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DE RUEHRL #1399/01 2891534
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P 151534Z OCT 08 ZDS
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2371
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMEM/EU MEMBER STATES
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNFRG/FRG COLLECTIVE

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E.O. 12958: N/A 
TAGS: EFIN ECON GM
SUBJECT: GERMANS DISCUSS FINANCIAL CRISIS, INVESTMENT 
SECURITY AND IRANIAN SANCTIONS WITH DEP SEC KIMMITT 
 
BERLIN 00001399  001.2 OF 002 
 
 
¶1. (SBU) SUMMARY.  State Secretary Dr. Bernd Pfaffenbach of 
the Ministry of Economics told Deputy Secretary of the 
Treasury Robert Kimmitt on October 10 that although Germans 
are alarmed by the ongoing financial turbulence, the 
country is relatively well positioned to ride out the 
storm.  A fiscal stimulus is unlikely due to a drive to 
balance the federal budget by 2011.  He expressed concern 
that France would again breach the Maastricht Treaty budget 
deficit ceiling of 3%.  On the new German investment review 
law, he said it is not intended to discourage U.S. 
investment.  Pfaffenbach also suggested that cutting off 
all business with Iran might constrain western countries' 
ability to pressure the country in the future.  END 
SUMMARY. 
 
GERMANS INCREASINGLY WORRIED ABOUT ECONOMIC GROWTH 
--------------------------------------------- --- 
 
¶2. (SBU) In Deputy Secretary Kimmitt's October 10 meeting 
in Berlin with Economics Ministry State Secretary 
Pfaffenbach, Pfaffenbach described Germans as increasingly 
"frightened" by the current financial turmoil.  He agreed 
with Kimmitt that a primary goal of policymakers should be 
to restore market confidence and that transparency is key. 
Germany's growth, currently forecast at 1.2% this year, 
will likely be revised downward.  The IMF has already 
downgraded its forecasts.  Pfaffenbach said Deutsche Bank 
CEO Josef Ackermann and others "hiding behind him" favored 
a stimulus plan.  Finance Minister Steinbrueck, however, is 
determined to balance the federal budget by 2011, so a 
stimulus is not on the table. 
 
 
FINANCIAL CRISIS: NEED FOR TRANSPARENCY AND COORDINATION 
--------------------------------------------- ------- 
 
¶3. (SBU) Pfaffenbach mused the financial crisis could end 
up strengthening the global financial system in the long 
term.  He conceded the Germans did not at first understand 
the possible spillover from the financial turmoil in the 
United States.  During a visit to New York, Pfaffenbach was 
surprised by German bank's lack of understanding about the 
sophisticated financial instruments they traded.  He also 
wondered to what extent Alan Greenspan's policies as 
Federal Reserve Chairman were to blame for today's 
situation.  Pfaffenbach also noted criticism of Merkel's 
pledge to guarantee private accounts.  On the previous day, 
the Czech Finance Minister complained that money was 
fleeing countries without such guarantees to those that had 
extended them. 
 
¶4. (SBU) Kimmitt said that open communication and close 
coordination are needed, and surprises should be avoided. 
The goal of recent interventions is not a government 
takeover of the market, but rather to get markets 
functioning again.  In order to be a more collaborative 
partner, Europe needs to develop a set of common principles 
to address the crisis.  Kimmitt agreed on the need for 
transparency,  but stressed that new regulation needs to be 
smart regulation, which also recognizes the importance of 
market forces and discipline. 
 
GERMAN'S PROCLIVITY FOR SAVING IS AN ADVANTAGE 
--------------------------------------------- - 
 
¶5. (SBU) Pfaffenbach said he trusted Secretary Paulson was 
trying to get the U.S. response right, but he still felt 
the $700 billion U.S. bailout amounted to a "socialization 
of losses."  He also thought the much-criticized German 
banking system, with its system of "Sparkassen" or small 
cooperative banks, was probably better able to withstand 
the current turmoil.  Germans' emphasis on high savings and 
lower consumption could also be helpful in the current 
environment, adding that "Germans don't buy Porsches on 
credit."  Pfaffenbach said he was concerned France would 
again breach the Maastricht Treaty budget deficit ceiling 
of 3%. 
 
