GERMANY'S NEW COALITION AGREEMENT: THE DOMESTIC

UNCLAS SECTION 01 OF 04 BERLIN 001340 SENSITIVE STATE FOR EEB (NELSON),DRL/ILCSR AND EUR/CE (HODGES, SCHROEDER) LABOR FOR ILAB (BRUMFIELD) TREASURY FOR ICN (KOHLER) SIPDIS E.O. 12958: N/A TAGS: ECON EFIN PGOV PREL GM SUBJECT: GERMANY'S NEW COALITION AGREEMENT: THE DOMESTIC AGENDA REF: A. BERLIN 1243 ¶B. BERLIN 1337 ¶C. BERLIN 1167 BERLIN 00001340 001.3 OF 004 ¶1. (SBU) SUMMARY. Germany's recently elected CDU/CSU-FDP coalition signed a Coalition Agreement -- the document setting out policy priorities for the next four years -- on October 24, 2009. The agreement includes several elements -- tax cuts worth around 24 billion euros for individuals and private firms, opposition to a national minimum wage, and others -- intended to please pro-business interests. In an important break with German social tradition, the new government will also require individuals to bear more of the burden of paying for healthcare. Likewise of note is the commitment to maintain nuclear power generating infrastructure for the time being. In most respects, however, the coalition agreement does not represent a radical break with the past. The CDU/CSU apparently tempered many of the FDP's more radical proposals, such as a complete overhaul of the tax system (REF A). The balanced budget amendment further limits the government's room for maneuver, casting doubt over whether promised tax cuts will ever really materialize. Chancellor Merkel's choice of political heavyweight Wolfgang Schaeuble as Finance Minister is a telling indicator of where the country's real challenges lie. Schaueble will have his hands full as he balances the need to boost economic growth with ever-tightening fiscal constraints. END SUMMARY. ECONOMIC/GLOBAL AFFAIRS HIGHLIGHTS -------------- ¶2. (U) Below are highlights of key domestic elements in the Coalition Agreement between Chancellor Angela Merkel's Christian Democratic Union (CDU)/Christian Social Union (CSU) and the Free Democratic Party (FDP) (the "Black-Yellow" coalition) signed on October 24, 2009 (see REF B for foreign policy provisions): MACROECONOMICS/TRADE: There was agreement to promote common principles for the global economy based on Chancellor Merkel's "Charter for Sustainable Economic Activity." The coalition supports a speedy conclusion of the WTO trade round, and a level-playing field for German producers on world markets. Aviation, aerospace and maritime industries are a focus. TAXATION: The coalition agreed to income tax cuts for individuals and businesses worth 24 billion euros. Tax brackets will be simplified, and companies can more easily deduct interest expenses and losses from their corporate tax bill. The inheritance tax will be lowered, and it will be easier to pass on businesses to heirs. The child tax credit will be raised, as will the tax-free family allowance. Special sales tax treatment for mail delivery companies will be abolished, possibly spelling the end of Deutsche Post's tax-exempt status. It agreed to a reduced Value Added Tax (VAT) of 7 percent for hotels and restaurants (compared with the normal 19 percent rate). BUDGET: There was agreement to implement mid-term targets associated with Germany's balanced budget amendment ("Schuldenbremse") as of 2011. To this end the coalition wants to strengthen the cabinet's budgetary powers. It plans to keep the rise in government spending below the rate of GDP growth, and prohibit spending on top of existing commitments. Details on further cuts are outstanding and will likely be announced along with the FY 2010 budget, currently under review. FINANCIAL MARKETS: The coalition wants the Bundesbank to have responsibility for banking supervision at the expense of the bank regulator BaFin. It aims to set stricter capital requirement rules for banks and eliminate regulatory gaps. It plans to link compensation more strongly to long-term performance. The coalition would like to establish resolution authority to enable the government to restructure BERLIN 00001340 002.3 OF 004 and wind down large, systemically important companies that risk failure. It also agreed to create a common venture capital market and reduce hurdles to the German Real Estate Investment Trusts (REITs) market. It supports efforts to set up a European Rating Agency. EMPLOYMENT/LABOR: The coalition opposes introduction of a national minimum wage, but advocates a legal ban on "immoral" wages; i.e., one-third below average wages in a given sector. Existing job protection rules will remain, but the coalition