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