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Viewing cable 09BERLIN1243, CHANCELLOR MERKEL'S NEW COALITION: WHAT IT MEANS

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Reference ID Created Released Classification Origin
09BERLIN1243 2009-10-05 13:30 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Berlin
VZCZCXRO1793
PP RUEHIK
DE RUEHRL #1243/01 2781330
ZNR UUUUU ZZH
P 051330Z OCT 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 5387
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCNMEM/EU MEMBER STATES
RUCNFRG/FRG COLLECTIVE
UNCLAS SECTION 01 OF 05 BERLIN 001243 
 
SENSITIVE 
 
STATE FOR EEB (NELSON), DRL/ILCSR AND EUR/CE (HODGES, 
SCHROEDER) 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR ICN (KOHLER) 
 
SIPDIS 
 
E.O. 12356:  N/A 
TAGS: ECON EFIN PGOV PREL GM
SUBJECT: CHANCELLOR MERKEL'S NEW COALITION: WHAT IT MEANS 
FOR GERMANY'S ECONOMIC AGENDA 
 
REF: BERLIN 01138 
 
BERLIN 00001243  001.2 OF 005 
 
 
1.  (SBU) SUMMARY: Germany's election of a center-right 
governing coalition, composed of the Christian Democratic 
Union (CDU), its Bavarian sister party the Christian 
Social Union (CSU), and the Free Democratic Party (FDP), 
was supposed to herald a shift to a more business- 
friendly government.  The reality may be something less 
than that as campaign rhetoric collides with exploding 
deficits and other constraints; tax cuts, for instance, 
will be limited as the government strives to rebalance 
budgets.  On economic and social issues, look instead for 
a continuation of many of the same policies of the Grand 
Coalition, with a few concessions to business.  The same 
goes for labor and social welfare programs.  Although the 
CDU/CSU took pains in the election campaign to present 
themselves as ideological bedfellows with the FDP, 
Merkel, as head of the coalition government staked out 
economic positions that frequently mirrored those of her 
SPD Finance and Labor Ministers.  With Merkel still at 
the helm, any drift to the right will be tempered by the 
Chancellor's own commitment to "social market economy" 
principles.  Major cutbacks on aid to job-sensitive 
industries like autos and on health care spending are 
therefore unlikely, as are an early privatization of 
Deutsche Bahn and a shake-up of labor hiring and firing 
policies.  A similar dynamic may play out on the energy 
and environmental agenda with Merkel, the committed 
environmentalist, in a tussle with the more pro-growth 
FDP.  The FDP is also unlikely to win a battle with 
Merkel to loosen constraints on German business with 
Iran.  Ultimately, the makeup of Merkel's cabinet (see 
also septel) may be as consequential for the Black-Yellow 
coalition's economic policies as the negotiated coalition 
agreement.  END SUMMARY. 
 
 
THE ECONOMIC AGENDA: CONTINUITY AND MODEST CHANGE 
--------------------------------------------- ---- 
 
2.  (SBU) As the new coalition prepares itself to take 
power, initial economic challenges will be largely 
tactical.  (NOTE: Chancellor Merkel (CDU), Minister- 
President Horst Seehofer (CSU) and presumed Vice 
Chancellor and Foreign Minister Guido Westerwelle (FDP) 
are aiming to sign a coalition agreement by November 9 at 
the latest, before the anniversary events for the fall of 
the wall.) The Chancellor, accustomed to moderating 
demands from her SPD partner to the left, will now find 
herself at the other end of the political spectrum, as 
she tries to balance pro-business FDP objectives with 
what some refer to as her "social democratic course." 
Early statements indicate that she intends to block FDP 
assaults on some policy positions taken by the previous 
Grand Coalition.  Potential flashpoints include financial 
market regulation, targeted state intervention on behalf 
of troubled industries and companies, and health care 
policy.  CDU sources tell us consideration of these issue 
areas may also guide the party as it parcels out the 
various ministries.  "In financial matters, working with 
the FDP will become more difficult, certainly in the 
beginning," a Chancellery contact told us.  The party 
will have a "steep learning curve and will have to modify 
and moderate its positions on several policy areas." 
 
