VZCZCXRO5780
RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHDF #0022/01 1141416
ZNR UUUUU ZZH
R 231416Z APR 08
FM AMCONSUL DUSSELDORF
TO RUEHC/SECSTATE WASHDC 0137
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNFRG/FRG COLLECTIVE
RUEHDF/AMCONSUL DUSSELDORF 0153

UNCLAS SECTION 01 OF 02 DUSSELDORF 000022 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PGOV EU GM
SUBJECT: THE WORD FROM GERMANY'S INDUSTRIAL HEARTLAND: IMPACT OF U.S. 
ECONOMIC SLOWDOWN ON GERMANY STILL TO COME 
 
 
DUSSELDORF 00000022  001.2 OF 002 
 
 
Sensitive but Unclassified -- Not for Internet Distribution 
 
¶1.  (SBU) Summary: Senior interlocutors in North-Rhine 
Westphalia (NRW) told EMIN April 16-17 that the international 
financial crisis and the weakening U.S. economy have had a 
limited impact on the real economy.  There would, however be 
"indirect impacts" as growth in Asian and other developing 
economies, now major export destinations of German goods, also 
slows.  Of greatest concern were the loss of consumer spending 
as a result of stagnation in real wages and pending EU 
legislation regulating car emissions.  We heard a sense of 
satisfaction that industry in the Rhine-Ruhr area has thus far 
ridden out the surging Euro and subprime crisis rather 
successfully, but also a concern about when the next shoe will 
drop.  End Summary. 
 
¶2.  (U) In a series of meetings in Duesseldorf, Bochum, and 
Cologne on April 16-17, Embassy Economic Minister-Counselor 
joined Duesseldorf CG and Pol/Econ Officer in discussing issues 
ranging from the health of the German economy and export sector 
to the environment and labor costs with senior representatives 
at the Cologne based Institute of German Economy (IW), one of 
Germany's five leading national economic think-tanks, the Opel 
AG automobile assembly plant in Bochum, and the Duesseldorf 
Chamber of Commerce (IHK).  The conversations took place just as 
the main German economic institutes released their quarterly 
forecasts, predicting positive growth domestically but a less 
positive outlook for the U.S. economy. 
 
Germany: Indirectly Affected by U.S. Slowdown 
--------------------------------------------- 
 
¶3.  (SBU) Our interlocutors expressed satisfaction that Germany 
had weathered the dual storm of the strong euro and weaker 
demand in the still very important U.S. export market, but 
remain concerned about the future.  IW economists described the 
close relationship between the German and U.S. economies, but 
stressed that the U.S. market has become relatively less 
important over time because of the fast growth of German exports 
to central and eastern Europe, Russia, China and elsewhere.  As 
German exports to the U.S. currently comprise 7-8 percent of its 
total, the impact of U.S. developments on the German economy are 
indirect (i.e. as U.S. demand for Chinese products decreases, so 
may Chinese demand for German goods).  Germany will suffer, they 
said, but not as badly as in the past because Schroeder-era 
economic reforms set the stage for a sounder economy, including 
a more flexible labor market, and exporters have adapted to the 
global economy.  The economists predicted that the slowdown in 
the U.S. would not have a great impact on German exports to the 
U.S. because a large percentage of this trade is in premium 
products (e.g. luxury cars) for which demand is relatively 
inelastic.  The senior Duesseldorf Chamber of Commerce official 
largely agreed, but said he feared "adverse affects in the near 
future" if the worldwide slowdown accelerates. 
 
The Revival of the Old Economy 
------------------------------ 
 
¶4.  (SBU) The IW economists expressed surprise at the depth and 
breadth of the German recovery, which in NRW in particular 
reflected the revival -- and strength -- of its traditional 
industrial and manufacturing based economy.  The reliance on 
these important sectors, however, left Germany "vulnerable" 
because a global slowdown would hit its economy more than 
countries that are less dependent on exports and more 
service-intensive.  This was all the more true because Germany's 
exports as a proportion of the national economy have doubled to 
45 percent since 1990. 
 
Growth Predictions for Germany and the U.S. 
------------------------------------------ 
 
¶5.  (SBU) IW economists expect 1.8 percent and 1.4 percent GDP 
growth for Germany in 2008 and 2009, respectively.  They stated 
that the U.S. is heading for a recession and called the 
underlying problems "structural" -- reflecting more than just 
the normal business cycle.   In their view, the U.S. recovery 
will be drawn out over the next few years, with 1 percent GDP 
growth in 2008 and 1.2 percent in 2009. 
 
