VZCZCXRO0382
PP RUEHIK
DE RUEHRL #1340/01 2991749
ZNR UUUUU ZZH
P 261749Z OCT 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 5577
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
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RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0243
RUEHFT/AMCONSUL FRANKFURT PRIORITY 8294
RUEHHT/AMCONSUL HAMILTON PRIORITY 0006
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RUEHMZ/AMCONSUL MUNICH PRIORITY 2196
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UNCLAS SECTION 01 OF 04 BERLIN 001340 
 
SENSITIVE 
 
STATE FOR EEB (NELSON), DRL/ILCSR AND EUR/CE (HODGES, 
SCHROEDER) 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR ICN (KOHLER) 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL GM
SUBJECT: GERMANY'S NEW COALITION AGREEMENT: THE DOMESTIC 
AGENDA 
 
REF: A. BERLIN 1243 
     ¶B. BERLIN 1337 
     ¶C. BERLIN 1167 
 
BERLIN 00001340  001.3 OF 004 
 
 
¶1. (SBU) SUMMARY.  Germany's recently elected CDU/CSU-FDP 
coalition signed a Coalition Agreement -- the document 
setting out policy priorities for the next four years -- on 
October 24, 2009.  The agreement includes several elements -- 
tax cuts worth around 24 billion euros for individuals and 
private firms, opposition to a national minimum wage, and 
others -- intended to please pro-business interests.  In an 
important break with German social tradition, the new 
government will also require individuals to bear more of the 
burden of paying for healthcare.  Likewise of note is the 
commitment to maintain nuclear power generating 
infrastructure for the time being.  In most respects, 
however, the coalition agreement does not represent a radical 
break with the past.  The CDU/CSU apparently tempered many of 
the FDP's more radical proposals, such as a complete overhaul 
of the tax system (REF A).  The balanced budget amendment 
further limits the government's room for maneuver, casting 
doubt over whether promised tax cuts will ever really 
materialize.  Chancellor Merkel's choice of political 
heavyweight Wolfgang Schaeuble as Finance Minister is a 
telling indicator of where the country's real challenges lie. 
 Schaueble will have his hands full as he balances the need 
to boost economic growth with ever-tightening fiscal 
constraints.  END SUMMARY. 
 
ECONOMIC/GLOBAL AFFAIRS HIGHLIGHTS 
---------------------------------- 
 
¶2. (U) Below are highlights of key domestic elements in the 
Coalition Agreement between Chancellor Angela Merkel's 
Christian Democratic Union (CDU)/Christian Social Union (CSU) 
and the Free Democratic Party (FDP) (the "Black-Yellow" 
coalition) signed on October 24, 2009 (see REF B for foreign 
policy provisions): 
 
MACROECONOMICS/TRADE:  There was agreement to promote common 
principles for the global economy based on Chancellor 
Merkel's "Charter for Sustainable Economic Activity."  The 
coalition supports a speedy conclusion of the WTO trade 
round, and a level-playing field for German producers on 
world markets.  Aviation, aerospace and maritime industries 
are a focus. 
 
TAXATION: The coalition agreed to income tax cuts for 
individuals and businesses worth 24 billion euros.  Tax 
brackets will be simplified, and companies can more easily 
deduct interest expenses and losses from their corporate tax 
bill.  The inheritance tax will be lowered, and it will be 
easier to pass on businesses to heirs.  The child tax credit 
will be raised, as will the tax-free family allowance. 
Special sales tax treatment for mail delivery companies will 
be abolished, possibly spelling the end of Deutsche Post's 
tax-exempt status.  It agreed to a reduced Value Added Tax 
(VAT) of 7 percent for hotels and restaurants (compared with 
the normal 19 percent rate). 
 
BUDGET:  There was agreement to implement mid-term targets 
associated with Germany's balanced budget amendment 
("Schuldenbremse") as of 2011.  To this end the coalition 
wants to strengthen the cabinet's budgetary powers.  It plans 
to keep the rise in government spending below the rate of GDP 
growth, and prohibit spending on top of existing commitments. 
 Details on further cuts are outstanding and will likely be 
announced along with the FY 2010 budget, currently under 
review. 
 
FINANCIAL MARKETS: The coalition wants the Bundesbank to have 
responsibility for banking supervision at the expense of the 
bank regulator BaFin.  It aims to set stricter capital 
requirement rules for banks and eliminate regulatory gaps. It 
plans to link compensation more strongly to long-term 
performance.  The coalition would like to establish 
resolution authority to enable the government to restructure 
 
BERLIN 00001340  002.3 OF 004 
 
 
and wind down large, systemically important companies that 
risk failure.  It also agreed to create a common venture 
capital market and reduce hurdles to the German Real Estate 
Investment Trusts (REITs) market.  It supports efforts to set 
up a European Rating Agency. 
 
