VZCZCXRO5311
RR RUEHAG RUEHDF RUEHLZ
DE RUEHRL #0833/01 1141654
ZNR UUUUU ZZH
R 241654Z APR 07
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC 8047
RUEAUSA/DOL WASHDC
INFO RUCNFRG/FRG COLLECTIVE
RUEHOT/AMEMBASSY OTTAWA 1019
RUEHKO/AMEMBASSY TOKYO 1443
RUEHRO/AMEMBASSY ROME 0466
RUEHFR/AMEMBASSY PARIS 8726
RUEHMO/AMEMBASSY MOSCOW 1775
RUEHLO/AMEMBASSY LONDON 8198

UNCLAS SECTION 01 OF 03 BERLIN 000833 
 
SIPDIS 
 
STATE FOR EUR/AGS AND DRL/ILCSR 
LABOR FOR ILAB/OIO 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ELAB ECON PGOV PREL GM
SUBJECT:  G-8 LABOR MINISTERIAL: SCENESETTER FOR ASSISTANT SECRETARY 
OF LABOR DEROCCO 
 
¶1.  Welcome in advance to Germany and to this year's meeting of G-8 
labor ministers, hosted by Germany's Ministry of Labor and Social 
Affairs May 6-8 in Dresden, the capital of the eastern state of 
Saxony.  Like the other states of the former German Democratic 
Republic, Saxony still lags behind the western states in economic 
terms; but it is growing fast, and cities like Dresden and Leipzig, 
the largest city in Saxony, are among the most prosperous in the 
former GDR.  Dresden is also rebuilding from the massive destruction 
it suffered during World War II, as you will see when you visit the 
newly restored Church of Our Lady. 
 
¶2.  You will also see a Germany experiencing overdue economic 
growth, due primarily to booming exports and a recent rise in 
investment spending.  Unemployment levels, declining but still high, 
are the indicator most watched by German officials and politicians. 
Germany under Chancellor Angela Merkel has resumed its old role as 
engine for European and global economic growth, despite the 
continued and longstanding need for structural reforms in labor, 
business regulations, taxation and other areas. 
 
Germany:  Political and Economic Overview 
----------------------------------------- 
¶3.  Now half way through its second year in office, the Chancellor's 
grand coalition between her own party, the right-of-center Christian 
Democratic Union (CDU, joined by its Bavarian sister party the 
Christian Social Union, or CSU), and the left-of-center Social 
Democratic Party of Germany (SPD) is in good shape and seems likely 
to survive until its four-year term expires in 2009.  Merkel's 
consensus-style leadership keeps a lid on tensions between the two 
parties, Germany's largest and traditional opponents, and wins her 
high ratings in public opinion polls.  She seems to have forged a 
good working relationship with SPD Vice-Chancellor and Minister of 
Labor and Social Affairs Franz Muentefering.  She is a strong 
advocate of close ties with the United States, and bilateral 
relations have improved since she took office in November 2005. 
Among the German people, however, skepticism about the United States 
over the invasion of Iraq, climate change, counter-terrorism, and 
other issues remains high. 
 
¶4.  The German economy in 2006 had its best year since 2000.  Its 
GDP grew 2.7 percent and economists have revised their 2007 and 2008 
forecasts upwards to 2.4 percent.  Tax revenues are up and the 
government's budget deficit is now well within the European Union's 
"Maastricht criteria" (3 percent of GDP).  Business confidence is 
high.  Employment is increasing and some employers complain of a 
shortage of skilled workers.  Unemployment dropped in March to a 
six-year low of 9.2 percent, seasonally adjusted, and economists now 
forecast annual unemployment of 8.7 percent in 2007.  (Unemployment 
is still nearly twice as high in the states of the former GDR, 
however, and long-term unemployment also remains high in the Ruhr 
and some other parts of western Germany where old smoke-stack 
industries have shut down in the face of global competition.) 
German companies have cut costs, and labor productivity per capita 
rose 1.8 percent in 2006.  Germany's trade unions feel they might be 
regaining political and economic power and after years of wage 
restraint are again demanding higher pay.  Although unions only 
represent about 25 percent of German workers, union contracts cover 
65 percent of the workforce. 
 
