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Viewing cable 09BERLIN254, MISSION GERMANY'S RESPONSE TO INFO REQUEST IN

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Reference ID Created Released Classification Origin
09BERLIN254 2009-03-03 16:37 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Berlin
VZCZCXRO8895
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHRL #0254/01 0621637
ZNR UUUUU ZZH
P 031637Z MAR 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 3443
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0193
RUEHFT/AMCONSUL FRANKFURT PRIORITY 7888
RUEHAG/AMCONSUL HAMBURG PRIORITY 0272
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0193
RUEHMZ/AMCONSUL MUNICH PRIORITY 2004
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
UNCLAS SECTION 01 OF 05 BERLIN 000254 
 
SENSITIVE 
 
STATE FOR EEB/OMA (WHITTINGTON), DRL/ILCSR AND EUR/AGS 
(SCHROEDER) 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR ICN (KOHLER), IMB (MURDEN, MONROE, BEASLEY) 
AND OASIA 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB PREL GM
SUBJECT: MISSION GERMANY'S RESPONSE TO INFO REQUEST IN 
ADVANCE OF G-20 MEETINGS 
 
REF: A. STATE 17502 
     B. BERLIN 0236 
     C. BERLIN 0159 
 
BERLIN 00000254  001.4 OF 005 
 
 
1. SUMMARY. (SBU) Due to the deepening financial and economic 
crises, Germany is experiencing its worst recession since 
World War II.  Its export-oriented manufacturing sector, 
including the automotive industry, has been hit particularly 
hard; new car orders fell 20 percent in the fourth quarter of 
2008.  To mitigate the effects of the recession, the German 
government has launched two stimulus packages totaling 81 
billion euros.  It is also taking steps to encourage firms to 
retain workers and to assist the unemployed.  The German 
government created a 500 billion euro bank rescue fund to aid 
banks struggling under the weight of toxic assets.  It is 
less enthusiastic about bailing out other countries, and 
instead supports extending help via international 
institutions.  At the G-20 Summit in London, Germany will 
support tougher regulation, a greater role for the 
International Monetary Fund and Financial Stability Forum, a 
strong signal against protectionism, and other priorities as 
articulated at the February 22 "Mini Summit" in Berlin. 
Chancellor Merkel will also promote her idea for a new 
Charter for Sustainable Economic Activity.  END SUMMARY. 
 
STIMULUS 
-------- 
 
2. (SBU) Since late 2008, Germany has passed two stimulus 
bills totaling 81 billion euros over two years, according to 
government figures.  The two packages amount to 1.4 percent 
of GDP annually.  The first stimulus plan was approved in 
December 2008 and amounts to around 31 billion euros over two 
years, of which about 12 billion euros is new spending.  It 
consists of 15 modest measures focusing on lending to SMEs, 
tax breaks for fuel efficient cars, and other CO2 reduction 
measures. 
 
3. (SBU) The second, more robust stimulus package was 
approved in February 2009, and amounts to 50 billion euros 
over two years.  (NOTE: It is still unclear how much of this 
total represents expenditures already in the pipeline.)  The 
package includes 18 billion euros of investments in 
infrastructure, schools, hospitals and broadband technology. 
Measures to boost demand for cars -- such as a rebate scheme 
that encourages drivers to scrap vehicles older than nine 
years in exchange for a 2,500-euro voucher to buy newer, more 
efficient models -- total 1.5 billion euros.  Other 
initiatives include lowering health insurance contributions, 
paying half of short-time workers' social security 
contributions, more training for unemployed workers, and 
raising child support for families on unemployment benefits. 
Overall tax relief measures amount to 2.9 billion euros in 
2009 and 6.05 billion euros in 2010.  A separate 100 billion 
euro "Germany Fund" has been created to help firms survive 
the credit crunch.  Most German economists have welcomed the 
second stimulus package, but note its effects are not 
expected to show up until the second half of 2009.  There are 
also concerns that it is too small and too heavily weighted 
towards investment rather than consumption. 
 
