Why is Germany shooting its own stagnating economy in the foot? | Simon Nixon

A A possible merger between a German bank and an Italian competitor would not normally generate much interest beyond the business pages. But these are not normal times. Italian bank UniCredit recently sparked a political backlash in Germany by acquiring a 21 percent stake in German lender Commerzbank. Even Chancellor Olaf Scholz weighed in, calling the Italian move “an unfriendly attack.” The significance of this dispute goes far beyond the Italian and German financial worlds.

News of the takeover came just weeks after Mario Draghi, the former president of the European Central Bank, published a report on how to deal with the EU’s declining competitiveness vis-à-vis the US and China. The former Italian Prime Minister warned that the EU faces “slow torment” unless it takes radical action. One of Draghi’s key recommendations was the need for deeper financial integration. In this context, Germany’s opposition to a connection raises serious questions about Berlin’s political commitment to broader European reforms.

From an economic perspective, a merger of the two banks obviously makes sense. UniCredit is Italy’s second-largest lender with existing international operations and has done a remarkable job of restoring its profitability after the Italian banking system suffered a near-death experience in the wake of the global financial crisis, when it was overwhelmed by bad debts and worries about the future of the single currency . In contrast, Commerzbank, despite being one of the largest lenders to Mittelstand (the small and medium-sized family businesses that form the backbone of the German economy), has been a persistent underperformer and has long been considered a takeover target. UniCredit already owns one of Germany’s largest banks, HypoVereinsbank, Therefore, a merger should result in significant cost savings.

A merger is also obviously attractive from a European perspective. Political decision-makers have long complained that Europe has a single currency but no unified financial system. More than 20 years after the introduction of the euro and despite post-crisis efforts to create a banking union, the banking system remains highly fragmented along national borders and there is very little cross-border lending. This puts Europe at a competitive disadvantage as the bloc cannot achieve continent-wide economies of scale, while high costs and weak profitability have contributed to chronically weak credit growth. The American JP Morgan has a market capitalization that is larger than that of the five largest EU banks combined.

So why the hostility in Germany towards UniCredit taking over Commerzbank? Part of that reflects anger at the way the Italian lender has amassed its stake.

In September, UniCredit failed at the gate of an attempt by the German government to offload some of the shares it had acquired as part of a post-crisis rescue package. UniCredit bought the offered 4.5 percent stake under Berlin’s nose and added the 4.5 percent stake that the company had already secretly acquired. UniCredit says it believes German authorities were aware of its plans and that the takeover was welcome. Since then, UniCredit has acquired an additional 12% stake and is seeking approval from the European Central Bank to increase its stake to 29.9%. That would put it in a good position to initiate a full takeover at some point in the future.

Nevertheless, much of the opposition smells of pure protectionism. Unions have raised the specter of major job losses if a takeover is allowed. Meanwhile, Bettina Orlopp, Commerzbank’s chief financial officer, claimed in an interview that a takeover would cause Commerzbank to lose customers. She also pointed out that German savers were exposed to the risk of an Italian debt crisis given UniCredit’s large holdings of Italian bonds. German politicians across the political spectrum have insisted that Commerzbank should remain independent and German-owned as a domestic competitor to Deutsche Bank, the country’s other major nationwide lender. Berlin has said it no longer plans to sell any more shares, making a full takeover impossible.

But some of these arguments do not stand up to scrutiny. Greater banking integration in the Eurozone will lead to greater efficiency and improved profitability, which in turn will allow banks to lend more, not less. Meanwhile, post-crisis reforms have meant that banks are now required to maintain much higher levels of capital and are closely monitored by the European Central Bank, significantly reducing the risk of insolvency. Furthermore, if Berlin were truly concerned about the spillover risks of cross-border banks on domestic savers, it should support the creation of a pan-European bank deposit insurance system. Instead, Berlin has consistently blocked this important step towards completing the banking union because it brings with it a pooling of financial risks.

But there is a price to be paid for this in Europe not Risk bundling – trend increasing. When the economy stagnates, it becomes harder for governments to reduce debt and deficits, leading to rising populism and increasing political fragmentation. This, in turn, makes it more difficult to deal with existential risks such as threats to European security and the climate crisis. German leaders claim they support efforts to deepen European integration. But all too often Berlin was an obstacle to progress and bowed to domestic self-interest. The irony is that the biggest victim was the German economy itself, which now finds itself at the epicenter of Europe’s crisis of stagnation.

No wonder the rest of Europe is closely watching Berlin’s reaction to UniCredit’s takeover of Commerzbank. Draghi’s 400-page report contained hundreds of recommendations to improve Europe’s competitiveness, many of which will force governments to make difficult compromises. What chance does Europe have if Germany’s heads of state and government fail at this first hurdle?