GERMANY MULLS NEW APPROACH FOR DEEPENING

C O N F I D E N T I A L SECTION 01 OF 02 BERLIN 003076

SIPDIS

SIPDIS

EUR/ERA FOR ELUFTMAN
USTR FOR MMOWREY, SDONNELLY
USDA FOR FAS/ITP GYOUNG, ROBERT CURTIS, FAS/CMP
RRIEMENSCHNEIDER, CRADLER, FAS/FAAS JHIGGISTON

E.O. 12958: DECL: 10/18/2016
TAGS: ETRD PREL PGOV GM EU EFIN EAGR
SUBJECT: GERMANY MULLS NEW APPROACH FOR DEEPENING
TRANSATLANTIC ECONOMIC RELATIONSHIP

REF: BERLIN 1747

Classified By: Economic Counselor Douglas Neumann for reasons 1.4(b) an
d (d)


1. (C) Summary: Chancellor Merkel has publicly affirmed that
she plans to pursue deepening transatlantic economic
relations during Germany's EU Presidency. In response,
German officials have been scrambling to devise a plan to
increase economic integration with the U.S. without adopting
the formula of a transatlantic free trade agreement (TAFTA),
which would delve into politically sensitive topics such as
agriculture. Ministry of Economics and Chancellery officials
believe the best way forward is to make progress in the area
of non-trade barriers, e.g. standards and regulations,
through a politically supported, government-funded forum.
End Summary.

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Background - TAFTA Reloaded
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2. (U) The idea of a transatlantic free trade agreement
originally surfaced in 1998, but was scrapped by EU and U.S.
officials due to significant differences on agriculture. On
June 19, 2006, Bundestag member, Matthias Wissman (CDU),
chair of the Bundestag EU Affairs Committee, and Elmar Bock
(EVP),chair of the European Parliament's Foreign Affairs
Committee, released a joint paper strongly endorsing an
ambitious Transatlantic Partnership Agreement (TPA) that
would replace current transatlantic frameworks (reftel).
Immediately following their press conference the report
received some coverage in national daily newspapers but
little political attention. However, in September, as
prospects for a successful round of WTO trade talks waned and
the EU embraced pursuing free trade agreements as part of its
revised trade strategy, business leaders began pushing the
idea of more economic integration between the U.S. and EU.


3. (U) Chancellor Merkel's initial positive reaction to
pursuing a free trade agreement between the U.S. and the EU
spurred further hopes that such an idea could become reality.
She stated she had not ruled out putting transatlantic free
trade on the agenda for Germany's EU presidency, as long as
she had assurances it would win sufficiently broad support to
yield results during Germany's six-month Presidency. Fueling
speculation on the Chancellor's plans was a recently released
book, "World War on Prosperity," by Der Spiegel reporter
Gabor Steingart, which calls for a free trade agreement, but
with the underlying goal of providing a counterbalance to
China's growing economic influence, a goal quickly rejected
by German government officials. That said, based on his
reported conversations with the Chancellor, Steingart
confirmed Merkel's interest in "integrating like-minded
people" via a transatlantic free trade arrangement.

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The new transatlantic free trade idea: What it isn't...
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4. (SBU) Pursuing a transatlantic free trade agreement in the
traditional sense has met with wide-spread skepticism within
the German government (as well as the EU Commission),which
threw cold water on the idea when it surfaced last month to
slow any momentum that the idea might be gaining within the
business community. The Ministry of Economics and the
Chancellery share the view that a free trade agreement makes
little sense, given the already low tariff levels the U.S.
and EU enjoy on non-agricultural products and the disparate
agriculture policies that led the EU and U.S. to scrap the
idea back in 1998. Chancellery contacts have suggested that
the TAFTA idea offered "great photo ops" for politicians and
business leaders, who are pushing the idea, but beyond the
"sexy" title, TAFTA lacked any grounding in the reality of
the transatlantic economic relationship.

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...and what it could be
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5. (C) Despite their skepticism regarding a traditional FTA,
officials at the Chancellery do not want to kill the idea of
pursuing deeper transatlantic cooperation and are considering
how U.S.-EU ties might be promoted during Germany's EU
presidency. Therefore, officials at the Ministry of
Economics and the Chancellery have put together a proposal
that reflects more realistic and pragmatic avenues for
cooperation. (Note: Chancellor Merkel has yet to approve this
current plan. End Note) This proposal would focus on areas
the EU and U.S. have previously agreed to address, i.e.
overcoming regulatory barriers and pursuing recognition of
standards. According to Knut Brunjes, Deputy Director of
Trade at the Ministry of Economics, the difference from the
current arrangement, i.e., what was agreed upon at the 2005
U.S.-EU Summit in Vienna, is that this proposal goes beyond
an exchange of regulators and looks to establish a more
formal, politically-supported arrangement with established
goals, a set timeline, and, most importantly for Germany,
requisite funding from the U.S. and EU budgets. The proposal
has business community support; BDI, Germany's largest
industrial association, will present Chancellor Merkel with a
similar plan when BDI President Thumann meets with the
Chancellor on October 26.

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The Hedge Fund Factor
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6. (C) Offering a different perspective, Johannes Kindler,
Deputy Director General for the Chancellery's Economic
Division, said the motivation for pursuing deeper
transatlantic integration in the regulatory area stems partly
from the Chancellor's concern about hedge funds and the lack
of transparency and regulations of these financial
instruments. According to Kindler, while Chancellor Merkel
realizes the benefit of hedge funds, she believes there is a
need to address financial market regulation within the
context of the transatlantic marketplace. Although Germany
sees the 2007 G-8 Summit as a venue to discuss this issue
more broadly, Kindler said the high level of U.S. hedge fund
activity in Europe makes addressing hedge fund regulation
within the framework of the transatlantic economic dialogue
important as well.

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Comment
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7. (C) Germany's thinking on how to deepen the transatlantic
economic relationship during its EU presidency continues to
evolve. Chancellor Merkel is undertaking a balancing act as
she attempts to maintain political momentum for achieving a
deeper transatlantic economic relationship -- something
Merkel has continually voiced during her time as Chancellor
-- without having the idea fall victim to the quixotic notion
of a transatlantic free trade agreement with its attendant
baggage. The initial idea of a more focused approach based
on harmonizing regulations and recognizing standards across
the Atlantic seems well-grounded, although achieving the
concrete results Germany seeks could be challenging, given
the different approaches the EU and U.S. take in these areas.
Also, concerns about hedge fund activity as a motivating
factor would provide a very narrow basis for pursuing the
type of deeper transatlantic regulatory cooperation as
envisaged by Chancellery officials.
TIMKEN JR