Traditional Social Partnership under Stress 
------------------------------------------- 
¶5.  Comprehensive collective bargaining agreements between unions 
and employers' associations, covering entire industries, were for 
years the rule in Germany, ensuring a remarkable degree of 
industrial peace.  This system is starting to break down: both 
unions and employers' associations are losing members and the unions 
find themselves having to negotiate contracts that give individual 
firms greater flexibility to meet the demands of global markets. 
Employee participation in company management through elected works 
councils, and employee representation on corporate supervisory 
boards (co-determination), are enshrined in German law but are also 
under stress, with employers arguing co-determination impedes 
competition in the global economy, an argument the unions absolutely 
reject.  Even in the chemical industry, where labor-management 
relations are perhaps the best in the country, union leaders have 
begun openly to question whether the concept of a social partnership 
is still valid. 
 
¶6.  These issues are reflected in the theme for this year's G-8 
labor ministerial:  "Shaping the Social Dimension of Globalization." 
 Muentefering argues EU governments must show themselves willing and 
 
BERLIN 00000833  002 OF 003 
 
 
able to influence global economic integration to preserve the 
achievements of the social welfare state.  The dynamics of the 
coalition government are a potent factor in this.  Some in the SPD 
argue the Christian Democrats are stealing the Social Democrats' 
thunder on social issues, and that the SPD must sharpen its social 
profile if it is to have any hope of returning to power in federal 
elections in 2009.  Muentefering, a former SPD chairman, put it this 
way at a conference last year: Germans see globalization as a direct 
attack on the achievements of the social market economy. 
Governments must show they can regulate globalization, he said, or 
the voters will be tempted to turn to a strongman to lead them. 
 
Principle Labor and Social Issues 
--------------------------------- 
¶7.  The Low-Wage Sector:  Although primarily a high-wage, high-skill 
economy, Germany has a significant low-wage sector which earlier 
governments promoted in an effort to reduce high unemployment. 
There is concern the number of working poor is on the rise.  The 
federal government reports that in 2004, 18.4 percent of full-time 
workers earned less than two-thirds of the median wage, up from 16.6 
percent in 1993.  Unlike most EU countries Germany has no 
across-the-board minimum wage, and the German Trade Union Federation 
is now demanding a national hourly minimum wage of 7.50 euros 
($9.50).  But even in the SPD there is some disagreement with this 
idea and the CDU/CSU strictly opposes a minimum wage, favoring 
instead a "combination wage" under which a government benefit would 
be paid to low-wage workers. 
 
¶8.  Older Workers:  Both houses of parliament have approved an 
initiative Muentefering launched last year called "50-Plus," to 
increase employment opportunities for older workers.  Only 45 
percent of Germans aged 55 to 64 are employed and over a quarter of 
the unemployed are 50 or older.  Muentefering argues the situation 
must change and Germany cannot afford to waste the potential older 
members of the workforce offer.  The government cut incentives for 
early retirement, shortened the period of eligibility for 
unemployment compensation, ended the early retirement option for 
persons 58 and older, and introduced a "combination wage" for 
unemployed older workers who take a job that pays less than they 
previously earned.  The initiative also includes wage subsidies for 
employers who provide jobs to older workers and supplementary 
training assistance for workers 45 and older. 
 
¶9.  Pensions:  For the first time in three years, pensioners in 
Germany will receive more money.  Muentefering announced old-age 
pension rates will rise 0.54 percent as of July 1, reflecting higher 
wages and salaries over the last year.  By law, pension benefit 
increases are tied to wage growth in the preceding year. 
Conversely, benefits can also be cut or frozen if wage developments 
warrant, as was the case over the last three years.  Still, about 20 
million pensioners face a de facto freeze on pension benefits in the 
coming years.  Defying union protests, parliament on March 30 
fulfilled an agreement between the grand coalition parties and voted 
to raise the retirement age from 65 to 67, to deal with a pension 
funding crisis resulting from Germany's low birth rate and ageing 
population.  Under the new law, everyone seeking retirement earlier 
than 67 will face a monthly pension cut of 0.3 percent.  Meanwhile a 
decision to increase employer-employee payroll contributions to the 
pension system from 19.5 to 19.9 percent of gross income has been 
widely criticized as undermining the effort to lower non-wage labor 
costs. 
 
