VZCZCXRO5128
PP RUEHIK
DE RUEHRL #1578/01 3480922
ZNR UUUUU ZZH
P 140922Z DEC 09
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 6047
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUEHDF/AMCONSUL DUSSELDORF PRIORITY 0257
RUEHFT/AMCONSUL FRANKFURT PRIORITY 8337
RUEHAG/AMCONSUL HAMBURG PRIORITY 0344
RUEHLZ/AMCONSUL LEIPZIG PRIORITY 0251
RUEHMZ/AMCONSUL MUNICH PRIORITY 2217
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 BERLIN 001578 
 
SENSITIVE 
 
STATE FOR EEB (NELSON, HASTINGS), EEB/IFD/OMA 
(WHITTINGTON), DRL/ILCSR AND EUR/CE (HODGES, SCHROEDER) 
LABOR FOR ILAB (BRUMFIELD) 
TREASURY FOR SMART, MEYER, ICN (NORTON), IMB (MURDEN, 
MONROE, BEASLEY) AND OASIA 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB ETRD GM PREL
SUBJECT: GERMANY DEFENDS EXPORT MODEL BUT EXAMINES WAYS TO 
BOOST CONSUMPTION 
 
BERLIN 00001578  001.3 OF 003 
 
 
¶1. (SBU) SUMMARY.  In December 7 meetings in Berlin, German 
officials expressed a cautious optimism about Germany's 
recovery, but stressed that downside risks remain, 
particularly weaknesses at state-owned banks 
("Landesbanken").  They were also concerned about Greece's 
debt position and the threat it could pose to the Eurosystem, 
suggesting that Greece might need an IMF program to ensure 
fiscal sustainability.  Officials defended Germany's 
export-led growth model, while reluctantly acknowledging the 
need to increase domestic consumption and address the broader 
issue of imbalances in the G-20.  On G-20 priorities, 
financial market regulatory reform and Chancellor Merkel's 
Charter for Sustainable Economic Activity top Germany's list. 
 Economics Ministry officials saw a continuing consultative 
role for the G-8.  END SUMMARY. 
 
FINANCE MINISTRY: ROLF WENZEL 
----------------------------- 
 
¶2. (SBU) Rolf Wenzel, Director General, Ministry of Finance, 
told U.S. Treasury Deputy Assistant Secretary Christopher 
Smart, Director for Europe and Eurasia Eric Meyer, 
Representative for Europe Matthew Haarsager, and 
International Economist Lawrence Norton, that he was 
concerned about the UK and Greek budget deficits.  He noted 
that the European Central Bank (ECB) wanted financial market 
support measures to be withdrawn.  While the Baltics were "on 
track," Bulgaria and Romania needed to address governance and 
corruption issues.  Wenzel dismissed the notion that 
Germany's troubled state-owned banking ("Landesbank") sector 
would weigh on the federal government's finances, claiming 
they were "someone else's problem" -- namely, that of the 
state government and savings bank association owners. 
 
¶3. (SBU) Wenzel was interested in reforms to financial sector 
compensation in the United States, saying they were "high on 
the political agenda."  On the G-20's balanced growth 
framework, he stressed the need to focus more on exchange 
rate policy, noting that the IMF recommended an appreciation 
of the Chinese renminbi.  He argued that German stimulus 
spending on construction projects and child credits were 
intended to increase domestic consumption, but thought there 
was little else the government could do to decrease its 
surpluses.  Wenzel bristled at the suggestion that Germany 
might cut the value-added tax (VAT) rate to boost 
consumption, arguing that the consequences would be too dire 
on public finances and that most Germans would just save the 
money anyway.  He likewise rejected the suggestion that 
Europe shies away from confronting Ukraine because of its 
dependency on Russian gas that traverses the country.  Wenzel 
said he believed the European Bank for Reconstruction and 
Development (EBRD) would remain flexible on shareholder 
participation in a temporary capital increase. 
 
ASSOCIATION OF GERMAN BANKS: BERND BRABAENDER 
--------------------------------------------- 
 
¶4. (SBU) Bernd Brabaender, Managing Director, Association of 
Germany Banks estimated that private German banks had already 
written off 90 billion euros in "toxic assets," with another 
70 billion euros to come. German banks would likely perform 
well in the 4th quarter of 2009 and 1st quarter of 2010, but 
do less well thereafter -- much depends on the global 
recovery.  Of concern is the Landesbank sector, which is full 
of "zombie banks." Brabaender saw the Copenhagen climate 
talks as a potential boon for Germany, as German firms are on 
the "cutting edge" of green technology. 
 
¶5. (SBU) On banking supervision, Brabaender considered the 
recent decision to transfer authority from the regulator 
Bafin to the Bundesbank irrelevant and said that the 
government needed to pay more attention to EU financial 
regulatory reform.  He noted that German supervisors were 
under pressure not to exacerbate the "credit crunch" by being 
too strict.  On Tier 1 capital, German private banks are in 
good shape, averaging 10 percent, though new rules under 
 
BERLIN 00001578  002.3 OF 003 
 
 
discussion in the Basel Committee could force them to start 
building new capital soon, further restricting credit.  He 
thought restarting securitization markets could help, 
although this would require some sort of government guarantee 
and the German public is deeply skeptical.  Brabaender 
worried about the long-term consequences of Germany's 
short-shift ("Kurzarbeit") program, and how productivity 
might be hurt. 
 
