VZCZCXRO6344
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHMZ #0166/01 1870550
ZNR UUUUU ZZH
P 060550Z JUL 09
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4836
RUEHRL/AMEMBASSY BERLIN 3496
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 MUNICH 000166 
 
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: EFIN ECON PREL GM
SUBJECT: DIM PICTURE OF ECONOMIC SITUATION IN GERMANY DRAWN BY 
INFLUENTIAL ECONOMIC THINK TANK 
 
SUMMARY 
------- 
 
¶1.  At a conference celebrating the 60th anniversary of the 
influential Munich-based think-tank, ifo, President Hans-Werner Sinn 
dueled with German Federal Bank (Bundesbank) President Axel Weber on 
the outlook for the German economy.  Sinn, one of Germany's most 
influential and most-quoted economists, drew a dim picture of the 
situation in Germany, anticipating a drastic downturn in GDP and 
increasing unemployment.  He mainly held Germany's extreme export 
orientation responsible for the steep recession and strongly 
criticized governmental bailout initiatives.  According to Sinn, the 
overwhelming danger was deflation, not inflation, a point that Weber 
pointedly disputed.  A subsequent panel discussion focused on 
renewing capital requirements for banks and finding a way out of the 
ongoing crisis. Later at a private meeting with Embassy and 
Consulate representatives, Sinn said that only German domestic 
investments could fill the nation's demand gap.  END SUMMARY 
 
No Relief in Sight 
------------------ 
 
¶2.  (U) Professor Hans-Werner Sinn opened the conference celebrating 
the 60th anniversary of the influential think-tank of which he is 
president, ifo, by painting a dreary picture of the German economy. 
Although ifo's own widely-recognized economic barometer, the 
"business climate index," tracked a more optimistic business 
confidence in June, Sinn did not see significant signs of recovery 
in what he called the crisis' "epicenter," the U.S. economy.  Since 
the German business cycle tends to lag that of the U.S. by a 
year-and-a-half, Sinn forecasted that German unemployment would rise 
dramatically until the end of 2010.  He anticipated growth rates of 
minus 6.3 percent for 2009 and around minus 0.3 percent for 2010. 
 
Exports to blame 
---------------- 
 
¶3.  (SBU) Sinn saw Germany's over-dependency on exports as 
responsible for the country's economic situation.  With orders from 
abroad decreasing by 41 percent, he suggested that Germany had 
become a "shock absorber" for the international crisis.  He 
explained his theory by saying that in the U.S., China and UK, 
imports decreased by much more than exports, causing a worldwide 
drop in demand.  Only Germany and Japan, where exports shrank more 
drastically than imports, helped to compensate for this.  (COMMENT: 
In a subsequent meeting with Sinn, EconMin disputed this assertion, 
noting shrinking German and Japanese current account deficits, while 
welcome, had not stimulated world-wide demand.  END COMMENT.)  Sinn 
also identified weak domestic investment as a fundamental "mistake 
in the German business model."  With its 4.1 percent net investment 
quota, Germany is last among all industrial nations.  Unable to find 
profitable investment opportunities in Germany, capital had flowed 
to foreign financial markets, and eventually to risky subprime 
markets, he said.  Sinn joked that the U.S. had effectively gambled 
away German money. 
 
"Bad bank" versus recapitalization 
---------------------------------- 
 
¶4.  (U) Bundesbank president Axel Weber did not agree with Sinn on a 
number of points, including the German government's bank rescue 
plan.  Where Sinn criticized the "bad bank" idea because it was 
based on the shaky assumption that toxic paper would gain value 
after the crisis, Weber supported the government's proposed scheme. 
Getting bad paper off the banks' balance sheets would help them 
raise new capital in financial markets, he claimed.  Sinn instead 
argued the government had no alternative but to become an active 
shareholder in stricken banks in order to recapitalize them.  At the 
same time, Sinn did not foresee an increased danger of inflation 
and, to the apparent irritation of Weber, contended that governments 
needed to turn on the money spigot to avert a dangerous deflationary 
spiral.  Privately, however, Sinn defended Chancellor Merkel's 
limited stimulus plan, and he faulted the U.S. stimulus package for 
seemingly substituting excessive government spending for excessive 
consumer spending. 
 
Short-term bailouts versus long-term prevention 
--------------------------------------------- -- 
 
¶5.  (U)  A panel discussion featuring Professor Sinn, Bundesbank 
President Axel Weber, HypoVereinsbank executive Theodor Weimer, and 
Bavarian Finance Minister Georg Fahrenschon (CSU) rounded out the 
event.  All participants agreed that strengthening capital 
 
MUNICH 00000166  002 OF 002 
 
 
requirements for banks and improving banking supervision were 
essential to avoid a repetition of the crisis.  Fahrenschon and 
Weber stated that the Basel II recommendations, with their limited 
capitalization requirement and narrow European scope, were not 
sufficient.  In a new bank supervisory system, the Bundesbank would 
have to play a key role, Weber said.  Weimer added that the timing 
of new credit requirement legislation was crucial.  Increasing 
capital requirements before a significant recovery from the crisis 
could cause a credit crunch that would further harm industry. 
Fahrenschon agreed and pointed out that banks should be pressed to 
give loans to industry in return for governmental aid, as is the 
case in Austria.  Most of the discussion, however, centered on 
different bailout models: mandatory capital injections (Sinn) versus 
bad banks (Weber). 
 
Sinn: More domestic investment and better supervision 
--------------------------------------------- -------- 
 
¶6.  (SBU)  In a private meeting at the Ifo Institute the next day, 
Sinn told EconMin Robert Pollard, Consul General Nelson, and ConGen 
Munich staff that only German domestic investments could fill the 
demand gap.  This should occur in tandem with higher savings and 
investment in the United States. Only investment meant real growth. 
"Investing in more machines results in higher wages and more 
consumption," Sinn said, and he recommended the same for the United 
States.  "Americans have been addicted to Champagne," he said. 
"Foreign credit exporters like Germany paid for the Champagne.  Now 
the government pays."  He said it was essential to reduce Wall 
Street profits and to "make banking boring again."  Sinn contended 
that the German bank supervisor, BaFin, had also failed, 
particularly in overseeing German banks' international businesses. 
He added that, although other European countries had done a better 
job in that respect, European credit requirements in general were 
insufficient.  "Basel II is not tougher than the current American 
regulations," he said, adding that Basel II was not a meaningful 
goal for the U.S. or the world.  It was important to use today's 
window of opportunity to increase capital requirements.  At the same 
time politicians needed to do everything possible to avoid a credit 
crunch.  Sinn advocated the recapitalization of stricken banks with 
increased capital requirements, despite the fact that this would 
make the bailout more expensive. 
 
NELSON