GERMANS DISCUSS FINANCIAL CRISIS, INVESTMENT

UNCLAS SECTION 01 OF 02 BERLIN 001399 SENSITIVE SIPDIS ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ///////////////////////////////////////////// ///// PLEASE CANCEAL BERLIN 001399 AND DESTROY ALL COPIES. IMI CANCEAL BERLIN 001399 AND DESTROY ALL COPIES. MSG WILL BE RESENT UNDER NEW MRN/MCN(s). ///////////////////////////////////////////// //// ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR ZFR E.O. 12958: N/A TAGS: EFIN ECON GM SUBJECT: GERMANS DISCUSS FINANCIAL CRISIS, INVESTMENT SECURITY AND IRANIAN SANCTIONS WITH DEP SEC KIMMITT BERLIN 00001399 001.2 OF 002 ¶1. (SBU) SUMMARY. State Secretary Dr. Bernd Pfaffenbach of the Ministry of Economics told Deputy Secretary of the Treasury Robert Kimmitt on October 10 that although Germans are alarmed by the ongoing financial turbulence, the country is relatively well positioned to ride out the storm. A fiscal stimulus is unlikely due to a drive to balance the federal budget by 2011. He expressed concern that France would again breach the Maastricht Treaty budget deficit ceiling of 3%. On the new German investment review law, he said it is not intended to discourage U.S. investment. Pfaffenbach also suggested that cutting off all business with Iran might constrain western countries' ability to pressure the country in the future. END SUMMARY. GERMANS INCREASINGLY WORRIED ABOUT ECONOMIC GROWTH -------------- --- ¶2. (SBU) In Deputy Secretary Kimmitt's October 10 meeting in Berlin with Economics Ministry State Secretary Pfaffenbach, Pfaffenbach described Germans as increasingly "frightened" by the current financial turmoil. He agreed with Kimmitt that a primary goal of policymakers should be to restore market confidence and that transparency is key. Germany's growth, currently forecast at 1.2% this year, will likely be revised downward. The IMF has already downgraded its forecasts. Pfaffenbach said Deutsche Bank CEO Josef Ackermann and others "hiding behind him" favored a stimulus plan. Finance Minister Steinbrueck, however, is determined to balance the federal budget by 2011, so a stimulus is not on the table. FINANCIAL CRISIS: NEED FOR TRANSPARENCY AND COORDINATION -------------- -------------- ¶3. (SBU) Pfaffenbach mused the financial crisis could end up strengthening the global financial system in the long term. He conceded the Germans did not at first understand the possible spillover from the financial turmoil in the United States. During a visit to New York, Pfaffenbach was surprised by German bank's lack of understanding about the sophisticated financial instruments they traded. He also wondered to what extent Alan Greenspan's policies as Federal Reserve Chairman were to blame for today's situation. Pfaffenbach also noted criticism of Merkel's pledge to guarantee private accounts. On the previous day, the Czech Finance Minister complained that money was fleeing countries without such guarantees to those that had extended them. ¶4. (SBU) Kimmitt said that open communication and close coordination are needed, and surprises should be avoided. The goal of recent interventions is not a government takeover of the market, but rather to get markets functioning again. In order to be a more collaborative partner, Europe needs to develop a set of common principles to address the crisis. Kimmitt agreed on the need for transparency, but stressed that new regulation needs to be smart regulation, which also recognizes the importance of market forces and discipline. GERMAN'S PROCLIVITY FOR SAVING IS AN ADVANTAGE -------------- - ¶5. (SBU) Pfaffenbach said he trusted Secretary Paulson was trying to get the U.S. response right, but he still felt the $700 billion U.S. bailout amounted to a "socialization of losses." He also thought the much-criticized German banking system, with its system of "Sparkassen" or small cooperative banks, was probably better able to withstand the current turmoil. Germans' emphasis on high savings and lower consumption could also be helpful in the current environment, adding that "Germans don't buy Porsches on credit." Pfaffenbach said he was concerned France would again breach the Maastricht Treaty budget deficit ceiling of 3%. GERMAN INVESTMENT SECURITY LAW NOT MEANT TO DISADVANTAGE U.S. INVESTMENT -------------- -------------- ¶6. (SBU) Pfaffenbach reported the new investment review law was discussed the previous day in the Bundestag, and that there seemed to be support for it. The proposed law would allow the government to block an investment if it posed a BERLIN 00001399 002.2 OF 002 threat to "national security or public order," and if the foreign investor would own 25% or more of the voting equity in a German company. Pfaffenbach explained that the law was not meant to discourage U.S. investment - in fact, there was an on-going government program to attract more such investment. Rather it was intended to prevent companies like Gazprom from taking over the electricity grid, for example. IRAN: SOME BUSINESS SHOULD REMAIN/FATF COULD DO BETTER -------------- -------------- ¶7. (SBU) Kimmitt said he appreciated Germany's support on implementing UN Security Council Resolution 1803 on Iran. Western countries need to make sure Iran does not have the opportunity to illegally transfer funds for its weapons program while eyes are averted by the financial crisis. Kimmitt encouraged Germany to support recent proposals by the U.S., French and British, respectively: expanding sanctions on financial services to include insurance; tightening export controls within the EU on oil refining technology; and tightening export controls within the EU on liquefied natural gas technology. He thought the Financial Action Task Force (FATF),at its meeting next week in Brazil, should send the strong message that Iran will pay a high price for failing to establish a system to fight money laundering and terrorist financing. ¶8. (SBU) Pfaffenbach suggested that western countries should not cut off all business with Iran. Doing so would deprive them of future leverage if the situation became even worse. He also suggested that harming the energy sector was akin to "shooting ourselves in the foot." Kimmitt explained that relevant UN Security Council resolutions linked sanctions to the proliferation issue, and did not seek to inflict damage on the wider Iranian economy. Tougher EU action supports the argument in favor of continued multilateral cooperation as opposed to Congressional proposals that would force foreign companies to choose between trading with the U.S. or with Iran, explained Kimmitt. ¶9. (SBU) Another participant, Director General for External Economic Policy, Dr. Karl Brauner, said the Germans are not happy with certain aspects of the dialogue within FATF. They feel the chairman of the working group should have allowed for more private discussions and more consensus building behind the scenes. Kimmitt encouraged Germany to support the work of the FATF on the Iran issue as Iran's anti-money laundering and counterterrorist financing deficiencies were identified by the group over a year ago. Kimmitt added that the FATF needs to send a clear signal to Iran that it cannot ignore the calls of the international community. Kimmitt asked Brauner to pass any suggestions on ways to improve the discussion within FATF to the U.S. Embassy in Berlin. He added that FATF should not become a mere discussion forum, but should be able to take decisions. ¶10. Note: Also attending the meeting from the Ministry were Director General, External Economic Policy, Dr. Karl Brauner; Head of Division, External Economic Policy, Dr. Adrian Bothe; Deputy Director General, Foreign Trade Law, Karl Wendling; and Head of Foreign Trade Law Division, Dr. Ursina Krumpholz. Deputy Secretary Kimmitt has reviewed and cleared this cable. KOENIG