3.  (SBU) A key issue to watch will be tax reform 
(reftel); the CDU and FDP will have to deliver, after 
making this their central economic campaign issue.  The 
CDU envisaged decreasing the corporate tax rate, and 
using tax incentives to encourage public and private 
sector research and development.  The FDP promised a 
radical overhaul of the entire system, with lower rates 
at some levels but higher rates at others; the net 
effect, however, would be a 35 billion euro loss in 
revenues, according to independent estimates.  Tax policy 
could, therefore, be a point of contention, but lower 
rates for small earners and for families, as well as some 
cuts in the corporate tax, are likely outcomes in any 
event. 
 
4.  (SBU) With an expected budget deficit of more than 2 
percent this year and 4 percent in 2010 -- just as mid- 
 
BERLIN 00001243  002.2 OF 005 
 
 
term targets for Germany's balanced budget amendment kick 
in, mandating structural deficits of no more than 0.35 
percent -- the new coalition will face strong pressures 
on revenues.  A VAT hike, at least in the near term, is 
unlikely since Merkel publicly ruled it out.  Tax cuts, 
however, could be accompanied by a "streamlining" of the 
tax code: code for phasing out subsidies.  Cutbacks in 
pensions, health care, unemployment support will be more 
difficult, since less funding for these social systems 
would increase costs for companies, which the FDP would 
staunchly oppose.  A senior Chancellery official 
envisages a net fiscal impact of around 10 billion euros 
at the most.  Bottom line: the scope for cuts is limited. 
 
THE LABOR/SOCIAL AGENDA: MERKEL'S BACKYARD 
------------------------------------------ 
 
5.  (SBU) In their initial reactions to the election 
result, ranking union leaders warned the new coalition 
government against embarking on a "neo-liberal policy 
course" and to respect worker rights.  The main reason 
for their concern is the FDP's election platform which, 
inter alia, calls for limiting labor's role in company 
advisory boards and work councils, and for measures to 
weaken protection against dismissal rules and collective 
bargaining coverage. 
 
6.  (SBU) Disappointed with the election outcome, German 
Trade Federation (DGB) President Michael Sommer warned 
against "an eradication" of the social-welfare system due 
to the crisis.  In a televised interview the day after 
the election, Sommer reminded Chancellor Merkel to keep 
her promise not to weaken the existing protection against 
dismissal regulations.  Sommer characterized FDP demands 
as a "declaration of war" against the unions, and warned 
the new coalition of "consequences." If necessary, unions 
would be able to mobilize resistance, Sommer held. 
 
7.  (SBU) Despite the sharp public rhetoric, union 
leadership knows it needs to continue on its current 
moderate course, including restraint on wage increases. 
In order to influence policymakers, leaders have 
scheduled a meeting with Merkel to discuss the economic 
crisis and the new coalition agreement.  Union leaders 
know that Merkel is their potential ally in the coalition 
and will not hesitate to woo her.  In a similar vein, 
Hubertus Schmoldt, outgoing chair of the Mine, Chemical 
and Energy Workers Union (IG BCE) noted, "The election 
result is obviously not what we had wanted, but we will 
look for a dialogue and cooperation." 
 
8.  (SBU) In a September 29 meeting, IG Metall's North 
Rhine-Westphalia district leader Oliver Burkhard told 
Embassy that the election outcome could be attributed, in 
part, to the SPD's obvious lack of "compassion" for the 
"ordinary people" most seriously affected by former 
Chancellor Schroeder's Agenda 2010.  Burkhard was 
cautiously optimistic that a CDU-led government might 
correct some shortcomings in the labor market and pension 
reforms, and did not expect major changes in labor law or 
worker participation rights.  "The FDP will not prevail," 
he said, referring to statements by prominent CDU leaders 
in North Rhine Westphalia such as Pofalla (a possible new 
Labor Minister), NRW Labor Minister Laumann (chair of the 
CDU's labor wing, and also a potential candidate for 
Labor Minister) and NRW M-P Juergen Ruettgers, who 
immediately after the elections strongly warned the FDP 
not to expect the new government to touch hot button 
issues like protection against dismissals, co- 
determination or health insurance system.  The coalition 
leader, Merkel, is likely to agree. 
 
