US embassy cable - 03FRANKFURT7909

UNCLAS FRANKFURT 007909 
 
SIPDIS 
 
DEPT FOR EUR/AGS AND EB 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, GM 
SUBJECT: CDU Stumbles on Welfare Reform as Saarland Jumps 
Ship to Endorse Schroeder Govt Plan 
 
 
SUMMARY 
------- 
 
1. The CDU-led Saarland government has rejected a Christian 
Democratic proposal for paying unemployment benefits at the 
local level.  Together with poorer CDU-led states in 
eastern Germany, Saarland could give the Schroeder 
government a Bundesrat majority on welfare reform -- and 
hand a defeat to national CDU leadership.  END SUMMARY. 
 
BACKGROUND 
---------- 
 
2. Currently, the national government pays for the first 12 
months of unemployment benefits, and local governments pay 
for unemployment and social benefits thereafter.  The 
Schroeder government will alter the second tier of 
unemployment benefits (Arbeitslosengeld II) so that after 
12 months, unemployed individuals would receive reduced 
benefits (at the same lower level as "Sozialhilfe" social 
welfare payments) paid by the federal labor office.  The 
national CDU leadership criticized the SPD-Green proposal 
as a power grab by the national government, and Hesse 
Minister-President Roland Koch (CDU) introduced a plan 
under which local governments will administer (and pay for) 
the new second-tier unemployment benefits. 
 
NEW DEVELOPMENTS 
---------------- 
 
3. Saarland's State Secretary for Social Affairs Josef 
Hecken (CDU) has rejected the CDU/Koch reform plan, calling 
it an unfair burden to Saarland and other poorer German 
states, particularly in East Germany.  Hecken's office told 
us that enactment of the "Koch/Merkel plan" (his quote) 
would mean Saarland would lose over 100 million euros 
annually versus under the current federal revenue sharing 
scheme (Laenderfinanzausgleich).  In defense of its 
position, the Saar government cites a study by Georgetown 
University lecturer Bernd Reissert showing that who pays 
Arbeitslosengeld II is, in fact, very important.  Reissert 
describes unemployment benefits as part of a "hidden 
revenue compensation scheme" channeling funds (EUR 4 
billion net transfer per year) from strong states to those 
with lower tax revenue and higher unemployment.  Paying 
benefits at the local level would potentially eliminate 
this regional transfer payment. 
 
4. Hecken recently told Saarland press that the CDU model 
represents the "survival of the fittest," a threat to 
solidarity and to the public finances and social policies 
of Saarland and similar areas.  He also criticized a CDU 
proposal to alter a similar redistribution scheme among 
health insurers (Risikostrukturausgleich Krankenkassen). 
Hecken opines that the Schroeder government model likely 
will receive a Bundesrat majority (suggesting Saarland will 
not/not vote the CDU line on welfare reform). 
 
GIVING SCHROEDER AN ISSUE MAJORITY IN BUNDESRAT 
--------------------------------------------- -- 
 
5. COMMENT. Reorganizing and reducing welfare payments is a 
key element of economic reform.  Hecken's announcement, 
which was vetted by Saarland M-P Peter Mueller (CDU), is a 
wake-up call for the CDU party leadership.  Saarland's 
rejection of the CDU/Koch proposal has political 
significance beyond the issue of welfare reform: 
 
-- It means that Schroeder government likely will obtain a 
Bundesrat majority on this issue despite opposition from 
the national CDU.  While the national CDU leadership 
rejected additional talks on the government's reform 
agenda, Saxony M-P Georg Milbradt (CDU) said he would 
welcome a summit with Schroeder if it would help his state. 
The SPD-Green government potentially can use regional 
transfer payments to prevail on other economic issues. 
 
-- Welfare reform could become a significant defeat for CDU 
chairperson Angela Merkel and for aspiring chancellor- 
candidate Koch.  Saarland's leadership is angry that Hesse 
and Baden-Wuerttemberg dominated CDU policy-making on this 
issue.  The breakdown of party unity on welfare reform 
shows CDU's vulnerability as it tries to govern in both 
rich areas (Hesse, Baden-Wuerttemberg) and relatively poor 
(Saarland, the new states). 
 
PASI