4. (SBU) The stimulus and bank rescue expenditures could lead 
to actual new public borrowing of up to 56 billion euros in 
2009.  The Finance Ministry expects the debt-to-GDP ratio to 
increase from 65.5 percent to 72.5 percent of GDP by 2012.  A 
constitutional amendment requiring states and the federal 
government to limit borrowing to 0.35 percent of GDP by 2020 
is making its way through the legislative process. 
Exceptions would be allowed for natural disasters and 
recessions. 
 
FINANCIAL SECTOR 
---------------- 
 
5. (SBU) With exposure to risky assets in Iceland, Ireland, 
Spain, and the UK, not to mention central and eastern 
 
BERLIN 00000254  002.4 OF 005 
 
 
European (CEE) banks, the German financial sector is 
struggling under the weight of toxic assets.   In response, 
the German government created a 500 billion euro financial 
sector rescue fund (known as "Soffin") in October 2008.  The 
fund consists of 400 billion euros in public credit 
guarantees and 80 billion euros for recapitalization -- the 
20 billion euro balance is a budget line item for defaulting 
credit guarantees.  Thanks to strict conditions for 
participation, many banks were initially reluctant to tap 
into Soffin. 
 
6. (SBU) Since January 2009, more institutions have taken 
advantage of the fund.  The list includes state banks 
("Landesbanken") WestLB, BayernLB, and HSH Nordbank, which 
have benefitted from Soffin credit guarantees.  The German 
states (Laender) have also provided these banks with 
recapitalization funds.  Another state bank, SaxonLB, steered 
clear of Soffin assistance by merging with LBBW (the state 
bank of Baden-Wuerttemberg), though the state of Saxony had 
to assume losses relating to the merged banks.  The first 
victim of the current financial crisis, IKB, received a 
bailout from the federal government and the government 
development bank, KfW, prior to the creation of Soffin. 
Commerzbank, Germany's second largest lender, received both 
public credit guarantees and recapitalization funds from the 
federal government; the government now has a 25 percent stake 
in the bank.  Its CEO Martin Blessing recently declined to 
rule out that additional funds might later be needed. 
 
7. (SBU) The highest profile bank bailout in Germany is that 
of Hypo Real Estate (HRE), called "Germany's Lehman Brothers" 
thanks to its systemic importance to the German covered bond 
("Pfandbrief") market.  To date, HRE has received over 100 
billion euros in public and private capital injections and 
guarantees.  Following inconclusive negotiations with U.S. 
private equity firm JC Flowers, which leads a group of 
investors owning almost 25 percent of HRE, Chancellor 
Merkel's (Christian Democratic Union ) CDU) cabinet approved 
a draft law that would give the federal government the right 
to seize private property for the first time since World War 
II.  The draft law's expropriation clause is designed 
specifically for a takeover of HRE, however, and would expire 
in June 2009.  It could be invoked only as a last resort. 
Unless a deal with JC Flowers is reached in the meantime, the 
bill could become law by early April. 
 
8. (SBU) The government has so far resisted pressures from 
within the financial sector to create a single bad bank. 
Both Finance Minister Peer Steinbrueck (Social Democratic 
Party ) SPD) and Chancellor Merkel have rejected such an 
approach on grounds of moral hazard and incalculable risks 
for the federal budget.  The influential Association of 
German Savings Banks ("Sparkassen"), whose members have 
little or no exposure to troubled assets, also opposes the 
creation of a bad bank.  Discussions have mainly focused on 
allowing individual lenders to set up their own bad banks to 
house toxic assets off their balance sheets, without shifting 
the burden to taxpayers.  Under one proposal, Soffin would 
provide guarantees to individual vehicles. 
 
REAL ECONOMY 
------------ 
 
9. (SBU) Germany is experiencing its worst recession since 
World War II.  Despite GDP growth of 1.3 percent for the year 
as a whole, German GDP fell by 2.1 percent in the fourth 
quarter of 2008 and is heading downward.  The Economics 
Ministry projects the economy will shrink by 2.25 percent in 
2009.  Deutsche Bank Research thinks a 5 percent contraction 
in GDP is "fairly optimistic."  Exports ) which fell by 7.3 
percent in the 4th quarter of 2008 ) are the main culprit, 
and predicted to decline by 9 percent or more in 2009. 
Unemployment will increase to 8.4 percent in 2009, up from 
7.8 percent in 2008, according to government estimates. 
Meanwhile, the German savings rate increased from 11.4 
percent to 11.9 percent in the fourth quarter of 2008, 
 
BERLIN 00000254  003.4 OF 005 
 
 
dampening hopes that lower inflation and the stimulus 
packages would trigger more consumer spending.  A contact at 
the Bundesbank told EMIN that the fourth quarter of 2008 and 
first quarter of 2009 would be the trough of the recession, 
with some modest growth possible by spring 2009.  This, 
however, seems less likely with time. 
 
