VZCZCXRO8036
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHRL #0059/01 0151657
ZNR UUUUU ZZH
O 151657Z JAN 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3052
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0173
RUEHFT/AMCONSUL FRANKFURT PRIORITY 7820
RUEHAG/AMCONSUL HAMBURG PRIORITY 0242
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0176
RUEHMZ/AMCONSUL MUNICH PRIORITY 1964
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 BERLIN 000059 
 
SENSITIVE 
 
STATE FOR EEB(NELSON),EEB/IFD/OMA(SAKAUE, 
WHITTINGTON),EEB/EPPD,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: EFIN ECON PGOV PREL GM
SUBJECT: GERMANY,S ABOUT FACE: STEEP DOWNTURN PROMPTS 
ROBUST SECOND STIMULUS PACKAGE 
 
REF: A. SECSTATE 134459 
     ¶B. BERLIN 1677 
 
BERLIN 00000059  001.2 OF 004 
 
 
¶1. (SBU) SUMMARY.  Fresh reports indicating a steep plunge in 
exports and a sudden rise in unemployment have shocked the 
German coalition government led by Chancellor Angela Merkel, 
and pushed it into crisis mode.  On January 12, the coalition 
agreed 50 billion euros worth of new stimulus measures, 
including additional spending on infrastructure and social 
benefits, as well as cuts in income taxes and social 
contributions, little of which was anticipated as recently as 
December.  The Chancellor has also proposed creating a 100 
billion euro "Loan and Debt Guarantee Program" to guarantee 
bank loans to credit-starved firms.  Critics are worried the 
additional spending will increase the federal deficit. 
Others are concerned the hodgepodge of measures will do 
little to help Germany's flagging economy, besides retarding 
the descent into recession.  Nevertheless, the wave of state 
and national elections this year virtually guarantees passage 
in Germany's lower house, though the proposal's fate in the 
upper house is less certain.  If passed, the measures would 
not begin to take effect until July 1, with most of the 
impact back-ended to 2010.  This second stimulus package 
underscores Merkel,s shift away from a focus on eliminating 
the budget deficit towards fighting the recession.  END 
SUMMARY. 
 
DETAILS OF THE SECOND STIMULUS PACKAGE 
-------------------------------------- 
 
¶2. (U) After weeks of internal debate, Chancellor Merkel's 
coalition agreed on January 12 details of a second stimulus 
package it claims will be worth 50 billion euros over two 
years.  Together with measures passed in November 2008, the 
new package brings Germany,s total 2009-2010 fiscal stimulus 
initiative to around 82 billion euros, or about 1.6 percent 
of GDP in each of the two years, according to the government. 
 If approved, the package would at face value be Europe's 
largest in responding to the current crisis, and Germany's 
biggest since the end of World War II.  According to 
Bundestag (lower chamber) Budget Committee Chairman Otto 
Fricke (FDP), final approval could come before the Easter 
recess.  Elements of the plan would then begin to take effect 
on July 1. 
 
¶3. (U) Principle elements of the 50 billion euro proposal 
include: 
 
-- transfers to municipal governments, over two-thirds of 
which are targeted at education and infrastructure (17.33 
billion euros); 
 
-- income tax cuts, including a reduction in the lowest rate 
from 15 to 14 percent and an increase in the tax-free 
threshold from 7,664 euros to 8,004 euros (8.94 billion 
euros); 
 
-- reduction in health-insurance contributions from 15.5 
percent of gross pay to 14.5 percent, and cuts in 
unemployment insurance payments (12 billion euros); 
 
-- family benefits, including a 100 euro-per-child payment 
for parents (2.3 billion euros); 
 
-- extension of state benefits to 18 months for employees 
obliged to work shorter hours (no estimate available); 
 
-- automobile industry assistance, including a 2,500 euro 
payment for drivers purchasing new, environmentally friendly 
cars (1.5 billion), and funds for innovation (500 million 
euros). 
 