GERMAN INVESTMENT SECURITY LAW NOT MEANT TO DISADVANTAGE 
U.S. INVESTMENT 
--------------------------------------------- ----- 
 
¶6. (SBU) Pfaffenbach reported the new investment review law 
was discussed the previous day in the Bundestag, and that 
there seemed to be support for it.  The proposed law would 
allow the government to block an investment if it posed a 
 
BERLIN 00001399  002.2 OF 002 
 
 
threat to "national security or public order," and if the 
foreign investor would own 25% or more of the voting equity 
in a German company.  Pfaffenbach explained that the law 
was not meant to discourage U.S. investment - in fact, 
there was an on-going government program to attract more 
such investment.  Rather it was intended to prevent 
companies like Gazprom from taking over the electricity 
grid, for example. 
 
IRAN: SOME BUSINESS SHOULD REMAIN/FATF COULD DO BETTER 
--------------------------------------------- ------ 
 
¶7. (SBU) Kimmitt said he appreciated Germany's support on 
implementing UN Security Council Resolution 1803 on Iran. 
Western countries need to make sure Iran does not have the 
opportunity to illegally transfer funds for its weapons 
program while eyes are averted by the financial crisis. 
Kimmitt encouraged Germany to support recent proposals by 
the U.S., French and British, respectively: expanding 
sanctions on financial services to include insurance; 
tightening export controls within the EU on oil refining 
technology; and tightening export controls within the EU on 
liquefied natural gas technology.  He thought the Financial 
Action Task Force (FATF), at its meeting next week in 
Brazil, should send the strong message that Iran will pay a 
high price for failing to establish a system to fight money 
laundering and terrorist financing. 
 
¶8. (SBU) Pfaffenbach suggested that western countries 
should not cut off all business with Iran.  Doing so would 
deprive them of future leverage if the situation became 
even worse.  He also suggested that harming the energy 
sector was akin to "shooting ourselves in the foot." 
Kimmitt explained that relevant UN Security Council 
resolutions linked sanctions to the proliferation issue, 
and did not seek to inflict damage on the wider Iranian 
economy.  Tougher EU action supports the argument in favor 
of continued multilateral cooperation as opposed to 
Congressional proposals that would force foreign companies 
to choose between trading with the U.S. or with Iran, 
explained Kimmitt. 
 
¶9. (SBU) Another participant, Director General for External 
Economic Policy, Dr. Karl Brauner, said the Germans are not 
happy with certain aspects of the dialogue within FATF. 
They feel the chairman of the working group should have 
allowed for more private discussions and more consensus 
building behind the scenes.  Kimmitt encouraged Germany to 
support the work of the FATF on the Iran issue as Iran's 
anti-money laundering and counterterrorist financing 
deficiencies were identified by the group over a year ago. 
Kimmitt added that the FATF needs to send a clear signal to 
Iran that it cannot ignore the calls of the international 
community.  Kimmitt asked Brauner to pass any suggestions 
on ways to improve the discussion within FATF to the U.S. 
Embassy in Berlin.  He added that FATF should not become a 
mere discussion forum, but should be able to take 
decisions. 
 
¶10.  Note: Also attending the meeting from the Ministry 
were Director General, External Economic Policy, Dr. Karl 
Brauner; Head of Division, External Economic Policy, Dr. 
Adrian Bothe; Deputy Director General, Foreign Trade Law, 
Karl Wendling; and Head of Foreign Trade Law Division, Dr. 
Ursina Krumpholz.  Deputy Secretary Kimmitt has reviewed 
and cleared this cable. 
 
 
KOENIG