10. (SBU) Large industrial companies like those in the 
automotive, machine tool, steel and metal processing, paper, 
engineering, construction, shipbuilding and ceramics 
industries are suffering most from the slowdown, according to 
the Association of German Industries (BDI -- Germany's 
largest business lobby group).  Some companies are having 
trouble obtaining credit or are able to do so only under less 
favorable terms, as banks increase loan guarantee premiums 
and demand tougher disclosure requirements.  Many also face 
liquidity constraints thanks to lower revenues.  Small- and 
medium-sized enterprises (SMEs), many of which are 
self-financing, had reported fewer financing troubles, but 
are now feeling the squeeze. 
 
11. (SBU) As exports slump, the automotive industry, which 
employs one in seven workers in Germany, is center stage in 
the economic crisis.  Total new car orders fell by 20 percent 
in the fourth quarter of 2008 to the lowest level since the 
late 1980s.  Carmakers have cut production and terminated 
employment contracts for temporary workers.  Both Opel, 
threatened by the potential insolvency of its parent General 
Motors, and the components supplier Schaeffler, which 
over-extended itself in taking over the larger Continental, 
say they risk bankruptcy without support from the state. 
While some manufacturers are attempting to protect their 
supply chains, 10 smaller automotive suppliers together 
employing almost 20,000 workers have already filed for 
bankruptcy.  Measures in the second stimulus package to 
encourage new car purchases may provide some short-term 
relief.  (See section above on stimulus.) 
 
12. (SBU) Understanding the importance of trade to German 
industry, the German government has come out strongly against 
protectionism.  Economics Minister Karl-Theodor zu Guttenberg 
remarked, "Free trade and open markets can make a 
considerable contribution to overcoming the economic crisis." 
 Meanwhile, Germans are deeply concerned about "Buy America" 
provisions in the U.S. stimulus package and protectionist 
noises from major trading partner France. 
 
SOCIAL/LABOR IMPACT 
------------------- 
 
13. (SBU) Germany's two stimulus packages contain several 
measures to address rising unemployment.  Most notable is the 
extension from 6 to 18 months of a program (known as 
"Kurzarbeit") whereby the Federal Employment Agency takes 
over a portion of social security payments from companies 
should they opt to introduce shorter working hours for 
employees instead of laying them off.  The stimulus packages 
also include qualification and retraining programs, subsidies 
for firms to hire or retain temporary workers, and expansion 
of regional and local employment agencies.  The Federal 
Employment Agency, which has run a budget surplus in recent 
years due to the previous decline in unemployment, is 
providing some funding in addition. 
 
14. (SBU) Germany has not experienced the same level of civil 
unrest seen in some other European countries.  In recent 
weeks, three major rallies have taken place in reaction to 
plant closures relating to the economic crisis: at Opel 
Qimonda, and Schaeffler.  Some 15,000 Opel workers from 
around Germany took part in a rally on February 26 at the 
German headquarters of the struggling company in 
Ruesselsheim.  They demanded that Opel's parent company 
General Motors scrap plans for plant closures in Europe.  A 
demonstration involving around 3,000 workers at chipmaker 
Qimonda and another involving around 8000 workers at car- 
part supplier Schaeffler, reflect the importance of both 
 
BERLIN 00000254  004.4 OF 005 
 
 
companies as the main employer in their respective regions. 
 
