The Finanzplatz Deutschland on its way to Europe

Author: | Published: 10 Oct 2001
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Finanzplatz eV is a not-for-profit organization, founded in 1997 by leading representatives of the German financial community. Its executive commitee comprises Dr Paul Achleitner, member of the board of Allianz, Dr Rolf-E Breuer, spokesman of the group board, Deutsche Bank, Heinz-Joachim Neubürger, CFO of Siemens and Ernst Welteke, president of Deutsche Bundesbank. The association today has about 500 members and pools the interests of industry, financial services, investors, politicians, federations and the media.

The capital market in Germany has a vast potential for growth and employment. Finanzplatz eV wants to help market participants make better use of this potential. The organization is actively committed to continuing progress and innovation in the framework conditions of the capital market, the tax system and the pension system. To this end it undertakes, coordinates and supports joint initiatives on the part of all partners interested in a prospering Finanzplatz.

Further, Germany has expanded into a leading financial centre in continental Europe. Finanzplatz eV wants to promote this position, enhancing the country's image in international finance and achieving higher recognition for Germany as an attractive location for business and investments. To this end, the association informs decision makers around the world about business opportunities, progress and growth prospects in Finanzplatz Deutschland.

For decades there has been a lot of talk and little action. But now action really is coming to the European capital market. What EU directives, despite their best intentions, could only advance very slowly, is now becoming reality with increasing speed since the introduction of the euro some 30 months ago – and shortly before the single currency replaces national notes and coins in 11 European countries. Once again, this is proof that traditional structures are not overhauled by plans drawn up in a bureaucratic ivory tower but by facts and deeds.

The euro has liberated the fragmented European capital markets. It has triggered a process of integration, whose drivers are competition and the introduction of modern information technology. Where do we stand now in this integration process? What obstacles still exist? And is the traditional concept of the financial centre, which aims at the concentration of as many different financial service providers as possible on one site, still required at all in the European context?

European bond market

The removal of currency risk and the adjustment of interest rates in the 11 participating countries of the monetary union have led to a Europe-based investment policy on the part of investors. In this context, the market for fixed interest securities is the most harmonized. Long before the introduction of the euro, standardized practice on the Eurobond market had been established for international trading. This was an excellent starting point for further integration within the framework of the monetary union. The removal of the currency veil has opened up greater perspectives for investors with regard to differentiating the characteristics of various issuers – far less easy while the veil was in place. In the case of government bonds, credit quality and liquidity still vary to a certain degree, leading to yield differences, even though these may be low. In addition, criteria such as issuing policy and a liquid futures and options market also play a role.

Let us take a look at the competition between financial centres in fixed income products: Germany's government has hitherto maintained its position as the benchmark issuer in important maturity segments that were previously attributable mainly to the deutschmark. The German mortgage bond market has also positioned itself extremely successfully in the Eurozone. The fact that this segment has become an international example that is increasingly finding emulators in other countries is one of the still too rare examples of the export of financial products with a German copyright. Moreover, the European bond market is, to a large extent, without fixed domicile: the actors in the different financial centres benefit from it without any particular centre having extended decisively its previous competitive position during the 30 months of the euro era.

Integration of the equity market

For stock corporations, the removal of currency risk means above all that they must compete more strongly than before, with listed companies from other European countries in the demand for capital. Volatile markets everywhere increasingly permit investors to look for interesting shares on foreign stock markets. The result is not only a growth in cross-border trading activities, but also a significant turnover in foreign shares on German stock markets: between 1998 and 2000 the turnover in foreign shares traded in Germany increased by 100%.

Difficulty in overcoming fragmentation

Nevertheless, the integration of the European equity markets has still to progress as far as in the bond market. This is due above all to the specific country differences still prevailing in Europe with regard to company taxation, accounting and corporate governance. A share is still not exactly a share. Therefore, the so-called home market scenario of the European equity market appears to be extremely stable even after the introduction of the euro: regarding their liquidity, the centre of gravity of European shares continues to lie in their respective home markets.

Fragmentation is further fueled by the continuation of trading and supervisory regulations that are still very different. The Investment Services Directive of the EU (ISD), launched with high ambitions, has not resulted in the hoped for breakthrough . The wide framework of this directive assured generous scope for implementation among the member states and full use was made of this scope! International investors and intermediaries thus still find the European equity market difficult to develop. Nevertheless, at least with regard to large European companies, a trend towards unifying standards can be seen. This will be driven forward less by legal measures and far more by the expectations of institutional investors. These include accounting in accordance with International Accounting Standards (IAS), quarterly reporting and regular analyst presentations.

