This article was downloaded by: [MPI Max-Planck-institute FurGesellschaftsforschung]On: 27 August 2014, At: 05:46Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number:1072954 Registered office: Mortimer House, 37-41 Mortimer Street,London W1T 3JH, UK

German PoliticsPublication details, including instructions forauthors and subscription information:http://www.tandfonline.com/loi/fgrp20

From managed to marketcapitalism? German financein transitionSusanne Lütz aa Max‐Planck Institute for the Study ofSocieties , Cologne, GermanyPublished online: 28 Sep 2007.

To cite this article: Susanne Lütz (2000) From managed to marketcapitalism? German finance in transition, German Politics, 9:2, 149-170, DOI:10.1080/09644000008404596

To link to this article: http://dx.doi.org/10.1080/09644000008404596

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of allthe information (the “Content”) contained in the publications on ourplatform. However, Taylor & Francis, our agents, and our licensorsmake no representations or warranties whatsoever as to the accuracy,completeness, or suitability for any purpose of the Content. Anyopinions and views expressed in this publication are the opinions andviews of the authors, and are not the views of or endorsed by Taylor& Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information.Taylor and Francis shall not be liable for any losses, actions, claims,proceedings, demands, costs, expenses, damages, and other liabilities

whatsoever or howsoever caused arising directly or indirectly inconnection with, in relation to or arising out of the use of the Content.

This article may be used for research, teaching, and private studypurposes. Any substantial or systematic reproduction, redistribution,reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of accessand use can be found at http://www.tandfonline.com/page/terms-and-conditions

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

From Managed to Market Capitalism?German Finance in Transition

SUSANNE LÜTZ

Deregulation, technological change, and the integration of marketsincrease the competitive pressures on forms of national and sectoralgovernance. The heart of the issue is whether the continental,consensus-oriented model of capitalism is gravitating towards theAnglo-Saxon, market-oriented model. This essay examines theheuristic value of this convergence thesis, using the German financialsector and its relations to industry and government as a case in point.It will be argued that while the institutional restructuring that is takingplace within Germany reflects characteristics of Anglo-Saxoncapitalism, institutional hurdles, such as federal structures and theveto power of certain societal lobbies, have thus far prevented such aconvergence throughout the entire system.

VARIATIONS OF CAPITALISM BETWEEN DIVERGENCE ANDCONVERGENCE

In the past decade, the managed capitalism thriving in the Federal Republicof Germany has been under unprecedented pressure to change. Theintegration of global and European markets, the unleashing of capitalismafter the collapse of socialism in the east, German unification and theemergence of the neoliberal economic doctrine have all played importantroles. The unrestricted mobility of financial capital in particular increasesthe competition among national regimes of capitalism.

What this actually boils down to is the competition between two idealtypes of capitalist regimes, which still peacefully coexisted in the early1980s: 'Rhenish' managed capitalism, found foremost in Germany, and'Atlantic' market-oriented capitalism, flourishing primarily in the UnitedStates and Great Britain.1

As Shonfield suggests in his analysis of the post-war period, the Germanmodel of 'organised' or managed capitalism is characterised by a high

Susanne Lütz, Max-Planck Institute for the Study of Societies, Cologne, Germany.

German Politics, Vol.9, No.2 (August 2000), pp.149-170PUBLISHED BY FRANK CASS, LONDON

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

150 GERMAN POLITICS

degree of collective functioning in the industrial and financial sectors.2 Anumber of cartel-like arrangements and umbrella associations which oftenenjoy a semi-public status (so-called 'private interest governments')3 helpco-ordinate the processes of introducing change to the various economicsectors, both from the side of management and of labour. In the world ofcorporate finance, banks play the major role, not the capital market. SinceGerman universal banks lend money, own stock and vote at shareholders'meetings, and have seats on the supervisory boards of their corporateclients, they are continually able to influence the management policy ofthese firms. Since, in turn, a great deal of information on corporatemanagement policy is transmitted to the banks, they are more willing tosupport longer term investment strategies by granting comprehensive andlow-interest credit (patient capital) and to bail their clients out of financialcrises. In this way, a company is integrated into a strong network of partnersthat largely protects each member firm from any attempt at 'hostiletakeover' by other companies. Co-operative labour relations within thecompany are maintained by ensuring employee rights of co-determinationon the supervisory board. In stakeholder capitalism, company policyremains opaque to those on the outside, especially to small shareholders.

Contributing to such opaqueness are the laws governing stockcorporations, capital markets and accounting standards, which allow marketactors a great deal of discretion in determining the confidentiality ofbusiness information. These laws also enable management to calculateprofits and losses over longer periods of time and to survive phases ofsevere losses better with the aid of tax-favoured reserves (accountingprinciple of caution). Such a strategy guarantees shareholders the paymentof unchanged dividends over a period of time, even though the dividendmay remain below the market value of the corporation's earnings andprofits. The advantage of such a model is that it nurtures close and long-lasting relations, which serve as a type of infrastructure for the company andenable it to pursue managed strategies of crisis management. Since muchresponsibility rests on the shoulders of corporative entities such as cartels,associations and corporate management, the burden of responsibility on thestate is significantly lightened. However, the state is incorporated into thesystem by being a partner on the national level and a member of numerousco-ordinating bodies.

The Anglo-Saxon model of market-oriented capitalism is characterisedby more loosely coupled relations between industry, finance andgovernment. Within the industrial and financial sectors, associations actmore like lobbies than like self-regulating institutions, and a strict anti-trustpolicy prevents the creation, at least in the United States, of cartel-likestructures of self-help in business. In the corporate finance system, banks do

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 151

not play a major role. Instead they act more as buyers and sellers ofsecurities, diversify their corporate stock holdings and tend to sell theseduring crises. Companies use the organised capital market first andforemost as a source to raise capital; they also diversify their ownership bybeing publicly traded. Rather than a strong network of stockholders andfinancial institutions, it is the market, meaning the stock market quotationof companies, which has the greatest influence on corporate management.Poor management is punished with falling stock prices and a drop individend payments, and the danger of an aggressive takeover increases veryrapidly. Successful management rewards its shareholders with morefrequent dividend payments during short-term periods of accrued profit.The advantage of a system based on short-term contacts is the ability toadapt immediately to changes on the market. Such a shareholder valueorientation also tends to characterise labour relations. Incentives such asshare-option programs and special performance-dependent bonuses helpmotivate top managers to pursue company interests aggressively. Thisinvestor-oriented system is supported, at least in the United States, by arigid and formalised regulation of capital markets (in the area of corporateaccounting standards and stock market regulation), which requires thepublic disclosure and reporting of information on the company and itsmarket performance (true and fair view principle). This is enforced in partby law. Like the model of managed capitalism, this model of market-oriented capitalism does not place government at the centre of events. Thestate does, however, act as a liberal regulator that interprets its majorfunction as being the guarantor of market transparency.

