[A-List] Germany & the imperialist chain

["Michael Keaney" <michael.keaney@xxxxxx>]

While the financial press, including FT Deutschland, argues for greater
"reform" along US lines, and German companies eager to compete abroad are
restructuring along US lines, this article suggests that the current bear
market has put a brake, maybe even permanently derailed, moves towards a
US-style equity culture. Chances are that would not have happened anyway,
since we are more likely to see "capitalism with German characteristics"
than a replication of US norms willy-nilly. Nevertheless it remains for
German companies and their financiers to restructure sufficiently to meet
the demands of competing head to head with their US rivals. That will mean,
inevitably, class war from above, as any government of whatever complexion
will "reform" the "labour market", and the state cuts back its commitments
to the welfare state (without dismantling it wholly -- far from it) in order
to finance the military build-up required of an EU common security and
defence policy. However some kind of continuity in the financing
arrangements between Mittelstand companies and local state banks is more
likely than a complete recasting, and with banks' balance sheets looking as
ropey as they do, the necessary repairs will have to come from higher taxes
(not so likely) or spending cuts (much more likely). With household debt
practically non-existent, the German financial system is in a much better
condition to repair its corporate sector debt than, say, the US, or indeed
Britain.


How Germany paid for the boom

The Dax's 50% fall shattered the dream of a share-owning democracy

Heather Stewart and Charlotte Denny
Friday October 11, 2002
The Guardian

Investors in Britain and the US watching their pension savings rapidly
shrinking might think things couldn't be any worse. But they would be
wrong - they could have invested in the German stock market.

Germany is in the middle of the worst market crash since the Depression. Two
weeks ago, the German stock exchange pulled the plug on its hi-tech
offshoot, the Neuer Markt. The index, which aspired to be the European
equivalent of the US Nasdaq - has lost 96% of its value since its peak in
March 2000.

The Neuer Markt's debut five years ago was a high-profile symbol of
Germany's fledgling shareholder culture. Spurred on by the decade-long bull
market in New York and London, investors started to see the equity markets
as an attractive place to put their savings. In the same way that Margaret
Thatcher's sell-offs of state utitlities in Britain in the 1980s spread
share ownership to the wider public, the privatisation of Deutsche Telekom
in 1996 helped raise the proportion of households owning shares from 9% to
21% by 2001.

For these newcomers to the equity game, it has all gone rather sour. Since
the start of the year, the index of Germany's leading stocks, the Dax, has
halved in value, compared to reductions of 30% in London and New York.
Germany's top 30 blue-chip shares are now valued at less than the combined
worth of America's top two corporates, Microsoft and Wal-Mart.

It must seem a bit unfair for the new converts to Anglo-Saxon style equity
financing that they arrived just as the party was about to abruptly end.
Germany's investors now appear to have a worse hangover than America's.

Danny Gabay at JP Morgan says German investors are suffering from the fact
that the firms they bought into went on a transatlantic spree just as share
prices reached their peak in 2000. They spent the equivalent of 3% of
national output buying up or taking over US hi-tech firms.

"German corporates seem to have come to the conclusion that if you can't
beat them then buy them. They came across the Atlantic with their shopping
trolleys and just hoovered them up."

With no domestic savings to rely on to fund its investment boom, America's
stock market bubble in the late 1990s was funded by sucking in massive
foreign invesment. The hi-tech bubble may have been an American phenomenon,
but it was European - and in the main German - companies that paid the bill.

"Every penny they made in Europe from 1997 to 2001 they shipped over to buy
up US companies," says Mr Gabay. And as long as the US stock market was
rising, this seemed a good strategy. It certainly excited local investors,
who powered the Dax to a peak of 8,064 in March 2000.

But what it disguised was how weak growth was at home. Germany's economy has
been faltering since the fading of the post-reunification boom of the early
90s. in the last five years, output growth has averaged 1.6%, well below the
2.8% achieved by the other countries in the euro zone.

David Walton of Goldman Sachs says Germany is still struggling with the
burden of absorbing east Germany's clapped-out economy. The decision to
convert the old eastern ostmark to the deutschmark at a rate of one to one
locked in long term uncompetitiveness. Germany faces a situation where its
workers cost 40% more than their French counterparts and 60% more than the
average Italian.

Faced with an uncompetitive cost base at home, German firms seem to have
decided to hitch their wagon to the US tech boom. "Their view seems to have
been that all they had to do was sit back and watch the profits roll in,"
says Mr Gabay.

But when US investors woke up to the fact that dotcoms were never going to
make money, Germany's corporate sector was saddled with worthless
investments and a pile of trouble at home. The European version of the tech
bubble was a telecoms industry which had massively overpaid for third
generation mobile licences. Germany's equity markets were further hit by
fiscal limits imposed by Brussels and the world economic slowdown.

"All the euphoria about recovery has gone up in smoke," says David Brown,
Bear Stearns' chief European economist. "Germany is flirting with recession.
It is bad sentiment, it is the worries about geopolitical risks - and it's
structural."

It was not only the firms that indulged in tech speculation that got their
fingers burnt. The banks who paid too much for shares have been forced to
liquidate their portfolios as prices have collapsed, reinforcing the market
slide and taking them dangerously close to their solvency levels.

As a result they have begun tightening lending criteria, pushing firms far
removed from the new economy into bankruptcy. According to the Bundesbank,
lending to manufacturing fell 3.3% in the year to August, a clear sign that
distress in the financial sector is hitting the rest of the economy.
Corporate insolvencies rose to 18,800 in the first six months of this year,
25% up on the same period last year.

"German companies are facing difficult financing conditions at a time when
they are having to deal with a less competitive currency and faltering
demand from abroad," says Colin Warren of GFC economics. "The heavy toll of
bankruptcies is helping to push up unemployment, which in turn is
undermining consumer confidence and household spending."

A further danger looms, however. Most analysts believe the euro will, sooner
or later, resume its upward rise against the dollar. With a current account
deficit running at over 5% of GDP, the dollar's high level seems
unsustainable. Mr Warren thinks a rise in the euro could be a final straw,
crushing any hopes that German exporters could rescue the economy and the
markets from the doldrums next year.

For first-time investors in Frankfurt it has been a lesson: that shares go
down, too. Any chance of Germany converting wholesale to Anglo-Saxon equity
culture now seems remote.