G-8 LABOR MINISTERIAL: SCENESETTER FOR ASSISTANT SECRETARY

UNCLAS SECTION 01 OF 03 BERLIN 000833

SIPDIS

STATE FOR EUR/AGS AND DRL/ILCSR
LABOR FOR ILAB/OIO

SIPDIS

E.O. 12958: N/A
TAGS: ELAB ECON PGOV PREL GM
SUBJECT: G-8 LABOR MINISTERIAL: SCENESETTER FOR ASSISTANT SECRETARY
OF LABOR DEROCCO


1. Welcome in advance to Germany and to this year's meeting of G-8
labor ministers, hosted by Germany's Ministry of Labor and Social
Affairs May 6-8 in Dresden, the capital of the eastern state of
Saxony. Like the other states of the former German Democratic
Republic, Saxony still lags behind the western states in economic
terms; but it is growing fast, and cities like Dresden and Leipzig,
the largest city in Saxony, are among the most prosperous in the
former GDR. Dresden is also rebuilding from the massive destruction
it suffered during World War II, as you will see when you visit the
newly restored Church of Our Lady.


2. You will also see a Germany experiencing overdue economic
growth, due primarily to booming exports and a recent rise in
investment spending. Unemployment levels, declining but still high,
are the indicator most watched by German officials and politicians.
Germany under Chancellor Angela Merkel has resumed its old role as
engine for European and global economic growth, despite the
continued and longstanding need for structural reforms in labor,
business regulations, taxation and other areas.

Germany: Political and Economic Overview
--------------

3. Now half way through its second year in office, the Chancellor's
grand coalition between her own party, the right-of-center Christian
Democratic Union (CDU, joined by its Bavarian sister party the
Christian Social Union, or CSU),and the left-of-center Social
Democratic Party of Germany (SPD) is in good shape and seems likely
to survive until its four-year term expires in 2009. Merkel's
consensus-style leadership keeps a lid on tensions between the two
parties, Germany's largest and traditional opponents, and wins her
high ratings in public opinion polls. She seems to have forged a
good working relationship with SPD Vice-Chancellor and Minister of
Labor and Social Affairs Franz Muentefering. She is a strong
advocate of close ties with the United States, and bilateral
relations have improved since she took office in November 2005.
Among the German people, however, skepticism about the United States
over the invasion of Iraq, climate change, counter-terrorism, and
other issues remains high.


4. The German economy in 2006 had its best year since 2000. Its
GDP grew 2.7 percent and economists have revised their 2007 and 2008
forecasts upwards to 2.4 percent. Tax revenues are up and the
government's budget deficit is now well within the European Union's
"Maastricht criteria" (3 percent of GDP). Business confidence is
high. Employment is increasing and some employers complain of a
shortage of skilled workers. Unemployment dropped in March to a
six-year low of 9.2 percent, seasonally adjusted, and economists now
forecast annual unemployment of 8.7 percent in 2007. (Unemployment
is still nearly twice as high in the states of the former GDR,
however, and long-term unemployment also remains high in the Ruhr
and some other parts of western Germany where old smoke-stack
industries have shut down in the face of global competition.)
German companies have cut costs, and labor productivity per capita
rose 1.8 percent in 2006. Germany's trade unions feel they might be
regaining political and economic power and after years of wage
restraint are again demanding higher pay. Although unions only
represent about 25 percent of German workers, union contracts cover
65 percent of the workforce.

Traditional Social Partnership under Stress
--------------

5. Comprehensive collective bargaining agreements between unions
and employers' associations, covering entire industries, were for
years the rule in Germany, ensuring a remarkable degree of
industrial peace. This system is starting to break down: both
unions and employers' associations are losing members and the unions
find themselves having to negotiate contracts that give individual
firms greater flexibility to meet the demands of global markets.
Employee participation in company management through elected works
councils, and employee representation on corporate supervisory
boards (co-determination),are enshrined in German law but are also
under stress, with employers arguing co-determination impedes
competition in the global economy, an argument the unions absolutely
reject. Even in the chemical industry, where labor-management
relations are perhaps the best in the country, union leaders have
begun openly to question whether the concept of a social partnership
is still valid.


6. These issues are reflected in the theme for this year's G-8
labor ministerial: "Shaping the Social Dimension of Globalization."
Muentefering argues EU governments must show themselves willing and

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able to influence global economic integration to preserve the
achievements of the social welfare state. The dynamics of the
coalition government are a potent factor in this. Some in the SPD
argue the Christian Democrats are stealing the Social Democrats'
thunder on social issues, and that the SPD must sharpen its social
profile if it is to have any hope of returning to power in federal
elections in 2009. Muentefering, a former SPD chairman, put it this
way at a conference last year: Germans see globalization as a direct
attack on the achievements of the social market economy.
Governments must show they can regulate globalization, he said, or
the voters will be tempted to turn to a strongman to lead them.

Principle Labor and Social Issues
--------------

7. The Low-Wage Sector: Although primarily a high-wage, high-skill
economy, Germany has a significant low-wage sector which earlier
governments promoted in an effort to reduce high unemployment.
There is concern the number of working poor is on the rise. The
federal government reports that in 2004, 18.4 percent of full-time
workers earned less than two-thirds of the median wage, up from 16.6
percent in 1993. Unlike most EU countries Germany has no
across-the-board minimum wage, and the German Trade Union Federation
is now demanding a national hourly minimum wage of 7.50 euros
($9.50). But even in the SPD there is some disagreement with this
idea and the CDU/CSU strictly opposes a minimum wage, favoring
instead a "combination wage" under which a government benefit would
be paid to low-wage workers.