CHANCELLERY: ANDREAS NICOLIN 
---------------------------- 
 
¶6. (SBU) Andreas Nicolin, economic advisor at the 
Chancellery, was cautious on Germany's economic outlook, 
adding that German banks would have further write downs. 
Germany and France need a common line on budget deficits 
within the EU to encourage consolidation in countries like 
Greece, he said.  The IMF could more effectively deal with 
Greece than could the EU, where member states are reluctant 
to be tough.  Nicolin acknowledged that proposed tax cuts -- 
8.5 billion euros in 2010 and 19 billion in 2011 -- would 
complicate Germany's fiscal situation.  The hope is, however, 
that stronger growth will increase tax revenues.  On 
imbalances, Nicolin said Germany's export-led growth model 
was sustainable, and that the onus was on current account 
deficit countries within the Eurozone to "improve 
competitiveness." 
 
¶7. (SBU) Nicolin said Germany reluctantly accepted the G-20's 
balanced growth framework.  Germany's real priorities in the 
G-20, however, are: 1) financial market regulation; and 2) 
Merkel's Charter for Sustainable Economic Activity.  On the 
former, Germany will push for the implementation of agreed 
action plans.  On the latter, the focus will be on getting an 
agreed Charter document by the end of 2010, which he 
acknowledged would be very difficult in light of the G-20's 
diverse membership.  Only after agreeing on a draft, which 
would need to be "soft enough" to get buy in from Brazil, 
China and India, and "not refer to the acquis of various 
international organizations like the OECD," should the 
implementation phase begin.  The plan is to consult with both 
the U.S. and major emerging economies by spring 2010, after 
which Germany will put forward its new paper.  Nicolin 
expressed frustration at the high number of top-level 
meetings next year due to the transition from G-8 to G-20 
format.  He said that Russia, Japan and Italy wanted to keep 
the G-8 as a key forum.  The G-8's development agenda still 
makes sense, but other elements should become more 
consultative.  (COMMENT: This contradicts recent comments by 
Development Ministry (BMZ) officials, who would like 
development moved to the G-20.) 
 
ECONOMICS MINISTRY: KNUT BRUENJES 
--------------------------------- 
¶8. (SBU) Ministry of Economics officials -- including Knut 
Bruenjes, Deputy Director General; Helen Winter, Head of 
Division, International and European Economic and Monetary 
Policy; and Matthias Koehler, Deputy Director, G8 Issues -- 
focused on exit strategies and worries over Greek bond 
spreads.  Bruenjes thought that Germany's strong economic 
performance would boost other EU economies.  He mentioned 
changes stemming from ratification of the Lisbon Reform 
Treaty, including introduction of majority voting on 
intellectual property rights (IPR) and investment issues, as 
well as the end of bilateral investment treaties among member 
states.  He dismissed the notion of altering the German 
economy's export orientation, but acknowledged Germany was 
looking at ways to boost domestic consumption.  One approach 
it will not pursue is allowing wage inflation to erode 
competitiveness.  Winter stressed differences between the 
current account surpluses of Germany and China, whose surplus 
is linked to currency manipulation.  Officials noted concerns 
over possible inflationary consequences of U.S. fiscal and 
monetary policy. 
 
¶9. (SBU) Koehler fretted that the transition from G-8 to G-20 
 
BERLIN 00001578  003.3 OF 003 
 
 
would spell a smaller role for Europe and Germany.  The G-8 
Heiligendamm Process, which includes China, India and Brazil, 
strikes an appropriate balance between involving important 
new economic players and the need to keep numbers to a 
workable level.  The G-8 can continue to be important, 
especially on issues like climate and development, and as an 
informal preparatory core for G-20 discussions.  Finance 
Ministers should continue to meet in G-7 format, where 
financial market regulation is an appropriate topic.  Worried 
about trends towards a "G-2" with only the U.S. and China at 
the table, Bruenjes proposed that the U.S. and EU establish a 
common approach to China.  He also said that Russia's customs 
union with Belarus and Kazakhstan would raise tariffs on some 
German goods and complicate its WTO accession, which the 
Russians want to complete in 2010. 
 
COMMENT 
------- 
 
¶10. (SBU) German government interlocutors were on the 
defensive when it came to Germany's current account surplus. 
There is a high degree of skepticism that Germany can or even 
should wean itself off exports or address its high savings 
rate.  The government claims to be taking steps to increase 
domestic consumption via controversial tax cuts totaling 27.5 
billion euros.  (NOTE: The first installment of the two-year 
package, worth 8.5 billion euros, has cleared the Bundestag 
(lower house) and appears likely to pass the Bundesrat (upper 
house) within days.  This initial package would adjust 
corporate tax rules, cut tax on hotel stays and increase 
child benefits.)  It is unclear, however, what effect these 
measures will have on domestic consumption.  Germany will 
have to begin reducing its budget deficit to comply with EU 
and constitutional limits by 2013, which could curtail 
consumption.  It may therefore also be necessary to examine 
ways Germany can stoke domestic consumption outside the tax 
code. 
MURPHY