The peaceful coexistence of these different models of capitalism seemsto be increasingly endangered. The deregulation of previously nationalisedor at least nationally supervised economic sectors has increased thecompetition between national enterprises and thus the pressure to createmore innovative products rapidly while reducing labour and capital costs.Decision-making processes that have traditionally relied internally on aconsensus between management and labour and externally on co-ordinationwith associations, banks and government representatives become costlywhen quick responses are the international order of the day. Theglobalisation of financial markets clears the way for the rapid and world-wide supply of capital and for a commercialisation of the relations betweencreditors and debtors. Lastly, growing markets and increasing anonymityrequire the disclosure and formalisation of the rules of conduct in themarket-place.

It is sometimes argued that the more product and capital markets areintegrated, the more the model of managed capitalism will be coerced toadapt to its Anglo-Saxon counterpart. In this paper, the accuracy of this

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

152 GERMAN POLITICS

convergence thesis will be explored in the case of the German financialsector and its relations to business and the state. Until now, finance wasalways part of a national configuration of capitalism and thereby helpedsignificantly to shape the mechanisms of a capitalist economy specific to anation. However, in the German model an important transformation istaking place that reveals characteristics of the Anglo-Saxon model in thedistribution of property rights, the nature of politics, the definition ofpolities and the creation of policy. At the same time, convergence of themodels throughout the entire system has been prevented until now byinstitutional 'brakes' such as federal structures and by the considerationgiven those clientele, closely affiliated with party politics, who may be thelosers in the modernisation process.

THE OLD MODEL: CARTELS, CORPORATISM AND SELF-REGULATION4

Until now, the German banking sector has been dominated by thecompetition between three main types of institutions (group competition)which vary in their business strategy and corporate structure: the privatecommercial banks, the public or non-commercial savings banks (includingthe banks of each Land), and the credit co-operatives. The members of allthree groups are universal banks, which are permitted to trade in securitiesand to deal in deposit-banking and lending. Unlike private commercialbanks, the federally established savings banks and credit co-operatives arealso charged with the task of pursuing goals that are good for the generalwelfare, in addition to those that are strictly good for their business. For thesavings banks and Lander banks, one such goal is to ensure that all regionsare sufficiently provided with financial services (principle of territoriality)and another is to use Lander banks to fulfil aims of industrial policy. Asinstitutions of public law, the savings banks are supported in this businessby their communities and the Lander banks by their respective state andmunicipal governments. They shoulder an unlimited liability for their banksby guaranteeing funds to cover unrecoverable capital (losses) and therebyinsure the further existence of the banks (Anstaltslast). For credit co-operatives, the collective purpose of the institutions lies in the support oftheir members, who traditionally have been private customers and smallskilled labour and retail businesses. Similar to the savings bank sector, theexistence of each institution is guaranteed, since the members of the co-operative are personally liable for the organisation in proportion to thenumber of shares each holds (Nachschuflpflicht).

This limited degree of competition is also supported strongly byumbrella associations, acting as 'private interest governments'5 which can

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 153

make binding commitments on behalf of the entire banking business. Aglance at the history of the development of the German Savings Banks andGiro Association (Deutscher Sparkassen- und Giroverband, DSGV) and theFederal Association of Credit Co-operatives (Bundesverband der Volks-und Raiffeisenbanken, BVR) shows that these associations have nearlyalways assumed the task of auditing the books of their members as wasstipulated in the Prussian auditing ordinance, or more specifically in the Co-operative Association Law. The umbrella organisation for the privatecommercial banking business, the Federal Association of German Banks(Bundesverband deutscher Banken, BdB), also assumes certain 'publicduties' because it runs a solidarity fund, financed by all member banks, toprotect customer deposits against bankruptcy and insolvency (depositinsurance). In practice, private banks are compelled to join the privatebanking association, because they are only permitted to operate when theycan prove their membership in a deposit insurance fund.6

Within the banking sector, we thus find an impressive degree of internalgovernance, the foremost purpose of which is to guarantee the continuedexistence of member firms and thereby stabilise the entire sector. Similarstructures and functions can also be found in the relationship between banksand industry. The Hausbank relationship, so essential to the German model,is usually considered to have its roots in the financial participation ofGerman banks during the industrialisation that took place in the latter thirdof the nineteenth century. Alexander Gerschenkron explained this quasi-symbiotic relationship between 'trust banks' and the business leaders oftrade and industry by pointing out the relative backwardness of a countrythat is considered to have been a latecomer to industrial development.7

Close relationships between banks and industry seemed to be a functionalsolution to the need to mobilise large sums of capital for investment.However, historians have challenged this functionalist perception byarguing that the power balance between banks and firms differed accordingto firm size, sector and region:8 banks preferred large firms to small ones.They figured prominently in coal, steel, heavy machinery and the electricalindustry, but never played a major role in textiles, machine tools or thechemical industry, whose rate of self-financing has traditionally been quitehigh. Up to 1900, the chemical industry was able to finance between one-third and one-half of its total expansion from operating surpluses.9

Moreover, as Herrigel demonstrated, some German regions (for example,Siegen, Baden-Wurttemberg) followed a decentralised industrialisationpattern in which small and medium-sized firms were dominant.10 RichardDeeg's work suggests that until the 1920s the financial needs of theseregions were typically served by smaller savings and co-operative banksrather than the big universal banks."

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

154 GERMAN POLITICS

While there is admittedly an empirical variety of German Hausbankrelationships, the importance of close relations between 'big banks' and 'bigbusiness' in German industrial history cannot be overlooked. The threemajor universal banks (Disconto-Gesellschaft, Deutsche Bank, DresdnerBank) were established by industrialists in order to raise capital by issuingand trading stock. By the same token, the banks bought shareholdings inmultinational companies and later sought to monopolise the financialarrangements of 'their' industrial customers and to serve them in variousways 'from the cradle to the grave'. Industrial partners were committed toconduct all financial business only with them, including lending and girotransactions.12 Banks also sought direct influence on all the importantinvestment decisions of the companies which they helped to finance while,on the other hand, they were prepared to accept short-term financial lossesin order to secure their long-term co-operation.13

Particularly during periods of crisis, the major private commercial banksused their close connections to industry to attain (additional) seats on thesupervisory boards of their corporate clients, to increase their ownshareholdings and, lastly, to procure more voting rights at the shareholders'meetings of these corporations. In addition, they held proxy voting power,which gave banks the right to vote on behalf of customers who had sharesdeposited with them. The cartels set up by these big banks in the steel andelectronics industries in order to save Krupp (1966) and AEG-Telefunken(1979) have a nearly legendary status. In both cases, the respectiveHausbank first organised a supportive banking consortium and additionalloan guarantees from the federal and Lander governments. Then bankrepresentatives assumed seats on the supervisory boards of these companiesin order to supervise the rescue operation better.14

At the same time that German universal banks were emerging andbecoming closely integrated with industry, the foundations of Germancorporate law were being laid. The salient features of this body of law were,firstly, the extensive autonomy granted corporate boards with regard to thedisclosure of company information and, secondly, the control of companypolicy given to insider networks. In 1870, on the eve of the foreseeableperiod of rapid industrial expansion (Griinderjahre), the mandatorylicensing of corporations was done away with and the German CommercialCode of 1861 became the framework for company founders. In keepingwith the common business practices of the time, entrepreneurs were simplyobliged to show 'adequate and orderly bookkeeping' as proof that they wereupholding the principle of 'commercial prudence'. Statutory disclosureregulations governing the issuing of equities did not exist. In the wake of thecrisis that followed this boom and of innumerable bankruptcies of stockcompanies, the state turned over its role as the formal supervisory agent to

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 155

supervisory boards in 1884, which were responsible for the appointmentand supervision of a company's board of directors and for approving certainbusiness decisions. Such supervisory boards represented the most importantgroups of shareholders, most of which were banks, the family owners oremployees of the company.15 In the 1950s, labour became part of thestakeholder network that supervised the work of the company'smanagement. In coal, iron and steel companies with more than 1,000employees, supervisory boards were organised on a model of parity co-determination with representatives from the unions and shareholders'groups; in 1976, this principle was extended in the Co-determination Lawto include all companies with more than 2,000 employees.