wants to facilitate temporary contracts. There was agreement to improve rules on labor market entry for non-Germans, while cracking down illegal workers. The coalition agreed to prolong benefits for the long-term unemployed. It would like to reform administration of unemployment benefits and placement services. To keep non-wage labor costs stable, the coalition will provide around 16 billion euros for the Federal Labor Agency. The unemployment contribution rate will increase from 2.8 percent to 3 percent as of 2011. The agreement also endorses collective bargaining. PENSIONS: The gradual increase in the retirement age to 67 as of 2012 will remain in place. A government commission is to examine how to avoid "poverty in retirement." Moreover, the new government plans to introduce a unified old age pension system for Eastern and Western Germany. HEALTH: One of the most controversial discussions in the coalition negotiations was the argument over who pays for new healthcare costs. As of 2012, employers' contributions will be frozen. Individuals will have to pay any additional costs thereafter, meaning that the burden of healthcare will begin to shift from business and toward employees. In addition, employees will have to contribute more to the insurance scheme for the elderly -- further whittling away at a key element of Germany's social compact. Meanwhile, the coalition agreed to inject 4 billion euros into the public healthcare system and to boost competition. A commission will work on reform of the health fund. In the future, insurers will have more leeway to set premium levels. DEVELOPMENT ASSISTANCE: Donor coordination and improved efficiency will continue to be guiding principles. There will be a greater emphasis on private sources of revenue for development assistance. Coalition partners had previously ruled out a merger between the Ministry of Foreign Affairs and Development Ministry. TRANSPORTATION INFRASTRUCTURE: There was agreement to accelerate infrastructure expansion, involving greater use of tolls. The coalition hopes to improve competitive conditions for the logistics sector, especially in ports and on the roads. It wants to improve public transportation law and conditions to spur competition. AVIATION: The coalition intends to amend the Aviation Law to ensure that economic, environmental and noise protection requirements are treated equally for night flights. Emissions trading for airlines are to ensure competitive neutrality. There will be a push for Single European Skies, and a review of the privatization of the German Air Traffic Service. RAIL: The coalition agreed to privatize the State Railroad if conditions permit. Rail infrastructure, stations and railroad energy systems will remain under state control. Railroad regulatory authorities will be strengthened to improve competition. Advantages for railroads over long distance coach services will be phased out. BROADBAND: The coalition will pursue implementation of the broadband strategy announced in February 2009 to expand access to all households and increase available bandwidth. The coalition plans to expand e-government, secure net neutrality and foster energy efficiency in IT usage. IPR AND COPYRIGHT PROTECTION: There was agreement to reform BERLIN 00001340 003.3 OF 004 the copyright law to improve protection and facilitate enforcement. The coalition plans to strengthen the legal framework for the protection of intellectual property rights and facilitate access to industrial property rights for small- and medium-sized companies. ENERGY: There was agreement that nuclear energy will be maintained as a bridging technology until renewable energy can replace it. Work will restart on final storage facilities for highly radioactive waste. The coalition agreed to expand renewable energy development, increase energy efficiency, and incrementally replace conventional energy sources. The Renewables Law will be amended to improve efficiency and reduce over-subsidization of solar energy. A Law on Carbon Capture and Storage (CSS) for high efficiency coal power plants is envisaged. The market for pure biofuel will be revitalized. The coalition aims to formulate foreign energy policies to support international energy infrastructure projects. It hopes to improve competitive standards on the domestic energy market. Research and development will focus on energy efficiency, storage technology and smart grids. Building insulation is to be encouraged. CLIMATE: The parties affirmed a 2-degree Celsius global CO2 target and committed to