VZCZCXRO9117
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #1309/01 2670759
ZNR UUUUU ZZH
P 230759Z SEP 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2230
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 001309 
 
SIPDIS 
 
TREASURY PASS TO FEDERAL RESERVE 
 
E.O. 12356:  N/A 
TAGS: EFIN PREL PGOV ECON GM
SUBJECT: MERKEL,STEINBRUECK STAND UP FOR BALANCED BUDGET 
 
¶1. Summary: On September 16, against a backdrop of the 
global financial crisis and increasing demands for domestic 
spending, Finance Minister Peer Steinbrueck (SPD) 
introduced an FY 2009 budget of 288.4 billion Euros -- the 
Grand Coalition's third and last joint budget prior to the 
national elections in September 2009. In his Bundestag 
presentation, Steinbrueck touted the government's horn for 
having lowered the country's deficit to the lowest level 
since German unification.  The tax windfall from the 
economy's robust performance during the last several years 
enables the government to increase the budget for defense, 
development assistance, education and infrastructure. 
However, parliamentarians across the political spectrum 
question the feasibility of Steinbrueck's goal of a 
balanced budget by 2011, particularly in light of 
increasing economic uncertainty and the growing demands for 
increased domestic spending as the parties gear up for the 
elections. End Summary. 
 
--------------------------------------------- --------- 
Reaping the Benefits of Consolidation and Economic Growth 
--------------------------------------------- --------- 
 
¶2.  With the cost-saving measures of previous years now 
paying off, Steinbrueck announced that the FY 09 budget 
would include a deficit of only 10.5 billion euros, a third 
of what it had been in 2005.  The deficit will be the 
lowest since German re-unification in 1990.  Steinbrueck 
plans to cut the deficit even further (to 6 billion euros) 
in the 2010 budget and plans a balanced budget the 
following year.  (Note: The deficit is with the Federal 
Budget; the state and communal entities already reported a 
budget surplus last year and will do so again this year). 
With 42.5 billion euros, Germany's debt service still makes 
up the second biggest line item in the budget. 
 
¶3.  Germany's FY-09 budget of 288.4 billion euros marks an 
increase of just 1.5%, one of the smallest in recent years. 
Germany's solid economic growth of more than 2% in 2007 and 
the significantly improved financial condition of Germany's 
various social welfare funds provided Steinbrueck even made 
some additional spending possible.  The defense budget will 
receive 1.9 billion euros more compared to 2008, the 
Ministry for Development Assistance will see an increase of 
800 million euros, and the budget for research and 
development will increase by 1.25 billion. 
 
--------------------------------------- 
Uncertainties from the Financial Crisis 
--------------------------------------- 
 
¶4. The budget debate took place under the growing gloom of 
international financial crisis and concerns over its 
possible spill-over into the German economy. In her 
September 17 budget speech to the Bundestag, Chancellor 
Merkel renewed her call for tighter regulatory control of 
the international financial system.  She said rating 
agencies that assess companies' financial health should be 
subject to a code of conduct.  She did not repeat her 
earlier proposal for a European rating agency.  Merkel also 
attempted to calm the public, saying that the effect on the 
German economy from the current crisis had been "moderate." 
(Note: Since then Merkel has used several campaign-related 
events to publicly call upon the U.S. and Britain to 
confront their serious shortcomings in financial regulation 
and has continued to stress tougher regulations and 
transparency in international finance markets as well as 
unspecified oversight of ratings agencies.) 
 
¶5. Finance Minister Steinbrueck was more direct.  While 
defending the underlying assumptions of his budget 
(especially the growth rate of 1.7% for 2008 and 1.2% for 
2009), he warned that Germany would not escape the 
financial crisis completely, but also warned against the 
creation of a stimulus package, saying this "would only be 
money burned."  (NOTE: Over the weekend of September 20-21, 
he downgraded the estimate for 2009 to 0.5%, and the 
prediction of 1.7% looks increasingly dubious.) 
Steinbrueck argued that Germany can best shield itself from 
international turmoil by staying on its budget 
consolidation course.  FDP budget expert Otto Fricke told 
Steinbrueck that he should have reduced the budget deficit 
even further during the last two years, when strong growth 
generated a revenue windfall of more than 9 billion euros. 
All opposition speakers and some from the ruling parties 
expressed their doubts about the government's ability to 
reach a balanced budget by 2011.  This view is shared by 
several of Germany's leading economic research institutes. 
The cooling of the economy will make it difficult for the 
 
BERLIN 00001309  002 OF 002 
 
 
government to retain the revenue level projected in the 
budget, Thomas Straubhaar of the Hamburg based HBWI said. 
 
------------------------------ 
Growing Election Time Appetite 
------------------------------ 
 
¶6.  The beginning of a national election campaign has 
already wetted appetites for additional spending.  The 
Bavarian CSU - facing state elections on September 28 - was 
the first party to demand additional tax reductions "to 
allow citizens to participate in Germany's improved 
economic situation."  The grand coalition has also 
announced that it will further reduce individual 
contribution shares to the unemployment insurance fund from 
the current 3.3% to 3.0% - or even lower.  The government 
is expected to approve a tax deduction increase for those 
paying child support.  Foreign Minister and Vice Chancellor 
Steinmeier - the SPD's announced candidate for Chancellor 
in 2009 - has called for more spending on education. 
Finally, the commuter tax break is expected to be 
reinstated (due to a probable court decision), which will 
result in several billion euros worth of revenue losses for 
the federal budget. 
 
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Comment 
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¶7. Increasing pressures on spending during an election year 
coupled with the expected economic slowdown will make it 
difficult to stay the course.  So far Steinbrueck's strong 
position within the SPD and the backing he receives from 
Chancellor Merkel have prevented any deviation from the 
government's budget consolidation course.  Both are 
determined -- probably even more so in times of financial 
uncertainties -- to make budget consolidation one of the 
shining accomplishments of the CDU-SPD Coalition.  For the 
German voter, such fiscal conservatism remains a virtue, 
particularly in times of crisis. 
 
Koenig