Speech on the occasion of the New Year's reception of the German-American Chamber of Commerce, University Club, New York, January 17, 2008

Dear Caroll, lieber Herr Neubauer,
dear Benno, lieber Herr Bunse,
friends, ladies and gentlemen,

Thank you for inviting me to this event. Both of you really have to take the credit for this great turnout. Let me congratulate you on your successful work of the last year which is acknowledged by the Chambers members. I wish you – and your members – the same success as in the year 2007.

I was asked to speak about German politics. You are, I hope, well aware, how sensitive this is. About two years ago around this time of the year I listened to a keynote speech by a German Ambassador who, with due reference to the “off-the-record” principle, stated that the new coalition in Germany would not last longer than two years.

You could now legitimately argue that I am making the same mistake speaking to you about “The Grand Coalition – A success story”. How do I know as the grand coalition only reaches its mid-term? Well, I do not and do not pretend to. That is why the title of this speech should have read to you “The Grand Coaltion – A success story?” and you might observe the question mark by the lift of my voice. But for any reason it has been left out by the editor in chief of today´s invitation cards. Perhaps because he was anticipating a Consul General´s loyalty to his government? – and again, mind the question mark! Anyway, coming back to the prediction that the grand coalition would not last longer than two years, what does that teach us? I think mainly: Predictions are dangerous, especially when they concern the future.

Nevertheless, it is worthwhile to look back to earlier predictions and the reasons for them to get a good assessment of where we stand.
Regarding the prediction that the government wouldn’t last, it seemed to be likely two years ago, because Christian Democrats and Social Democrats seemed to come from opposite political corners, seemed to be too far apart. But: The Grand Coalition is still on duty. How was this possible? Before the last elections the population had lost faith in the competence of the government to solve problems. But the population and the members of the government themselves saw that the grand coalition reduced unnecessary partisanship and allowed compromises.

Another prediction was: The economy would stagnate after Chancellor Angela Merkel and Finance Minister Peer Steinbrück raised the value added tax from 16% to 19%. Instead, 2007 has been an exceptional year. With two and a half per cent Germany saw robust economic growth, while German productivity jumped by over two and a half per cent - far faster than in France and Italy – helping the eurozone close the gap with the U.S. Meanwhile, unemployment dropped significantly to about three and a half million (as of December 2007) with an unemployment rate of nearly eight per cent. Forty million Germans where employed. Not only was this the highest postwar number of employed people in Germany recorded, but it meant Germany has already reached the 2010 employment goals agreed by the European Union in its so-called “Lisbon Strategy”.

Not surprisingly, the long-slumping private domestic demand is now gathering momentum and becoming a major driver of economic growth in the years to come. A forecast by the Cologne Institute for Economic Research expects the domestic demand in Germany to rise by over two per cent in 2008. This will lower the German dependency on exports. Given these encouraging developments, we also will witness a balanced federal budget in the very near future. We have already achieved - as just announced a few days ago - a balanced overall budget, that is all levels of government: federal, state, local and social security, as measured by the so-called Maastricht criteria. This is something that was deemed impossible only three years ago, when Germany faced severe penalties for failing to comply with the euro stability criteria set by the European Union. You may have read that this success story in part prompted the Financial Times to declare German Finance Minister Peer Steinbrück best Finance Minster of the Eurozone in 2007.

Perhaps you agree, that this could have led to the title “The grand coalition – a success story” even without a question mark, especially because as recently as two years ago, the country was being referred to as “the sick man of Europe” and was plagued by stagnant growth and high joblessness. Now the airliner “Germany” that is Europe´s largest economy has reached its cruising altitude, again.
Moreover, the airliner has attained high speed: Germany is - again - one of the most competitive economies in Europe and worldwide. The World Economic Forum ranked Germany fifth out of over 130 countries in its latest 2007 Global Competitiveness Index. Ranking “only” seventh last year, Germany could improve global competitiveness by two positions within a year. A fact that led a large number of German firms that moved production abroad some years ago to now bring their operations back home.