Do not take the second step before the first

How can the integration of the European stock markets be moved further forward? New EU directives, including above all the proposed adjustments to the ISD will only show an effect in the longer term if at all. Considerably more effective could be the creation of a European securities supervisory authority, as already demanded by some. Thereby, just as with the introduction of the euro, a new big bang could be triggered, which would, by necessity, have to be followed by further harmonization measures. This seems to be a politically tempting idea indeed. On the other hand, individual national authorities cannot be realistically required to give up tasks and become connected to Europe-wide centralized supervision before the markets themselves have taken considerable steps to unite. This would mean taking the second step before the first.

The next consistent step could be a unified platform for the trading and settlement of European shares. Much has been said and written about the various successful and not so successful initiatives by stock exchanges and settlement institutions around Europe. This does not need to be repeated here. The fact is that the traditional service providers such as stock exchanges must deliver soon, or be overtaken by other initiatives which could, for example, emerge from the information technology or telecommunications sectors.

However the race for the European trading and settlement platform is resolved, the physical presence of a stock market organization will be neither a prerequisite nor a guarantee for the future of a financial centre. Indeed, the equation of financial centre = stock market no longer holds true; it can only be explained from a historical perspective. Electronic stock markets are independent of location. Their participants are located where the best customer relationships exist, where qualified employees can be recruited and where the regulatory environment suits the participants. These positive general conditions are certainly also an argument for the location of a stock market organization. But even if, for example, Frankfurt were successful in becoming the location of a European stock market, ie operating the system house with the leading European trading platform in Frankfurt, this would of itself in no way lead to more participants relocating to Frankfurt.

From the location view to the capital market view

A successful market organization is and, of course, remains a key competitive factor for a financial centre. Nevertheless, its relevance is moving increasingly away from a location towards a capital market view: it is much less the location of Frankfurt and much more the German and increasingly the European capital market, which benefits from successful developments in Germany's market structure. Examples of this are:

  • the Neuer Markt, which in spite of recent turbulence has given life to the venture capital business and simplified the establishment of new companies like no other measures during the last decades;
  • the development of Eurex into the most liquid futures and options exchange in the world with trading participants from all over Europe and even from the US; and
  • the electronic trading system, Xetra, with direct access to the German equity market for more than 400 participants, of which approximately 170 are based abroad.

Through the consistent "remote membership" strategies of Eurex and Xetra, the liquidity of the share and bond markets has increased enormously, which again leads to favourable capital costs for the issuers. The German government also benefits from strong trading in the Bund future, since it must pay less interest for its federal loans than would be the case without a liquid futures market.

Competition for London?

But where does the Finanzplatz Deutschland – Germany as a financial centre - stand today? Or, to give preference to an equally loved but unreasonable question: can it already compete on a par with London? It is not possible to talk about it from a location point of view. If one follows more or less reliable estimations, approximately five times as many specialists are working in the various sectors of the financial services industry in London as in Frankfurt.

This, however, should not be cause for pessimism. Germany as a financial centre has developed with unprecedented speed over the last five years. It increasingly exploits the potential offered to it by the Eurozone, the second largest economic region in the world. The German equity market has the highest turnover of all domestic equity markets in Europe. It is becoming commonplace for companies in Germany to raise their capital on the stock market. The volumes of new issues in the stock market during 1999 and the first half of 2000 were higher than in London for the first time ever and therefore were the highest in Europe. The London stock market is looking for new listings in Malaysia, while Germany only has to go to Bielefeld or Leipzig. To an increasing extent, companies from neighbouring European countries are also seeking access to the German stock market. The M&A business is booming, a fact that has not escaped the attention of Anglo-Saxon investment banks, which have massively upgraded their corresponding capacities in Germany.

Europe discovers the capital market

Europe is discovering the capital market, which, in turn, is increasingly becoming the motor of the European economy, with Germany at the top. Even if the number of important financial centres is reduced in the context of further technological development, no one should fear for Germany's future as a location for financial services providers – a financial centre. For the future it will be necessary to further use Germany's potential in the international capital markets. This includes a competitive and Europe-oriented tax policy as well as the increased use of the capital market for pensions, and the further improvement of the market infrastructure in the European context. As a general rule it can be said that the greater the achievements of the capital markets in Europe, the more attractive Germany as a location will be. Location and capital market points of view do not exclude each other. It is necessary, however, to keep both components in sight and at the same time to look more favourably in one direction – to Europe.

Finanzplatz eV
Neue Boersenstrasse 1
D-60487, Germany
Tel: +49 69 9793 8700
Fax: +49 69 9793 4470