 
speeches, she called only for further reflection among 
member states about the Constitution, while emphasizing the 
EU's earnest need for this institutional reform. 
Chancellery and other advisors reportedly persuaded Merkel 
that major political uncertainties in key EU member states, 
including France's early 2007 election, would impede a more 
ambitious agenda for promoting the new constitution. 
Besides France, officials said political leadership issues 
would affect the UK, Italy, the Netherlands, and Finland in 
2007, thus preventing Merkel from enlisting vital allies for 
a Constitution (and other reforms) during the German 
Presidency. 
¶8.  While cautioning against hasty renewal of a ratification 
process for the Constitution, Merkel wishes to launch a 
process in 2007 for gradually building support for a 
constitution.  According to German officials, Merkel will 
"de facto" activate a provision in the stalled Constitution 
that calls for continuity between EU Presidencies by 
consolidating their agendas.  According to the Finance 
Ministry, Germany has already begun working with Portugal 
and Slovenia to craft a common EU Presidency agenda that 
would encompass the 18 months of all three countries' terms 
through mid-2008. 
 
ENERGY 
 
¶9.  Merkel highlighted the need to integrate energy security 
issues into Germany's and the EU's foreign and security 
policies. By the time of the spring summit in 2007, the EU 
Council will present a report on a coordinated EU energy 
policy.  Merkel summed up the EU members' problem as the 
need to recognize: a common energy dependency, a common 
responsibility for secure energy supplies, and a need to 
cooperate for access to energy supply.  The EU will have to 
find a way of ensuring supply without compromising its 
foreign policy human rights principles.  Merkel alluded in 
her speech to the pressures of competition from China for 
raw material imports. 
 
¶10.  Although Merkel announced a "common EU energy policy" 
as a goal, the German response to the EU's paper on energy 
policy in February had been to minimize the authority given 
to the Commission over energy diversification and supply. 
German officials believe energy policy should largely remain 
a member state prerogative.  German officials told us the 
Merkel coalition would look to continued discussions in the 
European Council on coordinating energy policies rather than 
an "integration" of energy policy in the Commission. 
 
¶11.  Merkel appealed for improved cross-border power line 
infrastructure, pointing to the many border choke points 
where too little current can pass between EU countries.  She 
noted that Germany can send surplus power to Italy only via 
transmission through France, which adds a corresponding 
cost.  Merkel also called for acceptance of "European 
champions" in industry, implicitly backing the cross-border 
takeover bid by Germany's Eon for Spain's Endesa.  According 
to a German Finance Ministry official, Merkel thus signaled 
Germany's confidence that capital market forces would 
prevail in resolving recent EU "investment protectionism," 
reflected by Spain's and France's steps to prevent takeover 
bids in the energy sector. 
 
DEREGULATION 
 
¶12.  Chancellery officials say Merkel will press for EU 
deregulation as a German Presidency theme.  Merkel 
ironically noted in her May 9 speech that, in its 50 year 
existence, the EU had never abolished a regulation.  She 
called for the introduction of the "discontinuity rule" in 
the European Parliament (legislative initiatives could not 
be transferred from one elective term to the next), which 
would automatically put the brakes on regulatory activity. 
The German auto and chemical industries have frequently 
complained about inconsistent EU regulations that mandate 
tougher safety and environmental standards without regard to 
cost and other burdens.  Chancellery officials have told us 
they would seek more fine-tuning of the REACH directive on 
safety of chemical substances.  In her May 9 speech, Merkel 
cited the EU Parliament's effective compromises on the REACH 
text, praising the Parliament's role in strengthening the 
EU's democratic process.  She noted EU parliamentarians 
carefully weighed the impact of the REACH directive on their 
home district industries as they considered ways to make the 
compromise draft compatible with industry interests.  Merkel 
specifically greeted the presence of EU Commission Vice- 
President Gunther Verheugen in her May 9 audience, 
emphasizing her support for Verheugen's goal of eliminating 
the EU's excessive or contradictory regulations. 
 
¶13.  COMMENT:   The German Presidency will profile Merkel's 
EU leadership role.  EU Commission Vice President Guenther 
Verheugen (SPD) endorsed many of her proposals and called 
for more leadership in the EU, pointing out that the 
political situation in other major EU member countries will 
thrust Merkel into a leadership position in the coming 
years. 
TIMKEN JR