Energy & Environment: Consumers will React 
------------------------------------------ 
 
¶6.  (SBU) A senior executive at the Opel (GM) assembly plant in 
Bochum expressed exasperation with German society's fixation on 
the environment.  Opel AG has invested enormous resources in 
addressing environmental concerns, but hesitated to reveal the 
added costs of meeting new emissions targets, lest it appear 
indifferent to climate change.  Instead, Opel lobbies hard to 
sensitize lawmakers and government to the real price of 
 
DUSSELDORF 00000022  002.2 OF 002 
 
 
environmental regulation but, like other German automobile 
manufacturers, does so quietly and privately, he stated. 
 
¶7.  (SBU) With regard to emissions standards and their potential 
cost to consumers, a senior IW economist said the institute 
believes that Germany will eventually reach the point where 
environmental policies will be "too financially painful to 
endure."  This is less likely so long as the economy is robustly 
growing, but should it turn downward, environment-related costs 
will become an issue, he predicted. 
 
Subprime Crisis 
--------------- 
 
¶8.  (SBU) IW analysts downplayed Germany's problem with the 
credit crunch growing out of the subprime crisis, pointing to 
the relative strength of its banks.  The IHK worried about 
lingering uncertainty in the financial sector and its potential 
impact on its members, mostly "Mittelstand" (SME) companies. 
The real estate market has remained largely flat over the past 
10-15 years, but commercial real estate, we heard from multiple 
sources, is booming. 
 
Consumer Confidence 
------------------- 
 
¶9.  (SBU) The senior Opel executive lamented declining consumer 
confidence even among his 4,000-plus employees, which made it 
more difficult to sell cars.  The Schroeder-era had witnessed 
major wage rollbacks that had hit workers in the pocketbook. 
Several years ago, for instance, Opel workers agreed to limit 
pay increases to save the factory, but with inflation, their 
real buying power had fallen.  The union, however, "gets it," 
which keeps pressure for wage increases down.  With 70 percent 
of costs being labor (including fringe benefits), the plant has 
nonetheless laid off some 3,000 employees since 2005 and does 
not pay overtime on Saturday and Sunday. 
 
¶10.  (SBU) Environmental concerns and uncertainty over future 
emissions regulations had also negatively affected demand for 
cars, our Opel interlocutor said.  The focus on CO2 emissions 
had prompted many Germans not to buy cars until they see how 
government emission regulations affect prices.  This is having a 
significant affect on the bottom line, he observed. 
 
Transatlantic Economic Cooperation 
---------------------------------- 
 
¶11.  (SBU) The senior IHK official said the Duesseldorf business 
community has expressed concern about the 100 percent screening 
requirement for containers entering the United States, observing 
that it risks becoming an informal trade barrier.  Small and 
medium enterprises consider the time, paperwork, and cost of 
such efforts to combat terrorism "significant."  EMIN responded 
that it is important to keep in mind that the 100 percent 
scanning law was quite flexible, and that movement in this 
direction was inevitable, not just in the U.S. but in Europe as 
well. 
 
¶12.  (SBU) The IHK official did not favor restrictions on 
sovereign investments funds in Germany.  The Chamber has not 
found evidence that these funds will use their investments for 
negative purposes, such as to steal technology or dominate 
certain sectors of the economy.  The IHK opposes prohibitions 
although it believes that Germany should seek more transparency. 
 What is also needed is more public discussion to address 
underlying fears about these funds.  The Duesseldorf region has 
attracted 200-300 Chinese companies to set up representative 
offices in recent years.  The IHK experience with Indian firms 
has been largely positive, as many have bought German companies 
that might otherwise have closed in order to complete their 
product range. 
 
Comment 
------- 
 
¶13.  (SBU) These dispassionate assessments contrast with public 
and media sentiment in NRW, which remains alarmed by the strong 
euro, the U.S. subprime crisis, and the global slowdown. 
Germany in their view has thus far withstood these difficulties 
in large part because of Schroeder-era economic reforms, smaller 
profit margins, and an increased awareness among labor and 
management that globalization requires ever greater efforts to 
remain competitive.  No one, on the other hand, was complacent, 
knowing that financial uncertainty and foreign competition could 
bring new challenges to Germany's industrial heartland.  End 
Comment. 
 
¶14.  (U) This message was coordinated with Embassy Berlin. 
BOYSE