VZCZCXYZ0000
OO RUEHWEB

DE RUEHFT #3633/01 3441420
ZNR UUUUU ZZH
O 091420Z DEC 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8922
INFO RUEHC/DEPT OF LABOR WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS FRANKFURT 003633 
 
STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), DRL/ILCSR AND 
EUR/AGS 
LABOR FOR ILAB(BRUMFIELD) 
TREASURY FOR ICN(KOHLER),IMB(MURDEN,MONROE,CARNES) AND OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND GM
 
SUBJECT: German State-Level Stimulus Aims to Offset Industrial 
Slump 
 
REF: (A)BERLIN 1631 (B) BERLIN 1592 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
¶1.  SUMMARY: As evidence mounts that Germany has slid into 
recession, the Baden-Wuerttemberg state government announced this 
week it will provide its own fiscal stimulus package to combat the 
coming crisis.  Automotive and industrial manufacturers in B-W will 
undoubtedly welcome the news, having already seen a sharp decline in 
global demand for their products.  Business leaders expect numerous 
insolvencies and large production cuts in the coming year, 
especially among small auto parts manufacturers.  Although the 
state's package will not be large enough to prevent the downturn, it 
may encourage other states or the federal government to provide 
their own larger fiscal stimulus packages.  END SUMMARY. 
 
 
 
 
State-Level Fiscal Stimulus on the Way 
-------------------------------------- 
 
¶2.  Baden-Wuerttemberg Minister President Guenther Oettinger 
announced this week a 1 billion euro ($1.27 billion) economic 
stabilization package to modernize transportation and education 
infrastructure in B-W.  Oettinger's announcement came as a surprise 
because he had just the previous week publicly backed Chancellor 
Angela Merkel's opposition to a stimulus package larger than her 
now-approved 12 billion euro plan.  Oettinger justified his change 
of heart by saying that the state's dependence on the automotive 
sector makes the crisis more acute in B-W than elsewhere.  The CDU's 
coalition partner in the state, the Free Democratic Party, would 
prefer to see tax cuts, but most parties reacted favorably to the 
news. 
 
¶3.  The announcement comes as economic misery has become reality in 
Germany's southwest; leading industrial manufacturers have announced 
reduced production and profit targets.  Baden-Wuerttemberg, 
Germany's third largest state in economic size, has consistently 
outperformed other states in growth and employment statistics.  With 
an unemployment rate of only 4%, economic growth rates of 4.4% in 
2006 and 2.8% in 2007, and a GDP of 353 billion euros ($448 billion) 
in 2007, B-W consistently scored well above the national average in 
its economy.  Although optimistic prognoses still put economic 
growth at 2% for 2008, predictions for 2009 are being revised ever 
downward.  In the Stuttgart area, the automotive sector accounts for 
51% of turnover and employs 121,000 people.  As the recession 
deepens in Germany, the B-W economy, with its large automotive and 
industrial manufacturing sectors, has been hit hard by the global 
collapse in demand for industrial products. 
 
Automotive Sector Already in Hard Times 
--------------------------------------- 
 
¶4.  Stuttgart-based Daimler, manufacturer of Mercedes and Smart 
brands, saw a dramatic reduction in sales in October and November, 
down 25% from the previous year.  Daimler now plans to reduce 
production by 80,000-100,000 cars in 2008 and 150,000 in 2009.  In 
addition to a five-week Christmas break and several days of 
production stops in February and March, Daimler will also add a 
summer recess in 2009.  In addition to cuts in part-time positions, 
Daimler announced on December 8 that it will go to a four-day work 
week for 20,000 of its 30,000 employees at its largest assembly 
plant in Sindelfingen (near Stuttgart).  An additional 6,100 workers 
at the nearby Rastatt plant will also work only 3 to 4 days a week, 
but the firm will resist making job cuts.  B-W's other leading auto 
manufacturer, Porsche, will also extend production shutdowns over 
the holidays and cancel 100 temporary contracts. 
 
¶5.  Daimler chief economist Juergen Mueller predicted to Econ Off 
and Econ Spec that the German auto industry would not see a return 
to 2006 and 2007 sales levels until 2011 or 2012.  Some factors will 
have a positive effect on sales, such as the decreasing cost of oil, 
lower raw material prices, and the weakening of the euro against 
other global currencies, but a global economic downturn will have a 
devastating impact on demand.  He worried most about small-parts 
manufacturers, predicting that 20-25% will slide into bankruptcy 
this year, even more should any U.S. auto manufacturers go bankrupt. 
 Although Daimler faces increased borrowing costs, it stands ready 
to reach out to its partners by paying for orders upfront or earlier 
than usual.  Mueller predicted that the German government may in the 
end need to create a stabilization package for the auto parts 
industry. 
 
 
Other Industries See Dark Clouds Ahead 
-------------------------------------- 
 
¶6.  Suedwestmetall, an employer association representing more than 
800,000 employers in the metal and electric industries, sees similar 
trends in other industrial sectors.  Managing Director Peer-Michael 
Dick described the present situation as catastrophic.  The speed and 
depth of the current downturn surprised industrial manufacturers, 
and the recession would affect B-W harder due to its dependence on 
industrial output.  He expected up to 33,000 bankruptcies among 
manufacturers and upwards of 140,000 lay-offs in the state in 2009. 
 
¶7.  Dick criticized the federal government's 12 billion euro 
financial stimulus package as totally inadequate and said that if 
the German government refused to take action, the auto industry 
would need help from the EU.  Both he and Daimler's Mueller argued 
that a cut in the value-added tax would boost consumption in 
Germany.  Both parties agreed that this recession would be 
particularly tough, as what might have been a normal business cycle 
downturn coincided with a financial crisis. 
 
¶8.  COMMENT:  The 1 billion euro infrastructure package from the 
state government will clearly not be large enough or come quickly 
enough to prevent a severe economic recession in B-W.  Nevertheless, 
the change of heart in the state government shows increasing 
acceptance of fiscal stimulus despite the federal government's 
intractability and prior state-level commitments to a balanced 
budget.  As fiscal stimulus gains acceptance at the state level and 
poor economic data continues to come in, resistance at the federal 
level may also dissipate.  END COMMENT. 
 
¶9.  This cable was coordinated with Embassy Berlin. 
POWELL