In a structural model that is based on a pronounced degree of self-regulation by banks, industry and labour, the state does not play a majorrole. The autonomy of the German Federal Bank has been seen as one of theforemost factors in hindering the state from dictating monetary policy.16 Butthe state is involved in making managed capitalism work, sometimesindirectly and sometimes decisively. For one, the state provides the bankingsector with the necessary autonomy to regulate itself by granting bankingassociations the status of public institutions, implicitly committing them toact in the public interest. For another, the state codifies into law collectivelynegotiated settlements, such as the capital adequacy standards set by thebanking associations, and makes these compulsory for all sectors of themarket. As a partner in corporatist alliances, the state invests resources andthereby compensates its partners for concessions made, which in turn helpsproduce agreements.

Overall, the advantage of managed capitalism is that it combinesstability with social balance: Risks are internalised through collective self-help, corporate decisions are controlled by an insider network, losers in thestructural processes of modernisation are compensated. However, aconsiderable disadvantage of the model is that the game plan of co-operation is devised by the insiders and remains obscure for outsiders,including small shareholders.

A NEW FRAMEWORK: GLOBALISATION, EUROPEANISATIONAND THE IMPACT ON GERMANY

In the 1970s, after the Bretton Woods system fell apart and a transition toflexible exchange rates was made, an international trend to dismantlenational controls over capital movement began to emerge. Governmentspermitted the trade of financial products and lowered the barriers formembership of foreigners on the domestic stock exchanges. The push toturn much of Europe into one large domestic market forced the integration

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

156 GERMAN POLITICS

of national financial markets beginning in the mid-1980s. Thanks to such a'European passport', banks, stock exchanges, stockbrokers and securitybrokerages were able to offer their services throughout Europe as long asthey upheld the minimum standards of capital adequacy and investorprotection. The project to unify Europe monetarily reduces the profit marginin foreign exchange trading and forces national financial markets to becomemore competitive. A European anti-trust policy, endowed with specialpowers by the European Commission, is being pushed ahead to tacklebarriers blocking further market integration.

Since the 1980s, a fundamental structural change has become evident:the business of issuing and trading securities has become much moreattractive than lending money. For large creditworthy firms, in particular, itis often cheaper to acquire capital on international markets by issuing sharesor bonds than to seek loans from their Hausbank ('securitisation').17 Banksare being side-stepped by their former customers as the classic financialintermediary ('disintermediation'), leaving the banks to get more involvedin the lucrative business of securities trading. Institutional investors haveexperienced a growth spurt in the last 15 years, especially in the UnitedStates and Great Britain, that has made them major contenders in securitymarkets internationally. Because they act as shareholders in largecompanies and as security buyers, these insurance companies, pensionfunds and investment funds have been courted by banks and big business.Since institutional investors tend to diversify their portfolios internationallyand operate with large blocks of the most liquid shares, they are in anexcellent position to pursue their own interests by playing national financialcentres, financial brokers and capital-seeking companies off against oneanother.

While the market is being expanded, efforts are also being madepolitically to adapt the legal framework of the financial business andcorporate governance to international standards. The European Commissionenvisions an integrated European capital market that also promotes investorprotection by creating transparency in capital market transactions and in thebusiness affairs of companies listed on the stock exchange. All the same, theinitial steps in starting the dynamic pace of Europeanisation were theindividual national strides towards harmonisation. In 1986 many countries,such as Great Britain, France, Spain and Italy, began codifying andformalising regulations pertaining to investor protection while establishingand expanding governmental supervision of the organised capital market.The motor driving this process has been fuelled by the United States, wherethe regulatory authority for the national capital market (Securities andExchange Commission, SEC) has dedicated itself to the 'mission' ofprotecting investors. Companies wanting to be listed on an American stock

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 157

exchange must guarantee that their accounting is 'transparent', in theAmerican sense of the term, so that immediate transactions involving thecapital market can be better monitored. On the international level, the SEChas successfully blocked any attempt by international 'regimes' to introducestandards of capital market regulation18 that appear to threaten Americaninterests. On the European level, the process of adapting to the Americanstandards was completed for all practical purposes with the EU directiveson 'insider trading' and on 'investment services'.19 For the first time, insidertrading was legally prohibited and a network of domestic oversight bodieswas established to insure international co-operation in regulating capitalmarkets.

In the mid-1980s, banks, big business and even German governmentalauthorities found themselves forced to take into consideration the needs of(foreign) institutional investors, their new target group, when shaping theirown company policy or when restructuring the domestic financial market-place. Important elements of the older German model threatened to impedeconsiderably the competitiveness of the German economy. One suchelement in corporate law was the importance given to the rules - self-madeand self-monitored by an insider network - that regulated the conduct of theproviders of financial services in capital markets or the conduct of companymanagement toward investors. Foreign institutional investors and the SECcriticised the existing system of informal self-regulation for its lack oftransparency and accountability. In addition, the SEC prohibited the sale ofnew stock exchange products in America by arguing that these came froma market operating with standards lower than its own.20 Americanauthorities and investors hold a similar position with regard to the German,that is, the continental model of accounting standards, which givesmanagement more leeway to calculate and report profits and losses overlonger periods. So far, the SEC has recognised neither the GermanCommercial Code {Handelsgesetzbuch, HGB) nor the internationally co-ordinated International Accounting Standards (IAS) as a ticket to theAmerican capital market. Instead, foreign firms wishing to be listed on theAmerican stock exchange are required to follow American standards(General Accepted Accounting Principles, GAAP).21

There was a time in Germany when close relationships within industry,but also between banks and industry, were considered to be the key tosuccessfully managing a business crisis or preventing 'hostile takeovers'.Now, foreign investors view 'Germany, Inc.' as a handicap to investment.Cases such as the bankruptcy of Schneider Enterprises and the crises of theMetallgesellschaft or, recently, the Holzmann company made the bankslook like clueless creditors and the supervisory boards like incompetent'closed shops'. International alliances of institutional investors have

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

158 GERMAN POLITICS

formulated principles for 'good corporate governance' that call for a greaterdistance of supervisory boards to their corporations and a limitation on thenumber of seats in Germany.22 For the big banks, which are engagedincreasingly in investment banking and act as security traders and businessconsultants, it could become disadvantageous to own large amounts ofindustrial stock and to hold seats on a number of supervisory boards. Manycompanies do not even want to be advised by a bank that owns stock in theircompetitor or holds a seat on its supervisory board.23

