For several years now the UK has been Europe’s dominant economy, while Germany, the largest economy on the continent, has been punching well below its weight. Everyone has been waiting for Germany to sort itself out, and according to the buzz at Euromoney’s recent Germany conference in Berlin, it has.
Although there was the inevitable handful of sceptics, the overriding sense that Germany’s recent strength is sustainable was apparent. One speaker was even of the opinion that indicators understate Germany’s true strength. The competitiveness of German companies has been on the rise for the past few years, as has domestic demand, and unemployment is at its lowest level for a decade. Even with the euro at record high levels, the restoration of confidence in Germany continues unabated.
Much of the good news results from the fruition of Germany’s restructuring and reform efforts that began after reunification in 1990, named by one private equity head as ‘the largest buyout in the world’. In the aftermath, Germany needed access to new sources of capital, and was forced to change the rules to allow easier access to international capital. This resulted in a domino effect of reform that took in the pension and healthcare systems, as well as the tax regime. There might have been an underestimation of how much of an effect on the capital markets Germany’s tax reforms had. All asset classes are now taxed at the same level, and although this will take away incentives for producers of some products, it does mean that the taxman is no longer distorting the process, and tax evasion has practically vanished.
In the corporate sector, after two years driven by M&A activity, the issuance stream in the first quarter of 2007 is down on last year’s figures, but this can be accounted for as a return to normal levels. Many companies are keeping things simple, sticking to plain vanilla issues and seeing no need to go structured just yet. The favourable conditions are expected to continue, prompting tremendous liquidity.
Not all the news is good in Germany, however. Net supply in the public sector is down, and the monies created do not seem to be benefiting German society at large. While Germany can claim to be more long-term than most from a capital markets standpoint, its social welfare system is one of the most short-term.
But Germany is competitive again, although it still has some way to go to challenge the UK, at least in terms of investment banking revenue. According to Dealogic, UK companies generated $6.7 billion in net investment banking revenue last year, while German companies made only $3.9 billion. So far this year, $2.7 billion has been generated in the UK with $1.7 billion being made in Germany. It’s time for Germany’s newfound optimism to reap rewards.