¶4.  (U) The Chancellor has also proposed the creation of a 
100 billion euro "Loan and Debt Guarantee Program" to provide 
state guarantees to small- and medium-sized enterprises 
(SMEs) having trouble getting credit.  Specifics have yet to 
be worked out, but indications are the state development bank 
 
BERLIN 00000059  002.2 OF 004 
 
 
KfW would administer the fund. 
 
CRITICISM OF THE PLAN 
--------------------- 
 
¶5. (U) Concern that additional stimulus spending will 
increase the German deficit is widespread.  Germany,s new 
borrowing will surge to 60 billion euros this year, according 
to the CDU's Budget Committee spokesman Steffen Kampeter, who 
adds, "We're getting to be like America."  According to a 
forecast published by the CDU/CSU Bundestag group, increased 
government spending combined with declining tax revenues 
could push the deficit to 3.5 percent of GDP in 2009 and 4.5 
percent by 2010 -- far above the Maastricht Criteria limit of 
3 percent.  CDU Minister-Presidents Christian Wulff 
(Lower-Saxony) and Guenther Oettinger (Baden-Wuerttemberg) 
-) whose views will be reflected in the Bundesrat (upper 
house) -- have threatened to withhold support for the package 
if it appears their states will be unduly burdened with new 
debt.  Both are calling for a schedule of specific steps to 
repay the debt after the crisis is over. 
 
¶6. (U) Some economists are also concerned about the 
composition of the plan.  Deutsche Bank Chief Economist 
Thomas Mayer notes that as political considerations played a 
significant role in the design of the plan, its effectiveness 
is "likely to be less than it could have been."  Bank of 
America's Chief Economist Holger Schmieding agrees.  He says 
the effort to please the CDU/CSU/SPD coalition,s various 
camps, from free-marketeers and low-tax conservatives to 
economic nationalists and public-spending advocates, resulted 
in a &very mixed batch8 of measures that will take a long 
time to work through the economy.  Others doubt the wisdom in 
favoring the automobile industry when other sectors are in 
similar straits. 
 
¶7. (SBU) Another common criticism is that the new measures 
will not take effect until July 1, long after expected 
further deterioration of the economy.  Schmieding worries the 
stimulus will kick in only late in 2009 and do nothing to 
help when the recession is at its worst.  On the other hand, 
Chief Economist of the Employers' Association (BDA) 
Ottheinrich von Weitershausen told Econ Counselor he was not 
concerned about the timing.  A fiscal boost later in the 
year, when joblessness is expected to be high, might actually 
prove advantageous. 
 
¶8. (U) Aware of the criticism, Chancellor Merkel has called 
the new stimulus package an "exceptional measure" to help the 
country weather the financial crisis.  She said, "The state 
is called upon to ensure that market forces will work again." 
 To counter criticism regarding increasing the federal 
deficit, the Chancellor said she would seek a constitutional 
amendment to ban public borrowing beyond 0.5 percent in 
"normal times."   She defended support for the car industry 
by calling it "the core substance of German industry." 
 
¶9.  (U) Although the Bundestag is expected to approve the 
stimulus proposal without major changes, passage by the 
Bundesrat, which represents the 16 German states, is less 
certain.  Opposition FDP Chairman Guido Westerwelle has said, 
"This is not an economic stimulus package, but a debt 
package."  If the upcoming Hesse state parliament elections 
result in a CDU/FDP coalition as expected, Merkel's coalition 
will need to compromise with the FDP in order to achieve 
passage in the Bundesrat.  In the event, Westerwelle later 
conceded the FDP would play ball in negotiations over the 
stimulus package, though the FDP will try to ensure tax 
reform is part of the deal. 
 