maintaining Germany's leading position in climate protection. They will continue existing policies to reduce Germany's emissions by 40 percent of 1990 levels by 2020, but agreed to review (and adjust, if necessary) the measures. The coalition envisions the development of a global carbon market, with certain industries exempt from auctioning. At Copenhagen, they will call on developing countries to take on their responsibilities using measurable commitments. INTERNAL SECURITY/COUNTERTERRORISM: The coalition agreement provides no new powers for police or security authorities. There is a heightened emphasis on ensuring data privacy, however. (REF C) The agreement increases oversight of security agencies' use of personal data. In particular, a heightened layer of court approval will be required for online investigations of terrorism cases. The coalition will conduct a mid-term review of the recently passed law that outlaws training at overseas terrorist camps, and criminalizes activities relating to terrorist attack preparation and distribution of extremist propaganda. An evaluation will be performed of all government security-related databases. The coalition agreement specifically mentions the ongoing U.S.-EU negotiations over the Terrorist Finance Tracking Program (SWIFT) and requires the coalition to work towards a higher level of data protection (no automatic access, strict limitations on use, data deletion, clear rules on sharing information with third countries and legal redress). The agreement also aims to improve legal protection for victims of trafficking in persons and forced marriages. A FEW WORDS ON THE NEW CABINET -------------- ¶3. (SBU) Wolfgang Schaeuble (CDU),the 67-year-old due to take over the Finance Ministry, is the most experienced member of the Merkel cabinet, having served as Chancellor Kohl's chief of staff, negotiator of the German unification treaty, CDU chairman and twice as Interior Minister. Confined to a wheel chair since he was shot and severely wounded during a campaign rally in 1990, Schaueble is not a close friend of Chancellor Merkel's, especially since she helped derail his run for President. His extremely tough negotiating skills and years of government experience, however, make him a key figure in Merkel's new cabinet. Schaeuble has already indicated that there will be no balanced budget within the next four years, and that he is ready to take Germany deeper into debt in order to boost growth. At the same time, he has cautioned against assuming that the proposed 24 billion euro tax cut is a foregone conclusion. Traditionally, German finance ministers are BERLIN 00001340 004.3 OF 004 fiscal hawks, and we expect Schaueble to be no exception when he settles into the job. ¶4. (SBU) The down-to-earth Rainer Bruederle (FDP) will take over the Economics Ministry from Germany's most popular politician, Karl-Theodor zu Guttenberg (CSU),who in turn is moving over to the Defense Ministry (see SEPTEL). Bruederle served as Economics Minister of Rhineland Palatinate for 11 years. During that time, he worked closely with regional industry and did not shy away from using subsidies to promote the regional economy. Bruederle will play a major role in trade policy and may be inclined to engage in an active industrial policy, but his Ministry plays second fiddle to Finance on economic policy. ¶5. (SBU) It was surprising that the Development Ministry went to a Secretary General from the FDP, Dirk Niebel. Niebel will have big shoes to fill in replacing Heidemarie Wieczorek-Zeul, who held the office for 11 years and was a well known, respected expert in international development assistance. Foreign Minister-designate Guido Westerwelle will want to make sure that Niebel's Ministry is in sync with the Foreign Ministry. Niebel is not considered an expert on development assistance. COMMENT -------------- ¶6. (SBU) Predictably, given the FDP's robust presence in the new government, business and industry have reacted positively to the coalition agreement. While the unions are less than enthusiastic, few of the elements of the coalition agreement, if any, mark a radical break with the past on issues of most importance to them. Given the fragility of Germany's economic recovery, every new Minister will face difficult choices. Among those with the most challenging jobs ahead of him, however, is Finance Minister-designate Wolfgang Schaeuble. He faces an increasingly dismal fiscal outlook, but is expected to keep the economy growing. Schaeuble is not one to shrink from a challenge. Delawie