VZCZCXRO6767
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #2014/01 3061643
ZNR UUUUU ZZH
R 021643Z NOV 07
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC 9690
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 03 BERLIN 002014 
 
SIPDIS 
 
STATE FOR DRL/ILCSR, EUR/ERA AND EUR/AGS; LABOR 
FOR ILAB 
(BRUMFIELD); TREASURY FOR OASIA 
USEU FOR PETER CHASE, JULIE NUTTER, BARBARA 
MATTHEWS 
 
SIPDIS 
 
E.O. 12356:  N/A 
TAGS: ECON ELAB EFIN PREL PGOV GM
SUBJECT: LABOR REFORMS IN GERMANY: A THREAT TO 
ECONOMIC RECOVERY? 
 
REF: (A) BERLIN 2004; (B) BERLIN 1977 
 
Summary 
------- 
 
¶1.  In the last few weeks, much has been written 
about the SPD's new program to roll back labor 
reforms in Germany, with the "Financial Times" 
characterizing them as a German retreat from 
economic reform.  Whether the Beck proposals or a 
government counter-proposal can be contained as a 
piece-meal package or represents a wider trend 
remains to be seen.  The question is one of both 
perception and reality.  The reality is that the 
reform rollbacks - primarily related to extending 
labor unemployment benefits - would have little 
immediate impact on the fundamental dynamics 
behind Germany's economic growth.  A greater 
threat stems from the perception among the 
business community and others that Germany is 
beginning to turn its back on reform (Ref. A). 
Nonetheless, Germany's economic recovery will 
continue to be much more significantly influenced 
by the mega-developments in the global economy 
and by its own fundamental restructuring. 
Ultimately, both major political parties 
recognize that jeopardizing Germany's steady 
economic recovery is not in their or Germany's 
longer term national interest. 
 
What is Germany Trying to Reform? 
--------------------------------- 
 
¶2.  Social perceptions drive the current debate 
on labor market rollbacks.  At the heart of the 
matter is the broad perception among the 
population that the so-called Hartz labor market 
reforms (targeted at Germany's inflexible labor 
market) are mean-spirited and disadvantage older 
workers in particular.  The panacea - extension 
of unemployment benefits to workers over the age 
of 50 - is seen to be relatively cost neutral as 
well socially advantageous.  While the proposals 
can be characterized as a rollback, they 
represent but one piece of a broader economic 
reform agenda (known as Agenda 2010) that touched 
on a significantly broader set of issues than 
just labor issues, for instance, tax reform. 
Though there is active discussion on increasing 
the number of rollbacks to the Hartz labor market 
reform package, there has been no discussion in 
Germany with regard to dismantling this broader 
package of reforms. 
 
Labor Reforms:  What Has Been Their Impact? 
------------------------------------------- 
 
¶3.  The Hartz package changed the maximum 
duration of unemployment benefits in an effort to 
ease the pressure on pension insurance funds and 
to reduce non-wage labor costs.  The package also 
sought to remove the disincentive for older 
workers to accept jobs they considered less 
attractive and to discourage early retirement at 
the taxpayer's expense.  Ironically, the current 
rollback proposals come just at a time when the 
Hartz reforms are bearing fruit.  When Chancellor 
Schroeder first presented his Agenda 2010 to the 
Bundestag on March 14, 2003, Germany had 4.6 
million unemployed; today the number is 3.45 
million, the lowest level in twelve years. 
 
¶4.  The cut in unemployment benefits for older 
jobseekers has contributed to a changed mentality 
by giving strong incentives to proactively search 
for work, according to the German Institute for 
Economic Research and the Center for European 
Economic Research.  Long-term unemployment has 
also fallen as flexibility increased, according 
to a recent study of the Federal Employment 
Agency's (BA) research Institute, IAB.  One in 
five companies polled reported jobseekers were 
 
BERLIN 00002014  002 OF 003 
 
 
more willing to work for lower wages, accept 
irregular work hours and take on long commutes. 
Even for hard to fill jobs, companies are finding 
applicants more easily.  This is where the 
proposed roll-back that the SPD proposes is 
likely to do most harm.  It may halt or even 
reverse this extremely positive trend. 
 
Business Community Concerned 
---------------------------- 
 
¶5.  The SPD proposals have concerned the German 
business community.  Ludwig Braun, president of 
the German Chamber of Industry and Commerce 
(DIHK), commented that any extension of benefits 
would give the unemployed "wrong incentives" and 
"increase the risk" for the labor market.  Others 
warn against a general "slide back" into past 
patterns of behavior.  The President of Germany's 
Federation of German Industries, Michael Thumann, 
called upon the membership of his organization to 
defend the reforms in meetings with government 
and parliamentarians. The overall effect of the 
proposed changes on the current upswing is, 
however, likely to be limited. 
 
Economic Boom above all a Business Success Story 
--------------------------------------------- --- 
 
¶6.  Holger Schmieding, Bank of America's Head of 
European Economics, estimates that the entire 
Agenda 2010 reforms (which contains much more 
than the labor reform package now under debate) 
contributed about one third to the current growth 
rate.  A dent in global economic activity could 
be as damaging since the current upswing is 
driven so much by global demand for German 
capital goods.  Moreover, German business - with 
cooperation from labor unions - has done its 
part.  In recent years many German companies have 
realigned their strategies, tapped into new 
production and sales markets, and slashed costs. 
While unit labor costs in the Euro area climbed 
by almost 10% between 2000 and 2006, they 
steadily declined in Germany as a result of wage 
restraint, longer working hours and more flexible 
labor input.  The Hartz reforms may have 
reinforced some of the wage restraint, but they 
were not the engine; the wage restraints started 
already in the mid-1990's - eight years before 
the Hartz reforms were implemented. 
 
¶7.  Germany's heightened price competitiveness is 
accompanied by regained technological prowess. 
Among the EU-15 Germany can boast the highest 
share, 65%, of innovative industrial enterprises. 
The broad range of high-grade, innovative German 
capital goods meets increasing demand from the 
high-growth emerging markets.  Germany is the 
only big industrial nation to have maintained its 
share of the world market.  Last year alone 
German shipments soared by 12.5% in real terms, 
while 2007 is predicted to turn in a similar 
increase.  The ratio of exports to German GDP now 
stands at 45% - astoundingly, over 10 percentage 
points more than in 2000.  As analysts across the 
board agree, the effect of the proposed labor 
changes is dwarfed by the threat of sluggish U.S. 
and global economic growth, the surge of the Euro 
and continuously rising oil prices. 
 
Comment 
------- 
 
¶8.  Since 2006, Germany has been registering 
rates of growth last seen in the 1998-2000 
period.  After years of stagnation (between 2001 
and 2005 the economy grew by a mere half percent 
per annum) - Germany is no longer the "sick man" 
of Europe, but rather by some measures its 
healthiest partner.  Business, through painful 
restructuring, the opening of new markets and the 
 
BERLIN 00002014  003 OF 003 
 
 
development of innovative products is the major 
force behind the success.  Wage restraint on the 
part of labor added substantially to the decline 
in unit labor costs.  While government policies 
have bolstered the upswing, they have only 
contributed to the forces already driving growth. 
The danger of the current rollbacks thus lies 
more in the signal they send to investors - i.e. 
that Germany is now less serious about reform - 
than to their immediate impact on the economy. 
 
TIMKEN JR