VZCZCXRO6715
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHRL #0517/01 1251727
ZNR UUUUU ZZH
P 051727Z MAY 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 4002
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0206
RUEHFT/AMCONSUL FRANKFURT PRIORITY 7972
RUEHAG/AMCONSUL HAMBURG PRIORITY 0286
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0201
RUEHMZ/AMCONSUL MUNICH PRIORITY 2045
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 BERLIN 000517 
 
SENSITIVE 
 
STATE FOR EEB(NELSON), EEB/IFD/OMA (WHITTINGTON), DRL/ILCSR 
AND EUR/CE (SCHROEDER) 
LABOR FOR ILAB(BRUMFIELD) 
TREASURY FOR ICN(KOHLER),IMB(MURDEN,MONROE,CARNES) AND OASIA 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB GM PREL
SUBJECT: MERKEL,S STIMULUS BY STEALTH 
 
BERLIN 00000517  001.2 OF 003 
 
 
¶1. (SBU) SUMMARY. Chancellor Merkel's April 22 "Economic 
Summit" yielded remarkably little in the way of breakthroughs 
or announcements.  The gathering did, however, help clarify 
Germany's economic outlook and enable the Chancellor to claim 
broad support for her economic stewardship, including her 
refusal to propose a third stimulus.  High-level participants 
from government, industry, and trade unions as well as 
economists agreed that the German economy probably bottomed 
out in the first quarter of 2009, and that the slump would 
continue into 2010.  A whiff of spring was also in the air, 
as some participants saw an end to the recession on the 
distant horizon.  The employment picture, however, is 
increasingly gloomy.  This factor more than any other might 
compel the Chancellor, whether she likes it or not, to 
promise additional stimulus measures as she heads into the 
September elections.  Merkel is, in fact, already taking 
smaller steps not requiring legislative approval that are 
meant to have a stimulatory effect, and is preparing the 
ground for tax cuts after the elections.  END SUMMARY. 
 
MERKEL'S APRIL 22 "ECONOMIC SUMMIT" 
----------------------------------- 
 
¶2. (U) Chancellor Angela Merkel's April 22, 2009 "Economic 
Summit," which brought together high-ranking representatives 
from the German government, industry, academia, and labor 
unions to discuss the state of the German economy, produced 
no major announcements.  The stated rationale for the meeting 
was to "inform" the government before the April 29 release of 
its revised 2009 growth forecast.  While a similar meeting on 
December 14, 2008 was held amidst the buzz of a possible 
second stimulus package, Merkel was very clear that 
discussion of a third such package was not even on the agenda 
this time.  Following the meeting, Finance Minister Peer 
Steinbrueck told reporters the German economy could shrink by 
5 percent this year, but that a plan in the works to help 
banks deal with troubled assets could hasten the end of the 
downturn.  Economics Minister Karl-Theodor zu Guttenberg 
added that Germany "may not reach the bottom (of the 
recession) this year," but could get to a point where the end 
was in sight.  Merkel herself made no statement, and there 
was no communique. 
 
BEHIND THE CLOUDS, RAYS OF HOPE? 
-------------------------------- 
 
¶3. (SBU) Germany's economic outlook is grim, as acknowleged 
by Holger Niermann, economic policy advisor to Chancellor 
Merkel.  The day after Merkel's "Summit," four leading 
economic institutes predicted GDP would contract by 6 percent 
in 2009.  A week later, the government followed suit, 
revising its own 2009 growth forecast to -6 percent (down 
from -2.25 percent).  (Note: There was divergence on the 2010 
outlook: while the government predicts 0.5 percent GDP 
growth, the institutes forecast -0.5 percent.)  The main 
factor dragging the German economy down was exports -- down 
23 percent in February 2009 from a year before -- dealing a 
crushing blow to the manufacturing sector.  The economic 
institute IFO's manufacturing barometer is at the lowest 
level in 10 years. 
 
¶4. (SBU) At the "Summit," however, some business and industry 
representatives were reportedly cautiously optimistic.  There 
was a general consensus that the first quarter of 2009, with 
a 3.3 percent drop in output, represented the deepest phase 
of the recession.  The economy would continue to contract 
during the remainder of 2009, but at a slower pace.  Several 
forward-looking indicators -- an improved purchasing 
managers' index and business climate index -- has convinced 
some that the recession had an end in sight.  The perception 
of a less uncertain future, whether justified or not, 
apparently reassured some "Summit" participants that a 
brighter future lay ahead. 
 
READ MY LIPS: NO (OFFICIAL) NEW STIMULUS 
---------------------------------------- 
 
¶5. (SBU) There was broad consensus at the April 22 "Summit" 
 
BERLIN 00000517  002.2 OF 003 
 
 
that time was not ripe for a third stimulus package, 
according to Niermann.  (NOTE: Labor union representatives 
did reportedly appeal for more public spending, especially on 
infrastructure projects.)  The feeling was that Germany's 
current stimulus packages, worth around 81 billion euros in 
2009 and 2010, were already bearing fruit.  In fact, the 
German measures were nearly as big as a percentage of GDP as 
the U.S. initiative, once "automatic stabilizers" were 
factored in, Niermann asserted.  (NOTE: Embassy and many 
private forecasters believe these figures significantly 
overstate the size of the real stimulus.)  The German 
government also feels its room for maneuver to counter the 
economic crisis is limited.  The government deficit could 
reach 89 billion euros in 2009 and may climb to 132 billion 
euros in 2010.  At 6.1 percent of GDP, this is twice the 
Maastricht criteria of 3 percent. 
 
