US embassy cable - 05FRANKFURT4005

UNCLAS SECTION 01 OF 02 FRANKFURT 004005 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: ECON, EINV, PINR, GM 
SUBJECT: Frankfurt Worries About Its Economic Future 
 
REF: Frankfurt 2147 
 
Sensitive but unclassified; not for Internet distribution. 
 
1. (SBU) SUMMARY:  Recent developments including the failure 
of the Frankfurt-based German Stock Exchange to take over 
its London counterpart have sparked concerns over the 
economic future of the Frankfurt/Rhein-Main area in 
comparison to other European metropoles.  With slow growth 
in the area's traditional strongholds (finance and 
transportation) and trailing some other cities in high 
technology, Frankfurt remains a competitive location for 
business but is losing ground relative to other European 
cities.  City leaders are working to diversify the Rhein- 
Main region's economic base by strengthening its nascent 
biotech and IT/media sectors.  While proposals abound, 
decisive action is unlikely until after local elections in 
early 2006.  END SUMMARY. 
 
2. (U) The shake-up at the German Stock Exchange in 
Frankfurt (which recently failed to take over the London 
Stock Exchange) comes in the midst of growing concerns over 
Frankfurt's future as a financial and business center. 
Consulting firm Cushman-Wakefield-Baker's 2004 study of the 
30 most competitive European cities (European Cities 
Monitor) forecasts that Frankfurt will fall from third place 
overall today (behind London and Paris) to number 11 by 
2009.  A December 2004 study comparing leading economic 
regions in Europe and the U.S. (conducted by the Rhein-Main 
Economic Development Initiative) names Frankfurt as Europe's 
top location in terms of transport accessibility and second 
in economic weight, but only in twentieth place when it 
comes to the quality of higher education (an important 
factor for high technology).  As Europe's "skyline" city, 
Frankfurt's slow growth is visible in high vacancy rates and 
the inability to move forward on two large building projects 
-- the "Osthafen" development surrounding the planned 
European Central Bank tower and the Millennium- 
Tower/Europaviertel next to Frankfurt's main train station. 
 
3. (U) Business and political leaders are well aware of the 
long-term challenges facing Frankfurt.  While arguably on 
par today with Munich as Germany's two leading economic 
regions, the Rhein-Main area's heavy dependence on finance 
and the Frankfurt Airport poses risks given the difficulties 
both sectors have faced in recent years.  Employment in 
Frankfurt's banking sector is shrinking (though banks still 
employ 80,000 people in the area).  While city authorities 
are promoting information technology (IT) and biotechnology 
in attempt to diversify the area's economic base, others 
question spending large sums on diversification and say that 
Frankfurt should focus on maintaining its leading position 
in financial services and transportation, since those 
sectors are key to creating demand (and comparative 
advantage) in other businesses. 
 
4. (U) Frankfurt trails German bio-tech centers in Munich 
and Berlin/Brandenburg but has heavily invested in bio- 
technology in an effort to shore up its once-large chemical 
and pharmaceutical sectors (which still employ 22,000 
people).  Data supplied by the Frankfurt Chamber of Commerce 
show that Munich is more economically dynamic than Frankfurt 
(particularly in high-tech manufacturing and management 
consulting) but Frankfurt has made some progress in the IT 
sector, doubling the number of employees from 1998 to 2003 
(to 16,000).  Today one third of the Germany's large IT and 
telecommunication service providers are located in 
Frankfurt; four-fifths of Germany's Internet traffic (and a 
third of Europe's web traffic) are routed through Frankfurt. 
One of Europe's leading trade fair venues, Frankfurt is host 
to several of the world's largest trade shows but must 
continually compete for their business. 
 
5. (U) Frankfurt's future as Europe's leading transportation 
hub depends on the expansion of Frankfurt airport, Germany's 
largest and arguably the most important in Europe in terms 
of combined freight/passenger traffic.  Centrally located 
and highly accessible (next to Europe's most-traveled 
highway intersection and near Europe's busiest train 
station), the airport is reaching the limits of its present 
infrastructure (which can support about 50 million annual 
passengers).  A new runway -- which could boost that 
capacity to 80 million -- was originally slated to open in 
2006 but will now come into service in 2008 at the earliest 
(legal challenges are still pending and construction has not 
yet begun).  Frankfurt airport is Germany's largest 
workplace with direct employment of 65,000 people (and 
indirectly another seventy thousand); expansion would create 
up to 100,000 new jobs according to airport authority 
Fraport (this figure is disputed).  According to the head of 
Frankfurt's Economic Development Authority, Hartmut 
Schwesinger, further delay in airport expansion would have 
serious negative consequences for Frankfurt's financial 
services sector and other businesses.  Airport authorities 
appear cautiously optimistic:  the city of Frankfurt and the 
state of Hesse back expansion, and the tough economic 
climate has softened resistance to the project. 
 
COMMENT 
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6. (SBU) Frankfurt remains Germany's most productive 
economic area in per capita terms (the Rhein-Main region 
produces 9% of Germany's GDP in an area representing only 4% 
of the country's territory) and has comparative advantages 
through a financial and transportation infrastructure 
unmatched on the European continent.  With limited resources 
-- Frankfurt is Germany's most indebted city per capita 
(excluding "city-states" such as Berlin and Hamburg) -- the 
city will be hard-pressed to invest heavily in 
diversification, suggesting that it will remain concentrated 
in finance and transportation with modest growth in related 
service sectors such as insurance, consulting, and 
media/public relations.  Frankfurt's PR and media sectors 
(especially post-production) are growing; its nascent 
insurance sector may expand with the city's selection to 
host the Committee of European Insurance and Occupational 
Pensions Supervisors (CEIOPS), the likely nucleus for a 
future EU-level supervisory agency. 
 
7.  (SBU) Frankfurt officials say privately that the city's 
biggest problem is political stalemate under a loose 
coalition of the four major parties and local election rules 
which favor small parties and independents (absent the five- 
percent threshold which applies in state and national 
elections).  Political insiders hope for a decisive outcome 
in spring 2006 local elections (REFTEL).  By most signs, 
"Mainhattan" must work harder to defend its claim as 
economic center to an expanding Europe.  END COMMENT. 
 
8. (U) NOTE:  the European Cities Monitor 2004 study is 
available at: 
 
http://www.frankfurt.de/sixcms/media.php/2000 /CitiesMonitor2 
004.pdf 
 
BODDE