EMPLOYMENT/LABOR:  The coalition opposes introduction of a 
national minimum wage, but advocates a legal ban on "immoral" 
wages; i.e., one-third below average wages in a given sector. 
 Existing job protection rules will remain, but the coalition 
wants to facilitate temporary contracts.  There was agreement 
to improve rules on labor market entry for non-Germans, while 
cracking down illegal workers.  The coalition agreed to 
prolong benefits for the long-term unemployed.  It would like 
to reform administration of unemployment benefits and 
placement services.  To keep non-wage labor costs stable, the 
coalition will provide around 16 billion euros for the 
Federal Labor Agency.  The unemployment contribution rate 
will increase from 2.8 percent to 3 percent as of 2011.  The 
agreement also endorses collective bargaining. 
 
PENSIONS:  The gradual increase in the retirement age to 67 
as of 2012 will remain in place.  A government commission is 
to examine how to avoid "poverty in retirement."  Moreover, 
the new government plans to introduce a unified old age 
pension system for Eastern and Western Germany. 
 
HEALTH:  One of the most controversial discussions in the 
coalition negotiations was the argument over who pays for new 
healthcare costs.  As of 2012, employers' contributions will 
be frozen.  Individuals will have to pay any additional costs 
thereafter, meaning that the burden of healthcare will begin 
to shift from business and toward employees.  In addition, 
employees will have to contribute more to the insurance 
scheme for the elderly -- further whittling away at a key 
element of Germany's social compact.  Meanwhile, the 
coalition agreed to inject 4 billion euros into the public 
healthcare system and to boost competition.  A commission 
will work on reform of the health fund.  In the future, 
insurers will have more leeway to set premium levels. 
 
DEVELOPMENT ASSISTANCE:  Donor coordination and improved 
efficiency will continue to be guiding principles.  There 
will be a greater emphasis on private sources of revenue for 
development assistance.  Coalition partners had previously 
ruled out a merger between the Ministry of Foreign Affairs 
and Development Ministry. 
 
TRANSPORTATION INFRASTRUCTURE:  There was agreement to 
accelerate infrastructure expansion, involving greater use of 
tolls.  The coalition hopes to improve competitive conditions 
for the logistics sector, especially in ports and on the 
roads.  It wants to improve public transportation law and 
conditions to spur competition. 
 
AVIATION:  The coalition intends to amend the Aviation Law to 
ensure that economic, environmental and noise protection 
requirements are treated equally for night flights. 
Emissions trading for airlines are to ensure competitive 
neutrality.  There will be a push for Single European Skies, 
and a review of the privatization of the German Air Traffic 
Service. 
 
RAIL:  The coalition agreed to privatize the State Railroad 
if conditions permit.  Rail infrastructure, stations and 
railroad energy systems will remain under state control. 
Railroad regulatory authorities will be strengthened to 
improve competition.  Advantages for railroads over long 
distance coach services will be phased out. 
 
BROADBAND: The coalition will pursue implementation of the 
broadband strategy announced in February 2009 to expand 
access to all households and increase available bandwidth. 
The coalition plans to expand e-government, secure net 
neutrality and foster energy efficiency in IT usage. 
 
IPR AND COPYRIGHT PROTECTION:  There was agreement to reform 
 
BERLIN 00001340  003.3 OF 004 
 
 
the copyright law to improve protection and facilitate 
enforcement. The coalition plans to strengthen the legal 
framework for the protection of intellectual property rights 
and facilitate access to industrial property rights for 
small- and medium-sized companies. 
 
ENERGY:  There was agreement that nuclear energy will be 
maintained as a bridging technology until renewable energy 
can replace it.  Work will restart on final storage 
facilities for highly radioactive waste.  The coalition 
agreed to expand renewable energy development, increase 
energy efficiency, and incrementally replace conventional 
energy sources.  The Renewables Law will be amended to 
improve efficiency and reduce over-subsidization of solar 
energy.  A Law on Carbon Capture and Storage (CSS) for high 
efficiency coal power plants is envisaged.  The market for 
pure biofuel will be revitalized.  The coalition aims to 
formulate foreign energy policies to support international 
energy infrastructure projects.  It hopes to improve 
competitive standards on the domestic energy market. Research 
and development will focus on energy efficiency, storage 
technology and smart grids.  Building insulation is to be 
encouraged. 
 
