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