DIMENSIONS OF THE CRISIS 
------------------------ 
15. (SBU) Not wanting to get stuck with the tab in an 
election year, German politicians are reluctant to bail out 
weaker European economies both inside and outside the 
eurozone.  Germany's public finances are among the healthiest 
in Europe, and many Germans bristle at the thought of paying 
for the alleged sins of undisciplined neighbors.  Under terms 
of the 1992 treaty leading to the creation of the euro, 
individual countries that use the single currency are 
prohibited from bailing out others if they default on their 
public debt.  The intent of this "no bail-out" provision is 
to force countries to embrace fiscal discipline. 
Nevertheless, Finance Minister Steinbrueck has intimated 
Germany would not stand idly by if another eurozone member 
ran the risk of defaulting.  His remarks reflect economic 
reality: 42 percent of German exports are bound for the euro 
region (and 64 percent for the 27 nations of the EU).  A 
Finance Ministry spokesman denied a report in "Der Spiegel," 
however, that the Ministry was considering specific 
scenarios, such as issuance of a Eurobond, to assist weak 
members.  A contact at the Chancellor's office confirmed that 
Germany opposed a common eurozone bond. 
16. (SBU) At the March 1, 2009 EU Summit in Brussels, 
Chancellor Merkel articulated an emerging German approach for 
eurozone and non-eurozone economies alike: "We help countries 
in need and we will do so further, particularly through 
international institutions."  Just a week earlier at a 
gathering in Berlin, Merkel and other EU leaders 
participating in the London G-20 Summit had called for a 
doubling of the IMF's balance sheet, to $500 billion, in case 
the fund receives more emergency requests for aid.  Analysts 
note that this approach skirts the issue of the "no bail-out" 
provision, and may be easier to finesse with the German 
public than unilateral assistance.  Having multilateral 
institutions take the lead also ensures that the institutions 
take any political heat for imposing strict fiscal reforms on 
countries that accept bailouts.  In return for its support, 
Germany will certainly want such reforms included in any 
multilateral bailout.  Following the Brussels March 1 Summit, 
Merkel told reporters she hoped to get a commitment from 
leaders at the March 19-20, 2009 EU Summit to return to the 
principles of the EU Stability Pact. 
 
ROLE OF THE G-20 
---------------- 
 
17. (SBU) At the April 2 G-20 Summit in London, Germany will 
support EU positions coordinated at a February 22 "Mini 
Summit" in Berlin (REF B).  Among the top priorities are: 
 
-- ensuring that "all financial markets, products and 
participants are subject to regulation," especially those 
that could present a systemic risk; 
-- tightening supervision of hedge funds and oversight of 
credit rating agencies; 
-- obliging private banks to build additional capital buffers 
"in good times" to prepare for economic downturns; 
-- designing executive compensation to prevent "excessive 
risk-taking"; 
-- strengthening the Financial Stability Forum (FSF) and 
International Monetary Fund (IMF); 
-- creating an IMF-FSF early warning system to prevent future 
financial crises; 
-- enlarging the FSF to embrace emerging economies; 
-- establishing supervisory colleges to coordinate 
cross-border financial institutions; 
-- taking action against tax havens and "uncooperative 
jurisdictions"; 
-- sending a strong signal against protectionism by 
concluding the Doha Round and ensuring stimulus measures and 
financial rescue plans do not distort competition; and 
-- committing to fiscal discipline once the crisis has 
passed. 
 
BERLIN 00000254  005.4 OF 005 
 
 
 
MERKEL'S INITIATIVE FOR THE LONDON SUMMIT 
----------------------------------------- 
 
18.  (SBU) In London, Chancellor Merkel is also expected to 
promote her idea of a new Charter for Sustainable Economic 
Activity (REF C).  Merkel has raised the concept several 
times in recent weeks, including at a meeting she hosted on 
February 5 with the heads of five international organizations 
(IMF, World Bank, WTO, ILO, OECD); the IO chiefs endorsed the 
proposal at least on paper.  Merkel also pitched the idea at 
the EU "Mini Summit" she hosted on February 22, appearing to 
get at least tacit support from her guests (REF B). (NOTE: 
Merkel seems to have dropped or delayed a parallel proposal 
for a "World Economic Council" that would parallel the UN 
Security Council.) 
 
POINT OF CONTACT 
---------------- 
 
19. (SBU) Embassy Berlin's designated point of contact on the 
financial crisis and G-20 Summit is Econoff John G. Robinson 
(email: robinsonjg@state.gov, tel.: 49-30-8305-2266). 
Koenig