Identifier
Created
Classification
Origin
04FRANKFURT9010
2004-10-19 15:02:00
CONFIDENTIAL
Consulate Frankfurt
Cable title:  

BUNDESBANK CHEERS REFORMS BUT WORRIES WHETHER

Tags:  ECON EFIN ENRG GM 
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C O N F I D E N T I A L FRANKFURT 009010 

SIPDIS

E.O. 12958: DECL: 10/18/2014
TAGS: ECON EFIN ENRG GM
SUBJECT: BUNDESBANK CHEERS REFORMS BUT WORRIES WHETHER
GOVERNMENT WILL TAKE NEEDED NEXT STEPS


Classified By: Consul General Peter Bodde, reasons 1.4 (b) and (d)

C O N F I D E N T I A L FRANKFURT 009010

SIPDIS

E.O. 12958: DECL: 10/18/2014
TAGS: ECON EFIN ENRG GM
SUBJECT: BUNDESBANK CHEERS REFORMS BUT WORRIES WHETHER
GOVERNMENT WILL TAKE NEEDED NEXT STEPS


Classified By: Consul General Peter Bodde, reasons 1.4 (b) and (d)


1. (C) SUMMARY. Bundesbank analysts see tangible results
coming out of the current labor-market reforms and a modest
improvement in German competitiveness, but not enough to
engineer a strong turnaround. Further reforms are necessary,
e.g., to expand the number of employed, but the Bundesbank
fears the political will to proceed is weakening. Germany
can readily adjust to higher energy prices as long as
supplies are assured. The Bundesbank sees overall financial
conditions in Germany as good -- with little current threat
of inflation or deflation -- so the focus must remain on
structural reforms. END SUMMARY.


2. (C) EMIN and Consulate rep called on Bundesbank Chief
Economist Willy Friedmann, who opined that general financial
conditions in Germany are good, including sustained low
interest rates, but investment remains surprisingly weak.
The Bundesbank does not/not agree with a recent OECD
conclusion that German companies have high debt loads, since
that study looked only at firms listed on stock exchanges and
not SME's (Friedmann argues German companies overall have
moderate debt-to-equity ratios which have flattened out since
the end of the stock market boom). Rather, Friedmann sees
poor domestic consumer confidence, high costs of doing
business, and in particular, uncertainty over which reform
initiatives politicians will approve and how far they will go
as reasons for German companies' reluctance to invest at
home. The Bundesbank expects an increase in Germans'
consumption spending in the coming year.


3. (C) On economic reforms, Friedmann called the Government's
Agenda 2010 a sound program, but one poorly marketed by
policy-makers. Friedmann expects the "Hartz IV" reforms
(lowering payments to long-term unemployed) will lead to
needed expanded employment in the low-wage sector in 2005.
Bundesbank data already show more flexibility in labor
markets. He noted what other German economic analysts have
suggested: that the long-term unemployed are going to have to
move from the east to the western part of the country where
there are better employment possibilities. The tendency in
German wages remains slightly downwards. Friedmann voiced
support for agreements reached within companies to expand
working hours -- frequently with little or no pay increase --
and for the opposition's proposal to limit the rules
protecting employees' jobs (Kundigungsschutz). These factors
should boost Germany's international competitiveness,
especially if there is further growth in the German low wage
sector. Unfortunately, reform momentum is stalling. Further
tax reform is not on the horizon and Germany's main political
parties still tend to espouse differing proposals (the right
would lessen the burden on companies and investors, while the
left has proposed to shift more of the tax burden onto
wealthier Germans). Pressure from outsourcing is becoming
more intense: a German Chamber of Industry and Trade (DIHK)
study shows that even medium-sized companies are considering
moving production out of Germany. Friedmann said German
companies are raising money for their foreign investments
outside Germany and that this explains why German statistics
do not show large outflows of investment funds.


4. (C) Asked about the potential impact of higher energy
prices, Friedmann predicted "Germany can live with $40
dollars per barrel" or even $50/barrel -- with only a limited
impact on the country's economic outlook -- as long as supply
is assured and demand forces are what pushes up energy
prices. Germany is now less dependent on oil than during
previous price spikes, according to the Bundesbank's chief
economist. The current deceleration of world growth should
ease demand pressure, and barring a true supply interruption,
risk premiums and prices should fall. Since low oil prices
are probably a thing of the past, Friedmann said Germany and
other oil-consuming countries will have to absorb a permanent
negative shift in terms-of-trade.


5. (C) Despite rising energy prices, the Bundesbank sees no
significant inflationary pressures (meaning core inflation of
0.5-1.0% excluding administrative price increases).
Importantly, the risk of deflation has also subsided. German
industry has seen modest nominal wage increases this year and
negative wage drift overall, meaning that Germany will likely
enjoy a modest boost in competitiveness relative to other
Euro-zone countries.
BODDE