 
STATE BAILOUTS: THE OPEL TEST CASE 
---------------------------------- 
 
9.  (SBU) Opel and Hypo Real Estate (HRE) may be early 
test cases for the new coalition.  Voices in the FDP (and 
CDU/CSU) bemoaned the Grand Coalition's willingness to 
prop up struggling firms through take-over, loan 
guarantees and other market interventions.  Serious 
debate, however, centered mainly on which firms were 
 
BERLIN 00001243  003.2 OF 005 
 
 
systemically important enough to be saved, and how many 
jobs were at stake. 
 
10. (SBU) During the campaign, FDP-leader Guido 
Westerwelle criticized Merkel's handling of the Opel 
bailout, but steered clear of dismissing a government 
role in saving Opel jobs, some of which are found in his 
home state of North Rhine-Westphalia.  The Chancellor 
could use a calculated confrontation with the FDP to 
demonstrate CDU compassion.  Where such a strategy would 
leave the CSU and, in particular, the current Economics 
Minister zu Guttenberg, is an open question, since zu 
Guttenberg once advocated insolvency for Opel.  On the 
other hand, the Chancellor is also vulnerable.  As the 
Magna deal becomes more complicated and mired in 
controversy, it could well become more draining on 
taxpayers.  Not facing these constraints, the FDP could 
argue against shoveling more public funds into Opel. 
 
 
PRIVATIZATION: NOT SO EASY 
-------------------------- 
 
11.  (SBU) The previous government was committed to the 
privatization of the public sector German Railway 
(Deutsche Bahn - DB).  Evidence of mismanagement, 
however, forced repeated delays of the plan to place DB 
stock up for sale.  Analysts have concluded that the 
troubled company is no longer a viable candidate for 
privatization.  In addition, the protracted recession has 
hurt railways badly, making it difficult to find 
investors willing to purchase DB stock.  Ever the 
pragmatist, Chancellor Merkel would likely be willing to 
delay privatization indefinitely.  The FDP, by contrast, 
is committed to privatization of public sector holdings 
on ideological grounds and could press for the plan to 
proceed, even if this is not the right time. 
 
 
NUCLEAR PHASE-OUT ON HOLD? 
-------------------------- 
 
12.  (SBU) During the campaign, the SPD tried to make 
nuclear power into an issue, but it failed to resonate 
with the voters.  The SPD argued that under no 
circumstances would it delay the phase-out of Germany's 
nuclear power plants.  (NOTE: The current arrangement 
would close the last reactor some time around 2020.) The 
FDP favored extending the life of the reactors.  Merkel 
refused to be pinned down, stating only that nuclear 
power must serve as "bridging energy" until renewable 
energy sources are fully up and running. 
 
13.  (SBU) With the SDP now in opposition, the CDU-FDP 
coalition is likely to become more sympathetic toward 
nuclear power.  The CEOs of energy giants RWE and E.ON 
have offered to turn over to the government part of the 
additional earnings generated by any extension of nuclear 
power.  As the EU's cap and trade system becomes more 
widespread, nuclear power could become more attractive. 
Should Germany proceed with the phase-out, it has few 
viable options to replace the power generated by nuclear 
reactors, which currently provide 23 percent of the 
country's power needs.  The introduction of more coal- 
fired plants with their large CO2 emissions would be 
prohibitively expensive while greater use of natural gas 
would increase Germany's dependence on Russia, the only 
viable supplier.  A CDU-FDP coalition could opt for an 
extension, although it would touch off a serious battle 
with the opposition and a hot public debate; Germans from 
across the political spectrum oppose nuclear power. 
 
 
HOW GREEN ARE YOU REALLY? 
------------------------- 
 
14.  (SBU) Under the Grand Coalition, Germany embraced 
environmentalism with an enthusiasm rarely seen in other 
countries.  Large tax-payer subsidies have fueled the 
creation of an enormous renewable power industry and 
Germany has surpassed its Kyoto Accord goals for curbing 
CO2 emissions.  This has come at a heavy price and become 
 
BERLIN 00001243  004.2 OF 005 
 
 
the cause of considerable complaint from many of those 
who voted for the incoming CDU-FDP coalition.  More 
conservative voters argue that Germany should not take an 
economic hit to meet its climate change and environmental 
goals, while economic rivals like China and India ignore 
global warming and the environment to procure an 
advantage. 
 