Pressure has been mounting since the mid-1980s not only on privatemarket investors but also on the state to make the domestic market aninternationally competitive 'financial centre'. The complaint made byforeign investors that German corporate law lacked investor protectionmeasures was addressed to the Federal Ministries for Justice (BMJ) andFinance (BMF), which are responsible for all issues regarding capitalmarkets, including corporate and stock exchange law. On the Europeanlevel, both ministries had long attempted to defend traditional continentalaccounting practices or, more specifically, the informal self-regulation ofcapital markets. With regard to accounting standards, it was clear by 1990at the latest that the strategy had failed when the European Commissionceased to issue further directives and turned the project of harmonisationover to the International Accounting Standards Committee (IASC). Thisbody consists not only of representatives from selected European states andJapan, India, Malaysia, Mexico and South Africa, but also of delegatesprimarily from countries with a tradition in Anglo-American accounting(such as the United States, Great Britain, Australia, Canada and NewZealand), who often cast the decisive votes in important decisions.24 Still,the German Finance Ministry attempted to prevent passage of the insider-trading directive in the Council of Ministers. The Germans foundthemselves isolated on this issue and faced with the possibility of beingoverridden by a qualified majority of member states. Moreover, theydiscovered that Germany's reluctance to establish a governmental authorityto monitor the national capital market was steadily turning into a obstaclefor international co-operation.25

ON THE ROAD TO A NEW MODEL? COMMERCIALISATION,PLURALISATION AND REGULATION

The relationship between the three German banking groups, which hadmaintained a commercial form of peaceful coexistence until now, isbecoming more and more tense. The trade associations of both the privateand public banking sectors no longer hesitate to battle out their differencesin the press.26 Structural changes in the international financial markets and

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 159

the plurality of interests arising from these changes, especially amongprivate and public banks, have turned this latent conflict into open hostility.As the profit margins dwindle in the classic lending and savings depositbusiness, savings banks and credit co-operatives are beginning toconsolidate their operations, a move that places the markedly decentralisednature of both banking groups in question. So far, not one credit co-operative bank has been closed; instead, problematic situations have beencorrected in the time-tested manner of fusing banks under the supervision ofthe umbrella association.

In the savings bank sector, pressures to modernise the decentralisedsectoral structure spurred efforts to centralise product development and thesettlement of equity trading activities or to establish a centralised onlinebrokerage service. Also, regional governments like Baden-Wurttembergand Saxony have put political pressure on their local governments, regionalsavings bank associations and regional public sector banks (Landesbankeri)to join forces. The state of Saxony, in particular, has pushed ahead the ideaof a 'Saxony Holding', including the state's Landesbank, the SachsischeAufbaubank (another large state-owned bank), and 22 smaller savingsbanks. Critics, such as regional savings associations and trade unions, arguethat the plan challenges the principle of territoriality and that it will lead tomassive job losses among regional savings banks.27

This strong resistance indicates that in this sector concentrationprocesses are considerably buffered by different veto players expecting tolose their autonomy in the face of further consolidation. This argument isalso true for regional governments themselves. On the one hand, states arepushing the centralisation of the public banking structure on their ownterritories; on the other hand, they are still rejecting the idea of merging all13 regional public sector banks or of incorporating them in a holdingstructure.28

The future structure and business strategy of the saving banksassociation, however, rests upon the decision whether or not to retain thestate-guaranteed status enjoyed by such banks, which has become unique inEurope. Should the savings bank sector be privatised, the consequencewould be an acceleration of the concentration process by merging savingsbanks and credit co-operatives or by merging larger savings banks andprivate banks. So far, the federal government and the majority of theGerman Lander have opted to retain the public banking system.

Opponents of this system, however, are resorting more and more toEuropean anti-subsidy laws in order to question its legitimacy. In 1994, theGerman association of private banks, in co-operation with its counterpartsin Great Britain and France, filed a formal objection with the EuropeanCommission that accused the government of North Rhine-Westphalia of

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

160 GERMAN POLITICS

illegally subsidising the Westdeutsche Landesbank (WestLB, West GermanState Bank). In 1992, the government had offered the bank a capital infusionin the form of publicly owned housing assets at the rock-bottom interest rateof 0.6 per cent. The private banks argue that their public competitors enjoybetter ratings, and thus significant advantages in refinancing thanks to stateguarantees. In July 1999, the EU Commission ruled that the WestLB had torepay the government of North Rhine-Westphalia subsidies amounting tonearly DM 1.6 billion.

This ruling was a signal to the governments of other German Landerwhere similar practices were common. In September 1999, the Commissionasked the German government for information about six other Landesbankenthat were involved in transactions comparable to the WestLB.29 Similarly, theEuropean Commission is examining whether the special feature of Germanbanking in which communal and regional governments back up their publicsector banks with unlimited liability guarantees must be considered anunacceptable state subsidy.30 Moreover, the European Banking Federation,the association of private banks in Europe, has prepared a formal complaintto the Commission about the controversial state guarantees for theLandesbanken, which it says discriminate against the private banks.31

So far, the WestLB has not paid back the subsidy. The state governmentof North Rhine-Westphalia does not want the money back and has insteadproposed increasing its 43 per cent equity stake in the bank rather thanreceiving the payment in cash. Concluding that this would do nothing toeliminate the cost advantages the WestLB had gained when it received theaid, the Commission rejected the proposal. In March 2000 the conflictescalated even further when German regional leaders from Bavaria, Hesse,Bremen and Thuringia threatened to block the EU's enlargement process inthe Bundesrat, the German upper house, if Brussels did not leave theLandesbanken alone.32 The Commission has threatened to take Germany tothe European court if it presents no new proposals as to how the subsidiesshould be paid back. The federal government, however, is seeking acompromise with Brussels on the state subsidies issue, because it does notwant to impede the process of European integration.33

These examples show how sensitive the private banking sector is topractices that allegedly place it at a disadvantage when competing onEuropean and even world markets. Big private commercial banks areconcentrating their business in the commission-earning business of securitiestrading. In the last couple of years they have pursued an aggressive mergerstrategy abroad in order to acquire the know-how of British and Americaninvestment banks. The Deutsche Bank merged first with Morgan Grenfelland in 1998 with Bankers Trust, while the Dresdner Bank joined withKleinwort Benson. The failed merger of the former rivals Deutsche and

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 161

Dresdner Bank, however, does indicate a qualitative shift with regard to theforthcoming structural changes on international banking markets. Themerger would have suggested an end to the old European universal bankmodel. The new group would have largely abandoned retail banking andinstead focused on more profitable areas, such as private banking forwealthy clients, asset management and especially corporate and investmentbanking.34