In 2007 we celebrated the 60th anniversary of the European Recovery Program better known as the Marshall-Plan, in 2008 we are celebrating the 60th anniversary of the airlift of Berlin, that is enough reason to also say a few words about how our two countries work together and are linked to each other 63 years after the world war. This is a foreign policy question of particular importance to Chancellor Merkel. The United States of America and the European Union account for forty per cent of the worldwide commerce. Goods worth much more than one billion Euro are exchanged every day between the European Union and the U.S. We are the two largest economic areas of the world, deeply affiliated by mutual investments of one and a half trillion Euro. We therefore represent the world´s deepest bilateral trade and investment relationship between continents.

German companies in the U.S. are in good shape. They contribute to economic growth here in the US: The total revenues of German companies operating in the U.S. are seven times the amount of the bilateral trade volume. The American Chamber of Commerce in Germany reports that the volume of investment from U.S. firms is higher in Germany than in any other country outside the United States. American companies in Germany account directly for 800,000 jobs while ten of them employ more than 10,000 people each. And people want even closer ties. According to a recent survey of public opinion on “Perspectives on Trade and Poverty Reduction” by the German Marshall Fund, about two thirds of Americans and Europeans support further deepening trade and investment between the European Union and the United States. A significant step towards this goal has been made during the German EU presidency at the summit in April 2007 as the U.S. and European governments agreed to renew efforts to a closer cooperation through the creation of the new Transatlantic Economic Council. The results after the first meeting of the Council in November 2007 are encouraging: Progress has been achieved regarding the central issues of the Financial Markets Regulatory Dialogue and the free flow of investment, the mutual recognition of accounting standards. Thus a successful kick-off meeting can be affirmed while both parties fortunately remain pressed forward to further success. Time does not permit me venturing to far into the field of foreign policy. But just let me state that the grand coalition has, in my eyes, a very balanced and successful foreign policy record. The European Union is back on track after the German EU presidency, the relations with Russia – of strategic importance for Europe´s energy resources – are good but not to cuddly, relations with difficult neighbors like Poland were handled in a relaxed and thoughtful way without losing sight of Germany´s own interests, German contributions to world crisis areas, like Near East or Iran, were proactively constructive. All in all, there might be other governments which are better in catching the eye of the media, but when it comes to down to earth results the German grand coalition has done a very good job.

Coming back to the predictions on the grand coalition, a third prediction was, that the policy of “small steps” will soon lead to stagnation and stalemate. Even the most furious critic of the government will have to admit, that regarding climate protection there has been no policy of “small steps”. In fact, one could say that the grand coalition in general and Chancellor Merkel in particular did have an annus mirabilis/vertical take-off on climate protection. Exclamation mark!

As chair of the European Union, she managed to get the union´s 27 member states to agree on an ambitious climate change agenda when the EU committed itself to reduce its carbon dioxide emission by 20% until 2020 relative to 1990 levels. In addition the EU committed to a reduction by as much as 30% over the same period, provided that other developed countries and economically more advanced developing countries also do their part. The EU also committed to increase energy efficiency and the share of renewable energies by 20%. As chair of the G8 Chancellor Merkel might also have played a role in U.S. President George W. Bush´s change of heart in climate change. Be that as it may, Germany´s G8 summit at Heiligendamm was a success. The G8 leaders committed themselves to climate protection and agreed to develop a common, long-term goal for greenhouse gas reductions. They will seriously consider at least cutting emissions in half by the year 2050. Heiligendamm can hence be seen as a kind of basis for the breakthrough “Bali Roadmap”, which charts the course for a new negotiating process to be concluded by 2009 that will ultimately lead to a post-2012 international agreement on climate change. We all noticed the ground-breaking decisions taken in Bali.