15. (SBU) Originally hailed in the media as the "Climate 
Chancellor" for her efforts to elevate awareness of 
environmental concerns, Merkel, along with the SPD, 
implemented large, taxpayer-subsidized plans that helped 
build a world-renowned renewable energy industry.  Merkel 
remains under pressure from German heavy industry 
concerned about carbon leakage and resulting job losses, 
however, especially in the auto, steel, chemical, 
aluminum, and cement industries.  Last December, 
Chancellor Merkel and the Economics Ministry lobbied the 
EU Commission to exempt German heavy industry from the 
planned auction of carbon permits in the EU Emissions 
Trading Scheme (ETS).  She also expressed deep opposition 
to EU legislation seeking to tax emissions from large 
cars, which would hurt the luxury sedans produced by 
German automakers.  Against the backdrop of a shaky 
economy, we expect to see the new coalition seek to 
navigate between the Scylla of climate advocates and the 
Charybdis of heavy industry.  Merkel will likely seek to 
execute her domestic climate renewable and energy 
efficiency plan, but with little further ambition, 
particularly if she is tugged back by the FDP. 
 
COMPLICATING SANCTIONS AND EXPORT CONTROLS 
------------------------------------------ 
 
16. (SBU) The shift in coalition partners from the SPD to 
the pro-business/pro-export FDP may also complicate 
Merkel's desire to tighten sanctions against Iran should 
diplomacy fail.  A FDP-led MFA is likely to keep the 
interest of their core business constituency in mind, 
particularly in times of financial crisis, and may be 
reluctant to back stronger sanctions that would 
negatively impact German exports.  In addition, the new 
coalition may become more liberal on the exports of "war 
weapons," particularly in politically sensitive cases 
that are decided by the "Bundessicherheitsrat" (national 
security council) - a panel composed of Merkel and the 
Ministers of Foreign Affairs, Defense, Finance, 
Economics, Interior, and Justice, which will be populated 
exclusively by CDU/CSU and FDP party members.  On the 
other hand, the export control authority for civil and 
dual-use goods, BAFA, is an independent agency within the 
Ministry of Economics and in theory is independent from 
any shift in the governing coalition.  And if Merkel 
decides on tougher sanctions for security considerations, 
that will trump the concerns of German business in Iran. 
 
 
MINISTERIAL ROULETTE 
-------------------- 
 
17.  (SBU) While speculation over future Black-Yellow 
policies is becoming a national pastime, the direction of 
the new coalition's economic, social and environmental 
policies is largely a question of who will lead the 
various ministries (see septel for full cabinet 
discussion).  The Finance Ministry is seen as the big 
prize, with the Economics Ministry trailing somewhat 
behind.  Although the Labor Ministry does not have the 
same cache, it is an important bellwether of social 
issues.  Options follow: 
 
--Finance: CDU will like to control the purse strings, 
but lacks financial expertise.  Hesse Bundestag Member 
Roland Koch is mentioned as a possibility, but he has 
shown no signs of interest.  Current Economics Minister 
zu Guttenberg is another, as is Hans-Otto Solms (FDP). 
Bottom line: No clear front runner. 
 
--Economics: Although the FDP may want it, it has only 
one viable candidate: Rainer Bruederle.  Succeeding the 
youthful and dynamic zu Guttenberg will be a hard act to 
follow for the soft-spoken, 60 year-old Bruederle. 
 
BERLIN 00001243  005.2 OF 005 
 
 
Moreover, zu Guttenberg is rumored to want to stay on as 
Economics Minister. 
 
--Labor: The CDU wants it to emphasize its credentials on 
social policies. The Chancellor may want to reward loyal 
stalwarts such as CDU Secretary General Ronald Pofalla. 
Josef Laumann, Social Affairs Minister in North Rhine- 
Westphalia is another leading contender (see septel). 
 
MURPHY