Domestically, the big banks are deliberately disengaging themselvesfrom industry35 in an effort to improve their international reputation assecurity traders and business consultants. However, the private bankingsector has become increasingly reluctant to enter risky and thereforeexpensive rescue operations of all types, which was particularly evidentduring the process of German unification. To many observers, Germanunification appeared to prove that the co-operative model of crisismanagement works and could survive; the contributions of the state,industry, labour and banks towards the rebuilding of east Germany werenegotiated and then legally stipulated within the framework of theSolidarity Pact.36 Under considerable pressure from the federal government,from the Treuhand Agency, and even from the public, representatives of thebanking associations finally announced in 1993 that they would support theTreuhand Agency with a billion Marks to aid in the process of privatisation.By mid-1995, the banks declared that they had already spent their 'bankingbillions'. At that point they had invested DM 340 million in 13 firms, andthe savings bank sector had invested a sum of DM 412 million.37 Banksreacted differently than they once had when a sector of the economy neededto be rescued in a crisis: they used their investment banking capacitiesand/or subsidiaries to facilitate the privatisation of Treuhand firms. Forexample, Deutsche Bank used its subsidiary Morgan Grenfell and theRoland Berger business consulting firm to advise the Treuhand Agency inthe selling of its companies, to counsel potential buyers of Treuhandenterprises, and to aid managers of privatised businesses.38

In the course of unification, the German banks showed little interest inbuying shares in privatised enterprises. This corresponds with an overallstrategy of the big banks to gradually reduce the underperforming shares intheir portfolios, although an active management of the stakes has beenblocked by the approximately 50 per cent tax payable on capital gains. TheDeutsche Bank in particular has reduced the number of its large industrialholdings (25 per cent or more) and tends to limit many of its holdings to lessthan ten per cent.39 The Institute for Economic Research (IFO) has estimatedthat merely ten per cent of the domestically owned shareholdings in late1996 were in the hands of the banks and that shareholdings only comprisedtwo per cent of all banking assets.40

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

162 GERMAN POLITICS

The accumulation of seats held by banks on supervisory boards nolonger seems to be an element of a managed model of capitalism, as it oncewas. Whereas in 1974 private banks held over 20 per cent of the supervisoryboard seats in the 100 largest companies, by 1993 this percentage haddropped to a mere 6.3 per cent.41 In addition, Krupp's attempt at a hostiletakeover of its competitor Thyssen in 1997 revealed that structural linkagescould be used under new conditions to break away from earlier principles ofconsensus. For example, the groundwork for this takeover attempt was laidby the investment bank subsidiaries (Morgan Grenfell and KleinwortBenson) of the Hausbank that sat on the supervisory boards of both Kruppand Thyssen. Thus, for the first time, German banks openly sided with the'hostile' attacker, whereas earlier they had defended German stockcompanies against an unwanted third party.42

Big business is also relaxing its relationship to the banking sector.43 Inrecent years, it has expanded its degree of self-finance significantly asopposed to turning to the banks for loans. In the course of the currentwave of transborder acquisitions and mergers, the international capitalmarket is developing into an important forum for redefining ownershipstructures and rules of conduct. The successful takeover of Mannesmannby its British rival Vodafone AirTouch was not only the world's largesthostile bid ever ($128 billion), but also exemplifies that Germancompanies are possible targets for hostile takeovers because their stockprices are estimated to be undervalued in light of the undisclosed reservesthat they have accumulated. The bid battle was run according to 'Anglo-Saxon market logic' since Mannesmann's eventual acceptance of the dealwas largely due to pressure from shareholders, that is, institutionalinvestors.

Deals such as the merger of DaimlerChrysler and the consolidations ofDegussa and Hiils and of Hoechst and Rhone-Poulenc are staged byinvestment banks, which then establish contacts to investors. Currently,foreign investors own between 40 and 70 per cent of the shares in 10 of thelargest 100 German companies (60-70 per cent of shares in the formerMannesmann AG and in the Metallgesellschaft compared, for example,with 44 per cent of Veba).44

These globally oriented companies claim to be the vanguard of acorporate policy that includes shareholder value-principles such as higherdividend payments and balance sheet disclosure. Companies like Hoechst,Schering, BASF or SAP plan in the future to increase the use of Anglo-Saxon instruments such as share-buy-back programmes. Another importantelement of this new corporate policy is to nurture relations with investors.The Deutscher Investor Relations Kreis, e.V. (DIRK) is an organisationfounded in 1990 that now comprises of 110 companies quoted on the

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 163

exchange and is dedicated to sharing experiences in dealing with investorsboth at home and abroad.

As corporate financing becomes internationalised, more German firmsare being listed on foreign, usually American, stock exchanges. For a longtime, German companies were deterred from entering the American capitalmarket because the SEC would not recognise German or even theinternationally established standards of accounting (IAS). In 1993, Daimler-Benz became the first company to abandon the domestic camp and to switchits accounting practices to the American GAAP standards in order to belisted on the New York Stock Exchange - a step that came under heavy firein Germany and weakened the German position in the organisationsupholding the international standards of accounting. To date, DeutscheTelekom, Hoechst, SAP, VEBA and SGL Carbon AG have followed theexample of Daimler-Benz.45

The fact that a certain sector of the business world, including thebanking business, is gearing itself to capital markets world-wide indicatesthat interests are becoming more diversified. Whereas the majority of smalland mid-sized companies still prefer to maintain the classic Hausbankrelationship with saving banks and credit co-operatives46 and appear as yetto be unruffled by the discussion concerning the adoption of Anglo-Saxonstandards of accounting, the globally oriented segment of the corporateworld has become part of a new capital-market-oriented policy community.This community no longer resembles earlier cartels or businessassociations. It includes such representatives of investors' interests as thelobbies of companies listed on the exchange that advertise stocks and offeradvanced training in stock market investing, shareholder associations,47 andthe Association of Investment Funds. New professional groups have alsodeveloped, such as the organisations for financial analysts and for certifiedand chartered accountants, whose expertise in working with new financialproducts, customers and rules is increasingly in demand.

Had the state not paved the way, none of the changes described abovewould have been possible. In the older model, the state was more like apartner in a corporatist alliance who approved and codified negotiatedsolutions. Now it acts as a benefactor, regulator, and lobbyist of domestic(financial) markets. Since the early 1980s, the state has generated anunprecedented thrust in legislative activity aimed at promoting Germany asa financial centre. In all, seven laws have been passed, in part to meetEuropean guidelines but more notably to help remove gradually the barriersblocking the use of the domestic capital market and the trade of newfinancial products. In 1989, the first revision of the German Stock ExchangeLaw in nearly a century created the legal framework for establishing theGerman Futures Exchange (Deutsche Terminborse, DTB), in which a

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

164 GERMAN POLITICS

number of foreign financial products such as options, futures and swapscould be traded. Between 1990 and 1998, three laws promoting financialmarkets were passed, of which the third alone contained 100 differentmeasures. Among the most important measures was the admission, in 1994,of money market funds and, in 1998, of a special retirement savings optionthat can be organised as a mutual fund. Nevertheless, American-style, tax-favoured pension funds have not yet been introduced because they arestiffly opposed by the German insurance business. In the field of equitytrading, the repurchase of a maximum of ten per cent of a company's ownstock was first approved in the 1998 Control and Transparency Act {Gesetzzur Kontrolle und Transparenz im Unternehmensbereich, KonTraG).