The Hartz Reforms 
----------------- 
¶10.  The Ministry has thoroughly reviewed Germany's initial labor 
market reforms, called Hartz I-III after former Volkswagen Personnel 
Director Peter Hartz, who was instrumental in their adoption.  An 
additional reform, Hartz IV, passed in 2004, was particularly 
controversial, inspired public demonstrations, and contributed to 
the defeat of the SPD and the rise of a new leftist party in the 
2005 federal election.  The Ministry says some elements of the 
initial three reform packages, such as make-work programs for 
hard-to-place long-term unemployed, have proven ineffective.  Other 
measures, such as restructuring the Federal Employment Agency to 
make it more service-oriented and promoting vocational training or 
re-integration subsidies, have been largely successful.  Still to 
come is a review of Hartz IV, which merged unemployment benefits and 
social assistance beginning in 2005. 
 
Co-Determination 
---------------- 
 
BERLIN 00000833  003 OF 003 
 
 
¶11.  An expert commission appointed by former Chancellor Schroeder 
in July 2005 reported to Chancellor Merkel last December that 
Germany's 1976 law mandating worker representation on corporate 
supervisory boards ("co-determination") has proved its worth and 
does not need fundamental changes.  Chaired by former CDU 
Minister-President of Saxony Kurt Biedenkopf, the commission was 
composed of three members each from academia, business groups, and 
employees' organizations.  Business and employee members could not 
agree on a joint reform proposal and left the commission in 
mid-November last year, and the report was issued in the name of the 
academic members only.  The businessmen argued co-determination 
should be voluntary, with at most a third of the seats on 
supervisory boards reserved for employee representatives, rather 
than as many as half, as required under the current law.  They said 
the law puts German companies at an international competitive 
disadvantage.  The academic and employee members rejected this 
argument, although the report does recommend certain changes to 
adapt co-determination to companies with employees outside Germany. 
 
Collective Bargaining 
--------------------- 
¶12.  After years of wage moderation, unions and workers are now 
demanding part of the fruits of the economic upswing.  The powerful 
Metal and Electronics Workers' Union, IG Metall, wants 6.5 percent 
more pay for its 3.4 million members, but the employers' association 
Gesamtmetall has offered only 2.5 percent, plus a 0.5 percent 
lump-sum payment for the year.  IG Metall has announced plans for 
warning strikes, which will spur the sides to narrow differences. 
Meanwhile, unions and employers in the chemical sector have quietly 
hammered out a deal giving 550,000 employees a 3.6 percent pay hike 
plus a lump-sum payment of 0.7 percent of their annual salary. 
Construction industry employers and unions have agreed on a 3.5 
percent wage increase covering nearly 700,000 workers, and a 
lump-sum payment of 0.4 percent which can be negotiated on a company 
basis. 
 
¶13.  The Apprenticeship Training System:  Germany's "dual system" of 
vocational training, which combines on-the-job training with 
vocational school attendance, has long proved to be an effective 
tool in reducing youth unemployment, which in Germany is relatively 
low (EU-15 average:  16.5 percent; Germany:  15.2 percent, 2005 
data).  However, an upward trend in youth unemployment in recent 
years prompted the German government, employers, and industry 
associations to agree on a voluntary job training pact on creating 
more training opportunities.  Last month the pact was extended until 
¶2010.  Business associations agreed to provide 60,000 new training 
slots each year, twice as many as before.  Nevertheless, German 
trade unions and opposition parties complain the number of 
applicants surpasses the number of slots available and are demanding 
the introduction of a compulsory "training levy" on companies which 
do not provide sufficient training opportunities. 
 
¶14.  Health Care Reform:  After months of political bickering, a 
health care reform bill went into effect April 1.  The initial goal 
of completely overhauling the healthcare system to ensure its 
sustainability in the face of demographic and budgetary constraints 
was dramatically scaled back over months of argument within the 
coalition and in parliament.  Minister of Health Ulla Schmidt (SPD) 
failed to obtain many of the structural changes she had sought, 
including the "disarming" of powerful statutory health insurance 
funds and physicians' federations.  The outcome is legislation that 
is unlikely to result in the savings necessary to shore up the 
country's healthcare system, which may lead politicians to look 
again at further regulation of pharmaceutical pricing-an issue which 
has already spurred bilateral disagreement with the United States. 
Although the Ministry of Health has the lead on this issue, the 
Ministry of Labor and Social Affairs is a player as well. 
TIMKEN, JR.