8. Older Workers: Both houses of parliament have approved an
initiative Muentefering launched last year called "50-Plus," to
increase employment opportunities for older workers. Only 45
percent of Germans aged 55 to 64 are employed and over a quarter of
the unemployed are 50 or older. Muentefering argues the situation
must change and Germany cannot afford to waste the potential older
members of the workforce offer. The government cut incentives for
early retirement, shortened the period of eligibility for
unemployment compensation, ended the early retirement option for
persons 58 and older, and introduced a "combination wage" for
unemployed older workers who take a job that pays less than they
previously earned. The initiative also includes wage subsidies for
employers who provide jobs to older workers and supplementary
training assistance for workers 45 and older.


9. Pensions: For the first time in three years, pensioners in
Germany will receive more money. Muentefering announced old-age
pension rates will rise 0.54 percent as of July 1, reflecting higher
wages and salaries over the last year. By law, pension benefit
increases are tied to wage growth in the preceding year.
Conversely, benefits can also be cut or frozen if wage developments
warrant, as was the case over the last three years. Still, about 20
million pensioners face a de facto freeze on pension benefits in the
coming years. Defying union protests, parliament on March 30
fulfilled an agreement between the grand coalition parties and voted
to raise the retirement age from 65 to 67, to deal with a pension
funding crisis resulting from Germany's low birth rate and ageing
population. Under the new law, everyone seeking retirement earlier
than 67 will face a monthly pension cut of 0.3 percent. Meanwhile a
decision to increase employer-employee payroll contributions to the
pension system from 19.5 to 19.9 percent of gross income has been
widely criticized as undermining the effort to lower non-wage labor
costs.

The Hartz Reforms
--------------

10. The Ministry has thoroughly reviewed Germany's initial labor
market reforms, called Hartz I-III after former Volkswagen Personnel
Director Peter Hartz, who was instrumental in their adoption. An
additional reform, Hartz IV, passed in 2004, was particularly
controversial, inspired public demonstrations, and contributed to
the defeat of the SPD and the rise of a new leftist party in the
2005 federal election. The Ministry says some elements of the
initial three reform packages, such as make-work programs for
hard-to-place long-term unemployed, have proven ineffective. Other
measures, such as restructuring the Federal Employment Agency to
make it more service-oriented and promoting vocational training or
re-integration subsidies, have been largely successful. Still to
come is a review of Hartz IV, which merged unemployment benefits and
social assistance beginning in 2005.

Co-Determination
--------------

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11. An expert commission appointed by former Chancellor Schroeder
in July 2005 reported to Chancellor Merkel last December that
Germany's 1976 law mandating worker representation on corporate
supervisory boards ("co-determination") has proved its worth and
does not need fundamental changes. Chaired by former CDU
Minister-President of Saxony Kurt Biedenkopf, the commission was
composed of three members each from academia, business groups, and
employees' organizations. Business and employee members could not
agree on a joint reform proposal and left the commission in
mid-November last year, and the report was issued in the name of the
academic members only. The businessmen argued co-determination
should be voluntary, with at most a third of the seats on
supervisory boards reserved for employee representatives, rather
than as many as half, as required under the current law. They said
the law puts German companies at an international competitive
disadvantage. The academic and employee members rejected this
argument, although the report does recommend certain changes to
adapt co-determination to companies with employees outside Germany.

Collective Bargaining
--------------

12. After years of wage moderation, unions and workers are now
demanding part of the fruits of the economic upswing. The powerful
Metal and Electronics Workers' Union, IG Metall, wants 6.5 percent
more pay for its 3.4 million members, but the employers' association
Gesamtmetall has offered only 2.5 percent, plus a 0.5 percent
lump-sum payment for the year. IG Metall has announced plans for
warning strikes, which will spur the sides to narrow differences.
Meanwhile, unions and employers in the chemical sector have quietly
hammered out a deal giving 550,000 employees a 3.6 percent pay hike
plus a lump-sum payment of 0.7 percent of their annual salary.
Construction industry employers and unions have agreed on a 3.5
percent wage increase covering nearly 700,000 workers, and a
lump-sum payment of 0.4 percent which can be negotiated on a company
basis.


13. The Apprenticeship Training System: Germany's "dual system" of
vocational training, which combines on-the-job training with
vocational school attendance, has long proved to be an effective
tool in reducing youth unemployment, which in Germany is relatively
low (EU-15 average: 16.5 percent; Germany: 15.2 percent, 2005
data). However, an upward trend in youth unemployment in recent
years prompted the German government, employers, and industry
associations to agree on a voluntary job training pact on creating
more training opportunities. Last month the pact was extended until

2010. Business associations agreed to provide 60,000 new training
slots each year, twice as many as before. Nevertheless, German
trade unions and opposition parties complain the number of
applicants surpasses the number of slots available and are demanding
the introduction of a compulsory "training levy" on companies which
do not provide sufficient training opportunities.


14. Health Care Reform: After months of political bickering, a
health care reform bill went into effect April 1. The initial goal
of completely overhauling the healthcare system to ensure its
sustainability in the face of demographic and budgetary constraints
was dramatically scaled back over months of argument within the
coalition and in parliament. Minister of Health Ulla Schmidt (SPD)
failed to obtain many of the structural changes she had sought,
including the "disarming" of powerful statutory health insurance
funds and physicians' federations. The outcome is legislation that
is unlikely to result in the savings necessary to shore up the
country's healthcare system, which may lead politicians to look
again at further regulation of pharmaceutical pricing-an issue which
has already spurred bilateral disagreement with the United States.
Although the Ministry of Health has the lead on this issue, the
Ministry of Labor and Social Affairs is a player as well.
TIMKEN, JR.