CLIMATE:  The parties affirmed a 2-degree Celsius global CO2 
target and committed to maintaining Germany's leading 
position in climate protection.  They will continue existing 
policies to reduce Germany's emissions by 40 percent of 1990 
levels by 2020, but agreed to review (and adjust, if 
necessary) the measures.  The coalition envisions the 
development of a global carbon market, with certain 
industries exempt from auctioning.  At Copenhagen, they will 
call on developing countries to take on their 
responsibilities using measurable commitments. 
 
INTERNAL SECURITY/COUNTERTERRORISM: The coalition agreement 
provides no new powers for police or security authorities. 
There is a heightened emphasis on ensuring data privacy, 
however. (REF C)  The agreement increases oversight of 
security agencies' use of personal data.  In particular, a 
heightened layer of court approval will be required for 
online investigations of terrorism cases.  The coalition will 
conduct a mid-term review of the recently passed law that 
outlaws training at overseas terrorist camps, and 
criminalizes activities relating to terrorist attack 
preparation and distribution of extremist propaganda.  An 
evaluation will be performed of all government 
security-related databases.  The coalition agreement 
specifically mentions the ongoing U.S.-EU negotiations over 
the Terrorist Finance Tracking Program (SWIFT) and requires 
the coalition to work towards a higher level of data 
protection (no automatic access, strict limitations on use, 
data deletion, clear rules on sharing information with third 
countries and legal redress).  The agreement also aims to 
improve legal protection for victims of trafficking in 
persons and forced marriages. 
 
A FEW WORDS ON THE NEW CABINET 
------------------------------ 
 
¶3. (SBU) Wolfgang Schaeuble (CDU), the 67-year-old due to 
take over the Finance Ministry, is the most experienced 
member of the Merkel cabinet, having served as Chancellor 
Kohl's chief of staff, negotiator of the German unification 
treaty, CDU chairman and twice as Interior Minister. 
Confined to a wheel chair since he was shot and severely 
wounded during a campaign rally in 1990, Schaueble is not a 
close friend of Chancellor Merkel's, especially since she 
helped derail his run for President.  His extremely tough 
negotiating skills and years of government experience, 
however, make him a key figure in Merkel's new cabinet. 
Schaeuble has already indicated that there will be no 
balanced budget within the next four years, and that he is 
ready to take Germany deeper into debt in order to boost 
growth.  At the same time, he has cautioned against assuming 
that the proposed 24 billion euro tax cut is a foregone 
conclusion.  Traditionally, German finance ministers are 
 
BERLIN 00001340  004.3 OF 004 
 
 
fiscal hawks, and we expect Schaueble to be no exception when 
he settles into the job. 
 
¶4. (SBU) The down-to-earth Rainer Bruederle (FDP) will take 
over the Economics Ministry from Germany's most popular 
politician, Karl-Theodor zu Guttenberg (CSU), who in turn is 
moving over to the Defense Ministry (see SEPTEL).  Bruederle 
served as Economics Minister of Rhineland Palatinate for 11 
years.  During that time, he worked closely with regional 
industry and did not shy away from using subsidies to promote 
the regional economy.  Bruederle will play a major role in 
trade policy and may be inclined to engage in an active 
industrial policy, but his Ministry plays second fiddle to 
Finance on economic policy. 
 
¶5. (SBU) It was surprising that the Development Ministry went 
to a Secretary General from the FDP, Dirk Niebel.  Niebel 
will have big shoes to fill in replacing Heidemarie 
Wieczorek-Zeul, who held the office for 11 years and was a 
well known, respected expert in international development 
assistance.  Foreign Minister-designate Guido Westerwelle 
will want to make sure that Niebel's Ministry is in sync with 
the Foreign Ministry.  Niebel is not considered an expert on 
development assistance. 
 
COMMENT 
------- 
 
¶6. (SBU) Predictably, given the FDP's robust presence in the 
new government, business and industry have reacted positively 
to the coalition agreement.  While the unions are less than 
enthusiastic, few of the elements of the coalition agreement, 
if any, mark a radical break with the past on issues of most 
importance to them.  Given the fragility of Germany's 
economic recovery, every new Minister will face difficult 
choices.  Among those with the most challenging jobs ahead of 
him, however, is Finance Minister-designate Wolfgang 
Schaeuble.  He faces an increasingly dismal fiscal outlook, 
but is expected to keep the economy growing.  Schaeuble is 
not one to shrink from a challenge. 
Delawie