The key factor leading to the restructuring of the German model was thatthe steps to liberalise the financial market were accompanied by attempts tore-regulate its framework. Reforms, first in stock exchange regulations andlater in corporate law, sought to make the conduct of market participants andthe business transactions of companies listed on the exchange moretransparent. The Second Law for the Promotion of the German FinancialMarket, passed in 1994, proved to be the turning point in the history of theGerman stock exchange because, following a bitter battle with the Lander,the federal government assumed responsibility for monitoring the stockexchange for the first time, and a supervisory agency for security trading(Bundesaufsichtsamt filr den Wertpapierhandel, BaWe) was establishedunder the jurisdiction of the Federal Ministry of Finance. Two of the tasksgiven this agency were to crack down on insider trading, which had finallybeen outlawed, and to insure that banks and investment businesses compliedwith the new 'rules of conduct'.48

Additional reforms concentrated on corporate law. With the passage ofthe above-mentioned KonTraG in March 1998, the proxy voting rights ofthe banks were restricted: if a bank holds more than five per cent of acompany's stock, the bank may no longer automatically assume the proxyvoting rights of its investment customers. Furthermore, banks andbusinesses must disclose holdings of over five per cent. The effort to reducethe number of supervisory board seats from 20 to 12 failed to succeedbecause of opposition from the unions, who feared losing their rights of co-determination, and from the Ministry of Labour. Against the initial plans ofthe Justice Ministry, the VW-law also remained intact, meaning that noother shareholder was allowed to own more than 20 per cent of the votingrights except the government of Lower Saxony and that the government, asa shareholder, could not be overridden.

The Justice Ministry was successful, however, in reforming theaccounting standards with the passage of a law facilitating the raising ofcapital {Kapitalaufnahmeerleichterungsgesetz, KapAEG) in April 1998.

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 165

German companies listed on the exchange are now allowed to issueconsolidated financial statements that are calculated on the basis ofinternationally accepted accounting standards (IAS or US-GAAP). They areexempted from filing the type of annual report required by German law.Thus, lawmakers were merely authorising the practice of using Americanaccounting standards that German companies had already actually adoptedupon entering the New York Stock Exchange. In March 1998, a GermanAccounting Standards Committee (Deutsches Rechnungslegungs StandardsCommittee, DRSC) was established to work out accounting guidelines andto represent Germany in international organisations.49

In December 1999, the Ministry of Finance unexpectedly announcedthat it would abolish the taxes on capital gains from selling equity stakes,held by one quoted company in another, as of January 2001. In theory, thismove would allow companies to divest free of tax the big shareholdingsbuilt up in rivals and industrial groups. However, it seems unlikely that thecomplex web of holdings between well-known firms and banks wouldimmediately unravel, since many of the stakes are so big that a quick salewould be impossible. Nevertheless, the measure is seen as an important steptowards a gradual whittling down of stakes which are considered non-essential.50 The ministry's plan now faces mounting opposition both fromthe Christian Democrats and some members of the ruling Social DemocraticParty. The CDU attacked the reform as unfairly benefiting large, publiclylisted groups as it only applies to joint stock and limited companies, whilethe Social Democratic state governments believe the decision is overlygenerous to big business and risks forgoing valuable tax revenues at a timeof austerity in state spending. It seems likely that the Federal Ministry ofFinance will give in to the opposition of the regional governments since theplan is part of a broader tax reform which needs ratification of the Germanupper house.51

Finally, an expert commission chaired by Chancellor Schroder isdrawing up plans to replace Germany's voluntary takeover code with a newtakeover law by the end of 2000. The expert group was set up to examinethe consequences of Vodafone's successful bid for Mannesmann. Theforthcoming law is supposed to include clear rules about the level ofshareholdings above which a general offer must be made for all of thecompany's shares and provisions to protect minority shareholders byensuring that they be treated equally - in terms of price and information.52

This burst of activity shows that the state is using its legal and regulatoryresources to promote Germany as a financial centre. On the European andglobal levels, ministries and regulatory agencies act as lobbyists of theircountry's own banks and businesses. The fact that German regulatorytraditions are exposed to considerable pressure to conform to the demands

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

166 GERMAN POLITICS

of these new market conditions is illustrated by the spread of principallyAmerican-like standards of transparency in laws governing capital markets,stock exchanges and corporate business, and by the resulting circumventionof international efforts to negotiate standards.

CONCLUSION: CONVERGENCE OR THE 'ALTERNATIVE PATH'?

German finance, possibly more so than other economic sectors or politicalarenas, is under increasing pressure to change structurally the older modelsof distributing property rights, conducting politics and constituting policy.Gone, or at least far less prevalent, is the institutional equilibrium betweenbanks, industry and the state, which had been maintained by a system ofcartels, corporatist self-regulation and informal norms. Instead, thespectrum of those involved is widening substantially, interests amongindustry and banks are becoming more heterogeneous and competitionbetween the three major bank groups is increasing. This trend towardsincreased commercialisation also influences the entire relationship betweenbanks and industry. In the process of reshaping corporate governance, theinterests of foreign investors and small shareholders are being given moreweight, whereas the power over company policy held by insider networks isconsidered less and less legitimate. More than ever, the state is acting bothat home and abroad as benefactor, regulator and lobbyist for domesticfinancial centres and is using its resources to promote competition. The lawspassed and regulations enacted to establish the national system reflect thenew overriding objective of every step towards transformation - to makemarket participants and market conduct more transparent.

Does this mean that German managed capitalism is unilaterally adaptingto an Anglo-Saxon market-oriented capitalism? Indeed, on the one hand, thereis good reason to assume that German finance will take further steps down theroad to a more market-friendly model. Investment funds will continue to gainground in the business of private investment for lack of an attractivealternative. Because of the financial problems facing the social insurancesystem, private and company pension funds will become at the least a supple-mentary source of old age security for some time in the German system ofsocial insurance. No one can yet predict whether this will develop into a 'greycapitalism'53 based on pension funds as is known in Great Britain. In any case,as investment funds gain a stronger foothold in Germany, a lobby of institu-tional investors increasingly independent of the banks will exercise more andmore influence on the financial sector and will demand from politicians moreextensive reform in the areas of corporate law and corporate governance.

Nevertheless, we should not overestimate the extent of thetransformation that has already taken place (particularly since we did not

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 167

discuss whether the Anglo-Saxon model is changing, too). So far, only thetop tier of the globally oriented segment of the banking and commercialworld has been affected. In the more nationally oriented segment of theeconomy, where the clientele consists of small and medium-sizedbusinesses, banks and industry remain closely meshed, capitalism continuesto be managed through various avenues by organised trade interests, andcorporate governance still exists in forms that permit a great deal ofcorporate autonomy. Examples of this are found at the regional level in thecontinuation of certain types of industrial policy (which are becomingincreasingly difficult to maintain in light of the EU ban on subsidies), in theco-ordinated regulation of equity standards by the major bankingassociations54 or in the maintenance of collective deposit insurance funds.

Furthermore, alliances between the federal government, management andlabour are apparently still possible, as is illustrated by the Solidarity Pact thatevolved from the process of German unification. However, the majorcommercial banks are not included in these networks.55 Over time it willbecome clear how the national model is internally handling the fissure that hasresulted from worldwide developments. The increasing concentration ofbusinesses through merger and consolidation within the sector of small-business-oriented savings banks and co-operatives indicates that this clienteleis also being forced by the processes of globalisation to accept expensivechanges that possibly even threaten its chances for economic survival.