MERKEL'S ABOUT FACE 
------------------- 
 
¶10. (U) The new stimulus proposal underscores Chancellor 
Merkel,s apparent shift away from a focus on eliminating the 
budget deficit towards fighting Germany's worst post-war 
recession.  As recently as December, Chancellor Merkel and 
 
BERLIN 00000059  003.2 OF 004 
 
 
Finance Minister Steinbrueck were ridiculing calls for a 
second stimulus package.  Not only would deficit spending 
today saddle future generations with debt, they argued, but 
traditional stimulus plans do not work in Germany (REF B). 
In the end, however, deteriorating economic conditions -- 
exports plunged more than 10 percent from October to November 
2008, and unemployment increased in December for the first 
time in nearly three years -- plus intense political pressure 
left Chancellor Merkel with little choice but to change tack. 
 In doing so, Merkel called it "the most difficult domestic 
political decision that I have taken as Chancellor." 
 
¶11. (SBU) Horst Classen, a top economic advisor to the 
Chancellor, provided EMIN with some context to Merkel's about 
face.  He confirmed that the economic downturn was consuming 
most of the Chancellery's time these days, with top advisors 
pulling all-nighters over the Christmas holidays.  The huge 
drop in exports (the mainstay of the German economy) in 
particular had left Chancellery officials breathless, Classen 
said, adding that the government feared the recent rise in 
unemployment was a sign of things much worse to come. 
 
¶12. (SBU) Classen also conceded politics played a role in 
shifting the debate in the direction of a larger stimulus 
package.  With the Hesse state elections on January 18, 
several more in August and September, and national elections 
in September, the parties of the coalition were scrambling to 
get spending proposals on the table, he said.  The upshot is 
a second stimulus proposal that is quite large and contains a 
little something for everyone -- "a smorgasbord", he said. 
Vice Chancellor and Foreign Minister Frank-Walter Steinmeier, 
who up to now had followed the lead of his fellow SPD Finance 
Minister Steinbrueck, reportedly sought to muzzle 
Steinbrueck.  For the sake of the party and coalition unity 
Steinbrueck toned down his strident criticism of deficit 
spending.  Classen contended the 50 billion euro price tag 
represented hard numbers; the budget deficit for 2009-2010 
would in fact increase by roughly 50 to 60 billion euros as a 
result of the plan's tax and spending provisions.  He 
acknowledged this could eventually push Germany up against 
the Maastricht Criteria. 
 
¶13. (SBU) Separately, senior Deutsche Bank analysts told EMIN 
the second stimulus plan represented a major step in the 
right direction.  They pointed out, however, that the fiscal 
boost may amount to only 20 billion in 2009, with the 
remainder coming in 2010.  Moreover, much of the spending 
represents infrastructure projects (bridges, telecom) that 
will take many months if not longer to complete. 
 
COMMENT 
------- 
 
¶14. (SBU) Despite Classen's assurances, the stimulus 
package's headline figure of 50 billion euros merits 
scrutiny.  After all, the government still ascribes a value 
of 32 billion euros to the November package, though private 
analysts put the real figure at around 12 billion euros over 
two years (2009-2010).  The latter discrepancy is due to 
several factors, including the fact that the government's 
numbers encompass spending that was already in the pipeline. 
Some politicians also have a certain fondness for rolling in 
"multiplier effects." 
 
¶15. (SBU) The differing figures moreover reflect conflicting 
political imperatives that may become more pronounced as the 
elections approach.  On the one hand, voices for bold fiscal 
action have grown louder.  On the other, deficit hawks, 
including Finance Minister Steinbrueck, continue to argue for 
fiscal discipline (if somewhat more quietly).  There is 
therefore a tendency for the Chancellor and others to tout 
the large size of the stimulus package publicly, while at the 
same time trying to limit the actual damage to the federal 
budget.  These conflicting forces are still very much at 
work, and will probably ensure the numbers game continues as 
the debate moves to the parliament. 
 
 
BERLIN 00000059  004.2 OF 004 
 
 
¶16. (U) This cable was coordinated with ConGen Frankfurt. 
Koenig