UNCLAS SECTION 01 OF 02 FRANKFURT 004005

SIPDIS

DEPARTMENT FOR EUR/AGS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EINV PINR GM
SUBJECT: Frankfurt Worries About Its Economic Future

REF: Frankfurt 2147

Sensitive but unclassified; not for Internet distribution.


1. (SBU) SUMMARY: Recent developments including the failure
of the Frankfurt-based German Stock Exchange to take over
its London counterpart have sparked concerns over the
economic future of the Frankfurt/Rhein-Main area in
comparison to other European metropoles. With slow growth
in the area's traditional strongholds (finance and
transportation) and trailing some other cities in high
technology, Frankfurt remains a competitive location for
business but is losing ground relative to other European
cities. City leaders are working to diversify the Rhein-
Main region's economic base by strengthening its nascent
biotech and IT/media sectors. While proposals abound,
decisive action is unlikely until after local elections in
early 2006. END SUMMARY.


2. (U) The shake-up at the German Stock Exchange in
Frankfurt (which recently failed to take over the London
Stock Exchange) comes in the midst of growing concerns over
Frankfurt's future as a financial and business center.
Consulting firm Cushman-Wakefield-Baker's 2004 study of the
30 most competitive European cities (European Cities
Monitor) forecasts that Frankfurt will fall from third place
overall today (behind London and Paris) to number 11 by

2009. A December 2004 study comparing leading economic
regions in Europe and the U.S. (conducted by the Rhein-Main
Economic Development Initiative) names Frankfurt as Europe's
top location in terms of transport accessibility and second
in economic weight, but only in twentieth place when it
comes to the quality of higher education (an important
factor for high technology). As Europe's "skyline" city,
Frankfurt's slow growth is visible in high vacancy rates and
the inability to move forward on two large building projects
-- the "Osthafen" development surrounding the planned
European Central Bank tower and the Millennium-
Tower/Europaviertel next to Frankfurt's main train station.


3. (U) Business and political leaders are well aware of the
long-term challenges facing Frankfurt. While arguably on
par today with Munich as Germany's two leading economic

regions, the Rhein-Main area's heavy dependence on finance
and the Frankfurt Airport poses risks given the difficulties
both sectors have faced in recent years. Employment in
Frankfurt's banking sector is shrinking (though banks still
employ 80,000 people in the area). While city authorities
are promoting information technology (IT) and biotechnology
in attempt to diversify the area's economic base, others
question spending large sums on diversification and say that
Frankfurt should focus on maintaining its leading position
in financial services and transportation, since those
sectors are key to creating demand (and comparative
advantage) in other businesses.


4. (U) Frankfurt trails German bio-tech centers in Munich
and Berlin/Brandenburg but has heavily invested in bio-
technology in an effort to shore up its once-large chemical
and pharmaceutical sectors (which still employ 22,000
people). Data supplied by the Frankfurt Chamber of Commerce
show that Munich is more economically dynamic than Frankfurt
(particularly in high-tech manufacturing and management
consulting) but Frankfurt has made some progress in the IT
sector, doubling the number of employees from 1998 to 2003
(to 16,000). Today one third of the Germany's large IT and
telecommunication service providers are located in
Frankfurt; four-fifths of Germany's Internet traffic (and a
third of Europe's web traffic) are routed through Frankfurt.
One of Europe's leading trade fair venues, Frankfurt is host
to several of the world's largest trade shows but must
continually compete for their business.


5. (U) Frankfurt's future as Europe's leading transportation
hub depends on the expansion of Frankfurt airport, Germany's
largest and arguably the most important in Europe in terms
of combined freight/passenger traffic. Centrally located
and highly accessible (next to Europe's most-traveled
highway intersection and near Europe's busiest train
station), the airport is reaching the limits of its present
infrastructure (which can support about 50 million annual
passengers). A new runway -- which could boost that
capacity to 80 million -- was originally slated to open in
2006 but will now come into service in 2008 at the earliest
(legal challenges are still pending and construction has not
yet begun). Frankfurt airport is Germany's largest
workplace with direct employment of 65,000 people (and
indirectly another seventy thousand); expansion would create
up to 100,000 new jobs according to airport authority
Fraport (this figure is disputed). According to the head of
Frankfurt's Economic Development Authority, Hartmut
Schwesinger, further delay in airport expansion would have
serious negative consequences for Frankfurt's financial
services sector and other businesses. Airport authorities
appear cautiously optimistic: the city of Frankfurt and the
state of Hesse back expansion, and the tough economic
climate has softened resistance to the project.

COMMENT
--------------


6. (SBU) Frankfurt remains Germany's most productive
economic area in per capita terms (the Rhein-Main region
produces 9% of Germany's GDP in an area representing only 4%
of the country's territory) and has comparative advantages
through a financial and transportation infrastructure
unmatched on the European continent. With limited resources
-- Frankfurt is Germany's most indebted city per capita
(excluding "city-states" such as Berlin and Hamburg) -- the
city will be hard-pressed to invest heavily in
diversification, suggesting that it will remain concentrated
in finance and transportation with modest growth in related
service sectors such as insurance, consulting, and
media/public relations. Frankfurt's PR and media sectors
(especially post-production) are growing; its nascent
insurance sector may expand with the city's selection to
host the Committee of European Insurance and Occupational
Pensions Supervisors (CEIOPS), the likely nucleus for a
future EU-level supervisory agency.


7. (SBU) Frankfurt officials say privately that the city's
biggest problem is political stalemate under a loose
coalition of the four major parties and local election rules
which favor small parties and independents (absent the five-
percent threshold which applies in state and national
elections). Political insiders hope for a decisive outcome
in spring 2006 local elections (REFTEL). By most signs,
"Mainhattan" must work harder to defend its claim as
economic center to an expanding Europe. END COMMENT.


8. (U) NOTE: the European Cities Monitor 2004 study is
available at:

http://www.frankfurt.de/sixcms/media.php/2000 /CitiesMonitor2
004.pdf

BODDE