The transformation that has taken place so far also demonstrates howeffectively institutional structures can halt externally induced processes ofadaptation. By far the most powerful check on the push towards theprivatisation and concentration in the public banking sector has beenGerman federalism. The unwillingness of the regional governments tomerge or even privatise their public sector banks and, for example, theopposition of the government of Lower Saxony to the proposed revocationof its majority voting rights at VW illustrate the zealous efforts the Landerare willing to make in order to retain, if at all possible, their influence onregional banks and businesses so as better to implement their industrialpolicy. With regard to corporate law reform, the unions, backed by theLabour Ministry, have proved to be a formidable lobby, one strong enoughto block the planned reduction of the number of supervisory board seats incompanies with co-determination.56

What does all this show us? The German model of managed capitalismwill not develop into the twin of its market-oriented counterpart. What is farmore likely is that market-oriented elements will be built into the systemand therefore a new 'hybrid' model will evolve. Whether this new systemwill finally combine the virtues of the German and the Anglo-Saxon model- social balance and flexibility - remains to be seen.

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

168 GERMAN POLITICS

NOTES

I am indebted to Richard Deeg, Josef Esser, Greg Jackson and Willie Paterson for helpfulcomments on earlier versions of this paper.

1. M. Albert, Capitalism vs. Capitalism: How America's Obsession with Individual Achievementand Short-Term Profit has Led it to the Brink of Collapse (New York: Four Wall EightWindows, 1993). M. Rhodes and B. van Apeldoorn distinguish between 'market-orientedversus network-oriented' types of capitalism, see M. Rhodes and B. van Apeldoorn, 'CapitalUnbound? The Transformation of European Corporate Governance', Journal of EuropeanPublic Policy 5/3 (1998), pp.406-27. For a further differentiation, see V. Schmidt, whoidentifies 'state capitalism' as a third type: 'Still Three Models of Capitalism? The Dynamicsof Economic Adjustment in Britain, Germany and France', in R. Czada and S. Lütz (eds.), Diepolitische (Constitution von Märkten (Opladen: Westdeutscher Verlag, forthcoming 2000); andF. Fukuyama, characterising the capitalist regime of Southeast Asia as 'family capitalism':Konfuzius und Marktwirtschaft. Der Konflikt der Kulturen (München: Kindler, 1995).

2. See A. Shonfield, Modern Capitalism. The Changing Balance of Public and Private Power(Oxford: Oxford University Press, 1965), pp.239-98. The model characteristics are alsoborrowed from the debate in economic sociology on the variations of national 'productionregimes', see D. Soskice, 'Divergent Production Regimes: Coordinated and UncoordinatedMarket Economies in the 1980s and 1990s', in H. Kitschelt et al. (eds.), Continuity andChange in Contemporary Capitalism (Cambridge: Cambridge University Press 1999),pp.101-34; W. Streeck, 'German Capitalism: Does it Exist? Can it Survive?', New PoliticalEconomy 2/2 (1997), pp.237-56; J. Zysman, Governments, Markets and Growth. FinancialSystems and the Politics of Industrial Change (Oxford: Oxford University Press, 1983).Nevertheless, in this paper, we examine more intensely the aspects of the transformation ofnational models relevant to political science, such as changes in the realm of business,politics and the role and possible impact of governments.

3. See W. Streeck and PC. Schmitter, 'Community, Market, State -- and Associations?',European Sociological Review 1/2 (1985), pp.119-37.

4. To get a general idea of the German model, see J. Story and I.Walter, Political Economy ofFinancial Integration in Europe. The Battle of the Systems (Manchester: ManchesterUniversity Press, 1997), pp. 162-70.

5. Streeck and Schmitter, 'Community, Market, State -- and Associations?'.6. More in V. Ronge, Bankpolitik im Spätkapitalismus (Frankfurt a.M.: Suhrkamp, 1979).7. See A. Gerschenkron, Economic Backwardness in Historical Perspective (New York:

Praeger, 1962).8. See J. Kocka, 'Entrepreneurs and Managers in German Industrialization', in P. Mathias and

M.M. Postan (eds.), The Cambridge Economic History of Europe. Vol. 7: The IndustrialEconomies: Capital, Labour and Enterprise; Part 1: Britain, France, Germany andScandinavia (Cambridge: Cambridge University Press, 1978); and, for an overview of themore critical literature, R. Deeg, 'On the Development of Universal Banking in Germany'(paper for the Conference on the Origins of Universal Banking, 2-4 March 2000, Fiesole,Italy).

9. Kocka, 'Entrepreneurs and Managers in German Industrialization', pp.565-6; see on thispoint also the study by W. Grant, W. Paterson and C. Whitston, Government and theChemical Industry: A Comparative Study of Britain and West Germany (Oxford: Clarendon,1988), pp.118-19.

10. G. Herrigel, Industrial Constructions: The Sources of German Industrial Power (Cambridge:Cambridge University Press, 1996).

11. Deeg, 'On the Development of Universal Banking in Germany'.12. K. Dyson, 'The State, Banks and Industry: The West German Case', in A. Cox (ed.), State,

Finance and Industry. A Comparative Analysis of Post-War Trends in Six AdvancedIndustrial Economies (Brighton: Wheatsheaf Books, 1986), pp. 120-23; L. Gall, 'DieDeutsche Bank von ihrer Gründung bis zum Ersten Weltkrieg 1870-1914', in L. Gall et al.(eds.), Die Deutsche Bank 1870-1995 (München: Beck, 1995), pp.1-113

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

GERMAN FINANCE IN TRANSITION 169

13. Kocka, 'Entrepreneurs and Managers in German Industrialization', pp.565-8.14. As a result of this strategy, big banks controlled a high percentage of industrial holdings and

voting rights: in 1980, the Dresdner Bank held more than 25 per cent of the shares of 15companies. According to the report issued in 1976 by the commission on monopolies, banksheld nearly 15 per cent of all board seats in the 100 largest companies and the chairmanshipin 31 cases (Dyson, 'The State, Banks and Industry', p. 130).

15. R. Tilly, 'Public Policy, Capital Markets and the Supply of Industrial Finance in NineteenthCentury Germany', in R. Sylla et al. (eds.), The State, the Financial System and EconomicModernization (Cambridge: Cambridge University Press, 1999), p.139.

16. See P.A. Hall, Governing the Economy. The Politics of State Intervention in Britain andFrance (Cambridge: Polity Press, 1986).

17. On securitisation, see Organisation for Economic Cooperation and Development (OECD),Securitization. An International Perspective (Paris: OECD, 1995).

18. These include the IOSCO (International Organization of Securities Commissions) and theIASC (International Accounting Standards Setting Committee). Whereas the IOSCO isdedicated to negotiating norms in the broadest sense for securities, representatives within theIASC attempt to agree on an international accounting standard.

19. 89/582/EEC, 13 Nov. 1989; 93/227/EEC, 10 May 1993.20. See for an elaboration of this case, S. Lütz, 'The Revival of the Nation-State? Stock

Exchange Regulation in an Era of Globalized Financial Markets', Journal of EuropeanPublic Policy 5/1 (1998), pp.153-69.

