Posted on 01/23/2003 3:21:30 PM PST by knighthawk
Two apparently contradictory pieces of news have hit the German financial center over the past week - on the one hand, rumors that Frankfurt Stock Exchange operator Deutsche Börse is planning to take over its London counterpart; on the other, a research piece showing that Finanzplatz Frankfurt is losing ground to London.
In what McKinsey called “a private memo“ to Dresdner Bank Chairman Bernd Fahrholz and Deutsche Börse Chairman Werner Seifert, two of its consultants concluded that “Frankfurt's financial community is undergoing erosion.“
The financial market experts point above all to the effects of the German banking crisis, the country's dismal growth rates and the government's resistance to much-needed reforms, as well as the loss of credibility caused by “ethically questionable“ behavior on the part of some market participants - meaning investment fraud and balance-sheet cosmetics. According to the authors of the report, Frankfurt's strong points - the ECB headquarters, the strong positioning of the local stock exchange and the impetus from Germany's growing market for old age provisioning - could thus not come to the fore.
A few days earlier, Deutsche Bank Chairman Josef Ackermann had expressed similar concerns at a New Year's reception where he pointed out that “Germany is no longer regarded as an economic engine, but as the next Japan.“ The ensuing soul-searching has shown just how concerned the local financial community is over Frankfurt's competitive position.
A few years ago, Frankfurt still believed it could challenge London's status as Europe's premier financial hub, and thought it had little to fear from the European continent's next-biggest financial center, Paris.
Frankfurt had the German central bank and all major German banks except Munich-based Hypovereinsbank. Eleven other euro-zone countries were looking to the German city for their monetary policy. Its stock exchange's international futures market thrived partly at the expense of London's LIFFE, and the Neuer Markt looked set to become Europe's premier segment for young and fast-growing stocks. Foreign banks began to increase their local presence, and the city's non-banking service complex was expected to expand fast since specialized services such as accountancy, consulting, insurance, law and real estate are needed to support a high concentration of financial services.
Since then, the stock market has collapsed, the tainted Neuer Markt segment will cease to exist this year, and a fledgling peripheral industry of stock offering advisers and other specialized consultants has been all but wiped out. Frankfurt's banks are counting their losses from the bear market and their unhealthy loan portfolios.
At 300, the number of foreign banks in Frankfurt has remained roughly stable over the past few years. But sources in financial circles report that U.S. banks Lehman Brothers and Merrill Lynch are scaling back their Frankfurt operations and shifting individual activities to London, with only Goldman Sachs insisting that all relevant business segments will continue to be covered from the German financial center. According to Peter Coym, the head of Germany's foreign banking association, staff cuts have been heavier in London and New York - a fact that is, however, probably related to the generous protection against dismissal afforded by German law.
Günther Merl, the chairman of Hesse's state bank, also blames Germany's high taxes and restrictive labor laws for Frankfurt's recent troubles. “Banking products are changing fast, but Germany's generous protection against dismissal means that staff numbers cannot be adjusted equally quickly. In London, departments can be closed when they do no more business. This flexibility persuades international companies to settle in London rather than in Frankfurt - or even to cover the German market from London,“ he told the Frankfurter Allgemeine Zeitung.
Another perennial disadvantage against London is the language. And while financial services in Britain and France are centralized in London and Paris, respectively, even Frankfurt's national position is weakened by the German federal system. Although Deutsche Börse is Germany's and continental Europe's premier stock exchange, the German states also have their own regional stock exchanges. Germany's insurance hub is in Munich, and service industries related to financial services - such as accountancy and legal services - are scattered across the republic.
At least Rolf Breuer, the head of Germany's private banking association and supervisory board chairman of Deutsche Bank and Deutsche Börse, is confident that Munich won't challenge Frankfurt within Germany even if its two big players, Allianz and Hypovereinsbank, continue to play a major role in the consolidation of the financial services industry: “What matters is not where international companies have their headquarters, but where the intermediaries and issuers get together and where the capital market music plays. And that is and will be Frankfurt.“
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