¶6. (SBU) The legislative timetable also makes an official 
third stimulus package prior to the September 27 elections 
unlikely.  The Bundestag takes its summer recess beginning 
July 4, only to reconvene after the elections (barring an 
extraordinary session).  According to Dietrich Jahn, Deputy 
Director General, Ministry of Finance, the political 
timetable is equally inauspicious.  Jahn told Econoff the 
German government had studied the 2008 "Bush stimulus," and 
concluded its effects lasted about three months.  There were 
more than three months left until the September elections, he 
noted. 
 
¶7. (SBU) Merkel,s chief economic adviser, Jens Weidmann, 
told EMIN that the only substantive new stimulus measure 
before the elections would be the expansion of the car 
scrapping (&wrecking8) premium from 1.5 billion to 5 
billion Euros, which the government approved in early April. 
In addition to the car scrapping premium, which Goldman Sachs 
believes could translate into the sale of two million more 
cars this year, other modest measures that can be enacted by 
executive order are in the works.  One is the recent 
extension from 18 to 24 months of subsidies for firms 
agreeing to retain workers part-time -- the so-called 
"short-shift" scheme.  Merkel also recently floated the idea 
of new tax cuts )- basically raising the threshold for 
higher-level incomes )- to co-opt rival SPD tax cut schemes, 
and appease her CSU allies.  This being Germany, however, a 
number of critics have attacked her proposals as being 
fiscally imprudent in light of soaring deficits.  Poorer 
states also fear it could mean a reduction of federal 
subsidies. 
 
 
IT'S ALL ABOUT JOBS 
-------------- ----- 
 
¶8. (U) Whatever positive signs some German businesses may 
see, there is no good news on the jobs front.  The 
unemployment rate stands at 8.4 percent -- up from 7.8 
percent in November 2008 -- and is rising.  The number of 
jobless could grow by one million to 4.7 million by the end 
of 2010, according the Germany's leading economic institutes. 
 The IFO employment barometer is at its lowest level since 
July 2003.  Job losses in the construction, automotive and 
chemical sectors are expected to be particularly severe. 
This will likely depress consumption for some time; indeed, 
the most recent consumer data showed no signs of a 
turn-around. 
 
¶9. (U) There is some concern that social stability could 
start to crack.  Prior to the April 22 "Summit," the head of 
the German Trade Union Federation (DGB), Michael Sommer, 
warned that mass layoffs would be taken as a "declaration of 
war" by workers and unions.  He added that a contraction of 6 
percent was comparable to the economic situation in the early 
1930s, which helped bring the Nazi regime to power.  "You 
know how people react when they are losing their livelihood," 
Sommer said.  Sommer for one would like to see a third 
economic stimulus package to safeguard jobs.  SPD 
presidential candidate Gesine Schwan agreed, and warned that 
the ongoing economic crisis could unleash violent reactions 
 
BERLIN 00000517  003.2 OF 003 
 
 
from a desperate population.  These comments, however, drew 
sharp rebukes from Chancellor Merkel, President Koehler, and 
business and economic commentators, who accused Sommer and 
Schwan of "scare-mongering." 
 
¶10. (U) In fact, worker demonstrations have thus far been 
peaceful.  About 3,000 workers -- among them 1,200 French 
factory workers -- gathered in Hannover on April 23 to 
protest plans by car parts supplier Continental to close 
factories in Germany and France, which would eliminate 1,900 
jobs over the next 12 months, and no major labor upheaval is 
expected by most analysts.  Even the annual May Day protests 
were less traumatic than some had predicted.  Germany,s 
comprehensive social system may be dampening the extent of 
the unrest. 
 
COMMENT 
------- 
 
¶11. (SBU) Despite a lack of deliverables, Merkel's April 22 
"Economic Summit" reminded many German voters that the 
steadiest hand was already at the helm.  While the Chancellor 
brandished her mastery of the most important campaign issue, 
the economy, her rival for Chancellor Frank-Walter 
Steinmeier, also present, appeared once again to be a bit 
player.  Although the recession's end is not imminent, some 
German businesses are reportedly more confident and 
optimistic about the future.  Rays of hope, however tenuous, 
may be supporting the Chancellor's argument that a third 
stimulus package is not needed, despite rumblings by the 
trade unions.  The legislative timetable likewise makes it 
unlikely the Chancellor could get a package through the 
Bundestag before the September 27 elections even if she 
wanted.  With a deteriorating employment outlook, however, 
pressure on Merkel to stimulate the economy ahead of the 
elections will grow, most likely leading to new pledges to 
boost public spending, cut taxes, or both.  In the meantime, 
smaller measures such as additional funding for "short-shift" 
work and the car scrapping premium may amount to an 
unofficial third stimulus -- this one by stealth. 
Koenig