21. On the political struggles between Europe and the United States with regard to globalaccounting standards, see Financial Times, 25 March 1999, p.6; Handelsblatt, 9/10 April1999, p.18; Financial Times, 19 Nov. 1999, p.5; and on the perceived 'disadvantages' of theGerman HGB compared with US GAAP, see Financial Times Deutschland, 21 Feb. 2000,p.xiv.

22. Financial Times, 6 April, 1998, p.6.23. Financial Times, 3 Sept. 1997, p.15.24. On IASC, see http://www.iasc.org.uk.25. Lütz, 'The Revival of the Nation-State?'.26. See, for instance, Frankfurter Allgemeine Zeitung, 5 Aug. 1999, p.25; 6 Aug. 1999, p.25.27. Frankfurter Allgemeine Zeitung, 1 Dec. 1999, pp.W 1-2.28. Financial Times Deutschland, 14 March 2000, p.1.29. Financial Times, 25 Nov. 1999, p.2.30. Handelsblatt, 7/8 May 1999, p.2.31. Financial Times, 2 Dec. 1999, p. 16.32. Institutional reforms that are linked with the EU's enlargement process would need German

upper house ratification.33. Financial Times, 3 March 2000, p.3.34. Financial Times, 10 March 2000, p. 19, Financial Times, 14 March 2000, p.15.35. More on this argument in J. Esser, 'Bank Power in West Germany Revised', West European

Politics 13/4 (1990), pp.18-32; J. Edwards and K. Fischer, Banks, Finance and Investmentin Germany (Cambridge: Cambridge University Press, 1994); U. Schröder, 'CorporateGovernance in Germany. The Changing Role of the Banks', German Politics 5/3 (1996),pp.356-70; R. Deeg, Finance Capitalism Unveiled. Banks and the German PoliticalEconomy (Ann Arbor: University of Michigan Press, 1999).

36. More in R. Sally and D. Webber, 'The German Solidarity Pact: A Case Study in the Politicsof the Unified Germany', German Politics 3/1 (1994), pp. 18-46.

37. Deeg, Finance Capitalism Unveiled, p. 195.38. Ibid., pp. 191-2. Yet, the Treuhand Agency did not turn to the banks in seeking help for its

own refinancing. Instead it issued medium- and long-term bonds and debentures (THAbonds), meaning it turned to international capital markets to raise the funds it needed (R.Czada, 'The THA in its Environment of Politics and Interest Groups', in W. Fischer et al.(eds.), Treuhandanstalt. The Impossible Challenge (Berlin: Akademie Verlag, 1996), p.167.

39. R. Deeg, 'The State, Banks and Economic Governance in Germany', German Politics 2/2(1993), p.l58.

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014

170 GERMAN POLITICS

40. IFO-Institut für Wirtschaftsforschung, 'Die deutschen Banken und ihr Einfluß aufUnternehmensentscheidungen', IFO-Schnelldienst 23 (1997), p. 10. Data for the period 1976to 1986 indicate that the number of firms in which banks held at least ten per cent of sharesdeclined from 129 to 86. H. Camman and W. Arnold, 'Anteilsbesitz der Banken: DieFakten', Die Bank 3 (1987), pp.120-23.

41. IFO, 'Die deutschen Banken und ihr Einfluß auf Unternehmensentscheidungen', p.11.Similar data in G. Jackson, 'Corporate Governance in Germany and Japan: LiberalizationProcesses and Responses' (paper for the concluding conference on the project 'Germany andJapan: The Future of Nationally Embedded Capitalism in a Global Economy', Max-PlanckInstitute for the Study of Societies, Cologne, 24-26 June 1999), p.24.

42. Frankfurter Allgemeine Zeitung, 19 March 1997, p. 15.43. For an overview of the current debate on issues of German corporate governance, see M.

Faust, 'Manager und Eigentümer: Shareholder Value-Konzept und Corporate Governance',Diskussionspapier des Forschungsinstitutes für Arbeit, Technik und Kultur EV (Tübingen:FATK, 1999).

44. See the database of the Max-Planck-Institute for the Study of Societies on theinternationalisation of the 100 largest German companies. A. Hassel et al., 'Dimensionen derInternationalisierung: Ergebnisse der Unternehmensdatenbank "Internationalisierung der100 größten Untemehmen in Deutschland"', MPIFG Working Paper 1 (2000), p. 19.

45. In March 2000, 25 German firms were listed on foreign stock exchanges and 11 companieswere following US GAAP accounting principles; Hassel et at, 'Dimensionen derInternationalisierung', p.20.

46. According to recent data of the German Bundesbank, small and medium-sized businesseshave become even more dependent on bank loans; Deutsche Bundesbank, 'Die Beziehungzwischen Bankkrediten und Anleihemarkt in Deutschland', Monthly Report 52/1 (2000),p.40.

47. E.g. the Verband der Kleinaktionäre (VdK) and the Deutsche Schutzvereinigung fürWertpapierbesitz e.V. (DSW).

48. For more on centralisation processes in systems of financial federalism, see R. Deeg and S.Lütz, 'Internationalization and Financial Federalism. The United States and Germany at theCrossroads?', Comparative Political Studies 33/3 (2000), pp.374-405.

49. The committee includes representatives from the Ministry of Justice, private banks and, inparticular, professional organisations such as the one representing the accountants.Frankfurter Allgemeine Zeitung, 30 March 1998, p. 16.

50. Financial Times, 24/25 Dec. 1999, p.3.51. Handelsblatt, 8 Feb. 2000, p.3; Financial Times, 17 March 2000, p.l.52. Financial Times, 13 March 2000, p.2; The Economist, 18 Dec. 1999, p. 136.53. R. Blackburn, 'Grey Capitalism and Pension Reform', New Left Review 233/1 (1999),

pp.3-6554. More on this in S. Lütz, 'Zwischen "Regime" und "kooperativem Staat" -Bankenregulierung

im internationalen Mehrebenensystem', Zeitschrift für internationale Beziehungen 6/1(1999), pp.9-41.

55. The spectacular bailout of the Holzmann company by banks, labour and, most importantly,the state does not reverse this overall trend. The banks would not have saved the firm frominsolvency had the Chancellor himself not subsidised the rescue operation with stateguarantees. Moreover, banks were under pressure from their own institutional investors tojustify this bailout. On the European level, the operation was criticised for underminingEuropean competition policy and burdening the stability of the Euro (see Financial Times,25 Nov. 1999, p.10; 3 Dec. 1999, p.l).

56. See Vitols with a similar evaluation regarding the winners and losers of this sectoralrestructuring, S. Vitols, 'From Banks to Markets: Liberalizing Coalitions and FinancialReform in Japan and Germany' (paper for the concluding conference on the project'Germany and Japan: The Future of Nationally Embedded Capitalism in a GlobalEconomy').

Dow

nloa

ded

by [

MPI

Max

-Pla

nck-

inst

itute

Fur

Ges

ells

chaf

tsfo

rsch

ung]

at 0

5:46

27

Aug

ust 2

014