AUSTRIA: COALITION TALKS PROGRESS, NEW GRAND

UNCLAS SECTION 01 OF 02 VIENNA 001670 SIPDIS SENSITIVE STATE FOR EUR/CE E.O. 12958: N/A TAGS: PREL PGOV AU SUBJECT: AUSTRIA: COALITION TALKS PROGRESS, NEW GRAND COALITION POSSIBLE BY DECEMBER REFS: (A) VIENNA 1455;(B) VIENNA 1606; (C) VIENNA 1287; (D) VIENNA 1418 THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED Q PLEASE PROTECT ACCORDINGLY. NOT FOR INTERNET DISTRIBUTION. ¶1. (U) Summary: Negotiators for the Social Democratic Party (SPO) and PeopleQs Party (OVP) have made substantial progress in talks aimed at forming a new QGrand CoalitionQ government. The two parties, which also share power in the outgoing government, have reached agreement on issues including tax cuts, an economic stimulus package, and the elimination of student fees. The parties have postponed action on more complicated matters, such as administrative and education reform, while some issues, such as referenda on EU treaties, remain pending. A contact on the SPO negotiating team told us a new government could be installed as early as the beginning of December. End Summary. Progress Toward New QGrand Coalition -------------- ¶2. (U) In intensive negotiations over the past week, the SPO and OVP have reportedly reached agreement on a range of issues, among them law enforcement, economics and defense policy. In areas such as health reform and education, the parties appear to have agreed to postpone major reforms that some observers consider overdue. The SPO won OVP acquiescence for its proposal to abolish university student fees. This will be compensated by measures relieving the financial burden for universities. On pension reform, which has been a major bone of contention under the outgoing Grand Coalition, the parties reportedly have also found a compromise solution on how to ensure longterm financing. Pending Issues -------------- ¶3. (U) Major unresolved issues include EU policy and administrative reform. SPO Chairman Werner Faymann has pressed the OVP to allow differences of opinion on the issue of referenda on future EU treaties, particularly considering that, according to Faymann, this question is not likely to arise during the current legislative term ending in 2013. The parties have agreed on some elements of administrative reform, such as the establishment of provincial administrative courts to deal with complaints against administrative decisions. Critics argue, however, that the parties are avoiding a comprehensive streamlining of the bureaucracy, particularly in the provinces, that could produce significant savings. Current Problems -------------- ¶4. (U) The negotiations are burdened by controversies surrounding various partly privatized, partly state- owned companies that are currently in financial troubles, among them the Austrian postal system and Austrian Airlines. In reaction to reports that the postal companyQs management plans to eliminate 9,000 jobs, Faymann announced he would oppose the closure of any postal offices. Designated OVP Chairman Josef Proell, in turn, criticized Faymann for Qobviously allowing himself to be pushed around by the unions and defended managementQs attempt at Qretaining or achieving competitiveness.Q On the issue of the problematic sale of the highly indebted Austrian airlines (reftel B),the SPO has called for a parliamentary investigation of potential mismanagement on the part of OVP Finance Minister Wilhelm Molterer. Economic Aspects -------------- ¶5. (U) On November 6, the SPO and OVP reached a broad consensus on economic issues. They agreed to implement tax cuts in 2009, a year earlier than previously planned. The plan involves an income tax cut of 2.2 billion euros and an additional 500 million euros in (unspecified) relief measures for families, but the parties have left open the question of which groups will VIENNA 00001670 002 OF 002 benefit from the cuts. Agreement was also reached on a 1.9 billion euro economic stimulus package for 2009/10, which concentrates on construction projects (850 million euros) and investment promotion measures (570 million euros),but also foresees funds for improving the energy efficiency of buildings, regional employment programs, research and development, and a mandatory free kindergarten year for 5- year-olds. ¶6. (U) Coalition negotiators project these measures will raise AustriaQs total public sector deficit from 0.6 percent of GDP to 2.2 percent in 2009, 2.9 percent in 2010, and 2.8 percent in 2011, before declining to 2.5 percent in 2012 and 1.7 percent in 2013. Under this scenario, government debt would increase by 50 billion euros until 2013. ¶7. (U) Economists generally approve of the idea of expanding the budget deficit in reaction to the economic slump, but had expected a much higher tax cut (3-6 billion euros). There are doubts about whether the government will be able to meet the projected deficit levels. The government approved about 2.7 billion euros in spending before the elections (reftel C),and will need to commit another 450 million euros to save the ailing social health insurance program. Cost-saving measures, such as healthcare and administrative reforms, have meanwhile been postponed. The deficit projections are based in part on the assumption that SPO and OVP leaders will make good on their agreement to achieve 8 billion euros in budget savings through 2013. However, Faymann and others have been vague about how they intend to trim spending. Personnel Issues -------------- ¶8. (U) It is generally expected that the once and future coalition partners will continue to evenly split the 14 cabinet portfolios in the new government. Several ministers are expected to stay in their current positions; these may include the SPOQs Defense Minister Darabos and Education Minister Schmied, as well as Science Minister Hahn from the OVP. There is some speculation that Proell, in addition to Vice Chancellor, will serve as either Finance Minister or Foreign Minister. Comment Q New GOA Could Form Quickly -------------- ¶9. (SBU) It remains unclear whether Proell will submit a draft coalition agreement for approval at the November 28 OVP convention, where he is set to be officially elected party chairman. There would be some risk to this, given the shrinking but persistent opposition of some of the OVP rank and file to the idea of entering into another Grand Coalition. To avoid a messy convention, Proell could push to wrap up the talks quickly, win approval of a coalition pact by the OVP Executive Board, and have the new government sworn in before November 28. There are no concerns on the SPO side of the equation, where Faymann is expected to win easy approval for an agreement. ¶10. (SBU) A leading advisor on the SPO coalition negotiating team told us he expects Proell to take both the coalition agreement and the proposed list of ministers to the OVP convention, in the hopes that the prospect of retaining high-level portfolios will assuage concerns about another Grand Coalition. Schieder predicted a new government could be installed by December 1 or 2, a prospect we consider realistic. GIRARD-DICARLO