US embassy cable - 04FRANKFURT4560

UNCLAS FRANKFURT 004560 
 
SIPDIS 
 
DEPARTMENT FOR DRL/IL, EUR/AGS AND EB 
DEPT PASS DOL/ILAB (BRUMFIELD) 
TREASURY/OASIA FOR MCDOWELL 
DEPT PASS FEDERAL RESERVE BOARD FOR ELLEN 
 
E.O. 12958: N/A 
TAGS: ELAB, PGOV, ECON, GM 
SUBJECT: Hesse Leads Opposition to Agenda 2010 Unemployment 
Benefits Reform 
 
REF: A) 2003 FRANKFURT 07909, B) Berlin 1570 
 
1.  SUMMARY: Led by Hesse Minister-President Roland Koch 
(CDU - Christian Democrat), the conservative-dominated 
Bundesrat recently rejected a bill to combine social-welfare 
and long-term unemployment benefits, a key element of the 
Schroeder government's "Agenda 2010" economic reform 
package.  Although government and opposition generally agree 
on the need to streamline and reduce jobless benefits, Koch 
and other conservatives want to give local authorities more 
scope to administer unemployment benefits as a wedge to 
introduce flexibility into labor markets.  The current 
deadlock means that local governments, which had expected 
the federal government to pay benefits under the planned 
reform, may face an additional burden of up to 2.5 billion 
euros in 2005.  END SUMMARY. 
 
2.  On May 14, the CDU-lead majority in the Bundesrat 
(Germany's upper house) rejected the "Hartz IV" welfare 
reform, which would merge unemployment benefits and social 
welfare payments to long-term unemployed (those drawing 
benefits for more than 12 months), effectively reducing 
payments (ref B).  The bill will now go to a mediation 
committee.  Government and opposition agree on the need for 
reform but disagree on the question of turf:  Whereas Social 
Democrats (SPD) and Greens would put the Federal Employment 
Agency in charge, the CDU and Free Democrats (FDP) want to 
give cities and counties more authority to administer 
benefits.  As architect of the so-called "Optionsmodell" 
(inspired by the "Wisconsin Works" program), Koch recently 
managed to unite other CDU-led states behind his opposition 
to the SPD-Green plan, arguing that the government's bill 
would merely expand the federal government's reach.  Since 
cities and counties are subordinate to states, Koch's plan 
to put local communities in charge of benefits would tend to 
give state governments -- most of which are conservative at 
this time -- more influence over the labor market. 
 
3.  Other CDU-led states have practical concerns about the 
reform, including Saarland -- traditionally a net 
beneficiary of social transfer payments -- which originally 
supported the SPD-Green model (Ref A) but recently closed 
ranks with the opposition.  Aide to Saarland Minister- 
President Peter Mueller (CDU) Stefan confided that Koch had 
lobbied other states heavily on this issue.  State Secretary 
Josef Hecken (CDU) added that the Saarland CDU is not 
looking to hand the Schroeder government a defeat but fears 
a debacle if governments appear unable to pay benefits on 
January 1.  Given the legal and financial uncertainties 
connected with the reforms, Saarland had no choice but to 
reject the bill.  Hecken is hopeful that the sides can still 
reach a compromise. 
 
4.  Local communities fear the deadlock will cost them 
billions of euros.  Few believe that the Federal Employment 
Agency will be ready to pay benefits on January 1, meaning 
that cities and counties (many of which teeter on the edge 
of bankruptcy) will have to keep paying welfare to the long- 
term unemployed.  The spokesman for the Council of Cities in 
Hesse, Bernhard Brehl, told us cities could live with a 
variety of reforms, but failing to implement reforms by 
January 1 would be "the ultimate disaster" -- an additional 
2.5 billion euro expense in 2005 for local budgets.  Brehl 
criticized the Koch plan since it would not support local 
authorities who choose to let the Federal Employment Agency 
administer benefits.  Frankfurt Lord Mayor Petra Roth (CDU) 
-- who also serves as head of the German Council of Cities - 
- has spoken out in favor of a greater federal role in 
fighting long-term unemployment.  On May 25, the Federal 
Employment Agency announced an agreement with the Council of 
Cities and the Federation of Cities/Towns, signaling local 
government support for the federal government's approach 
over Koch's conservative model. 
 
5. COMMENT:  Continued stalemate on reforming long-term 
unemployment benefits could be the worst possible outcome -- 
a defeat for economic reform, a continued drag on growth and 
employment, and an unfunded mandate for local governments. 
END COMMENT. 
 
BODDE