Irrespectively, climate protection is and has been one of the focal points of Germany´s policies. Germany is cutting-edge regarding climate protection in general and the expansion of renewables in particular.
In no other nation has the development of renewable energy been as rapid as in Germany and we still remain ambitious: The government has announced a 40% reduction in greenhouse gas emissions by 2020. In order to reach this goal, an integrated climate and energy package comprising about thirty measures was adopted at a special cabinet meeting in August 2007. Germany will remain on the forefront of climate protection.

On the other hand, regarding the economic aspect of the “policy of small steps”, I think that Chancellor Merkel has proven one old saying right: 90% of the economy is psychology. As long as the population and the economic actors believe that the steps – as small as they may be – go in the right direction, she will be sailing with fair winds. And one shouldn’t underestimate the “small steps” that were taken: The retirement age was raised from 65 to 67, the “Elterngeld” (child credit) was introduced and the unemployment insurance rate was cut from 4.2% of gross wages to 3.3%. Further areas of progress are corporate tax reform, reduction of social security tax rates and reforms to the federalist structures and the reform of the national health care system.

However, there is of course still a lot to do and the social and economic reforms in Germany must not lose their momentum. Especially, as the threats to a further prosperous development are gaining ground. The widespread turmoil of the subprime crisis is beginning to unfold. Some of you might have been here when FM Steinbrück underlined the dangers of this crisis. It is “no fun”, and for once the governments can not be made accountable, some soul-searching for financial business-leaders is to be done. On top we have the soaring oil price, the undervalued US-Dollar and the rising danger of a downswing of the US-economy. – This takes me back to my question mark and the fact, that 90% of the economy is psychology: So we have enough reason to believe that the German airliner could loose its altitude again. Some say, in addition, that the achievements of the grand coalition at home have been modest at most: In two years, the government adopted only a handful of measures that live up to the standards set by the former Agenda 2010 package of social security and labour market reforms. And indeed, after two years of robust growth and sinking unemployment, the government will now face rising pressure from a slowing economy, rising inflation and the cry for more generous wage agreements. The overall picture will make the government look vulnerable to accusations of economic mismanagement and complaints that many Germans did not profit from the upswing. Moreover, it seems to lead to broad discussions about “social justice” and the call for a “strong state” as issues like the minimum wage and chief executive salary caps arise. Thus, as economic growth is expected to slow down further while inflation is rising and even the government expects a slight deficit in the overall budget this year, again, it will be the task of the government, not to gamble away the achieved.

In addition, the upcoming elections in different “Bundesländer” are producing a rough political climate. Critics argue that the government will under those circumstances of political infighting not take any concrete labour market steps before 2009. This could lead the airliner to a serious stall. But this scenario is not inevitable. The regional elections which will be held in the states of Lower Saxony and Hesse both on the 27th of January, followed by Hamburg on the 24th of February, are of a certain importance for the major parties in Germany because the outcome is not predictable. After those elections there will be an election-campaign-free period until the elections in Bavaria on the 28th of September. But in Bavaria no major upset is to be expected, even though the governing CSU is in a stage of renewal. In spring and summer 2009 the political climate will, of course become hot again because of the campaigns for the election of the Bundestag, the European Parliament and the parliament of Thuringia. Hence, at least a gap remains for the government, big enough to realize its plans in the fields of mutual consent. And there still are fields of broad acceptance: more funds for R&D, further stabilization of budget and finances; step-wise restructuring of non-wage labour costs, including eventually an indirect tax, family policy, immigration policy without the former ideological wars and foreign and EU-policy. However, there are also policy fields where the differences of both the parties are important: they don’t agree on liberalisation of labour rules, extension of the unemployment compensation, income tax reform and a further reform of the death duty, internal security and nuclear energy.

So if you want me to tell you whether I do agree to the title of this speech “The Grand Coalition - A success story” or if I should have insisted on the question mark, allow me - innately being a historian – to leave this for my colleagues, the historians, to be judged in the future. But, my opinion is that the great coalition did far better than expected - exclamation mark! If you ask me now: Are the recent developments encouraging? Let me answer this way: This remains an open question. Period.