Press conference following the meeting of the Board of Directors of the Association of German Banks

Klaus-Peter Müller
President of the Association of German Banks and Chairman of the Board of Managing Directors of Commerzbank AG

Check against delivery

Ladies and gentlemen,

The “grand coalition” has now been in office for twelve months. Measured in terms of what is needed in economic and financial market policy in Germany, I have to say that we – and we are not the only ones – expected more.

“Germany needs a growth strategy, linked to considerably greater investment. A central goal of the coalition is to create new growth and more employment for Germany.”

That is what the coalition agreement between the CDU, CSU and the SPD says. This cannot mean government investment programmes but rather the government not losing sight of the target it set itself of improving the conditions for private investment. The coalition agreement also says that “One of the most important conditions for higher growth and employment is the international competitiveness of Germany as a financial centre.”

To accomplish this, efforts from two sides are needed: From politicians on one side and from market participants themselves on the other. The private banks are doing their bit. We have made progress, though we are still a long way from European standards. We are still making adjustments where necessary. But we are investing and taking on staff again. However, we would be making faster progress if we had better framework conditions.

That takes me back to politicians. The performance so far of the grand coalition, which does, after all, have a broad majority, is disappointing. The high standing which the Chancellor quickly won at both European and international level has been offset at home by discord between the coalition parties and the eagerness of some of their members to make a name for themselves.

Internal party debates are being conducted through the media in a publicity-seeking manner – not only in summer – and some regional politicians appear to enjoy hogging the limelight at the government’s expense.

So no wonder the guiding principle in economic policy is virtually undistinguishable now and there is no clear roadmap for workable reforms with clearly defined targets and reform measures geared to the timetable adopted.

The coalition is wasting too much energy on working out compromises which are nothing more than smallest common denominators. But this isn’t enough to solve the problems. As a result, the pace of reform is far slower than that required.

Let me now “set the benchmark” for six fields that are of great importance to the banking industry and Germany as a financial centre:

The first benchmark is growth. We urgently need more growth. This is essential for the entire economy, including the banking sector, and particularly for employees and the unemployed. It is a fact that Germany is experiencing an upturn in 2006. The Association of German Banks is expecting growth of around 2 ¼ % for the year as a whole.

But it is also a fact that, at just under 1 ½ %, our growth potential – that is, the long-term growth trend – remains poor. And even with a 2 ¼ % increase in growth, we shall still be below the eurozone average once again this year. Germany last grew more strongly than the eurozone in 1994.

For 2007, we are expecting the growth rate to be halved, not only because of the burden imposed by the upcoming tax increases, but also because the global economy is slowing down, albeit at a high level. We are therefore expecting a decline in growth from 5 to 4 ½ % worldwide next year.

These figures also show that Germany as a business location is not profiting nearly enough from the booming global economy. Not nearly enough, ladies and gentlemen, to allow us – as many hope – to “grow out of” our difficulties. The economy is definitely not going to solve our problems.

Not, for example, in budgetary policy – at least, not in the long run. For even though tax revenue is flowing more freely than it has done for a long time and Germany has as a result been able to keep its budget deficit within the limits set in the Maastricht Treaty for the first time since 2001: This is a pleasing economic effect, but no means structural consolidation. The latter must remain on the agenda.

This why it is puzzling that some politicians are already once again theoretically earmarking the extra revenue for more government spending and thinking about cancelling previous labour market reforms. On the other hand, it is to be welcomed that the Finance Minister and some federal states now want to enshrine the Maastricht criteria in the constitution and introduce an additional national stability pact, as they are taking up a request made by the Association of German Banks some time ago.

The economy, as I have said, doesn’t sort out public finances. Nor does it solve the problems on the labour market. We need more flexibility and lower non-wage costs there.

This takes me to the second benchmark: Structural reforms of the social security systems. The planned health system reform, to take but one example, is certainly not such a structural reform, as it is concerned far too much with simply providing the statutory medical insurance scheme with fresh funds. Far too much emphasis is placed on redistribution. And if what is planned becomes reality, the result will be far too much bureaucracy. What is really needed – strengthening market economy elements, more competition and more personal responsibility – has unfortunately been largely abandoned.

Bureaucracy – or more precisely – a reduction in bureaucracy and better regulation is the third benchmark. Banking is one of the most heavily regulated industries. So for banks in particular, less bureaucracy and efficient regulation would spur more momentum and growth.

The fact that the government has set up the Normenkontrollrat and put it under the roof of the Federal Chancellery is a positive signal. This is a big step forward that deserves praise. We hope the introduction of the standard cost model to identify red tape means that the bureaucracy problem can now be tackled systematically and expertly.

In the process, the rule should be that existing laws and all legislative proposals – meaning not only government bills – are assessed to determine their bureaucratic implications.

Progress is urgently needed in this area, as other countries have also recognised the signs of the times. In the Netherlands and the UK, for example, the “one in, one out” rule has been adopted. This means that no new regulation that produces costs can be introduced until another regulation has been abolished in return. This is a good idea that we should take as a model.

Politicians need to put themselves under pressure, as it were, instead of simply “goldplating” like they have tended to do so far. One example of this unfortunate practice is the General Anti-Discrimination Act. We all know that this Act was born in Brussels.

But we also know that German legislators added a few knots to the mesh of regulation, resulting in more bureaucracy that harms Germany as a business location and financial centre.

I now come to the fourth benchmark: tax policy. There have been some pleasing developments here, but no breakthrough as yet. A business tax reform is overdue in particular if we want to be internationally competitive again. This is why we expressly welcome it that the government intends to lower corporations’ nominal tax burden from 39 to just under 30 %.

And may I dispel a widespread misconception: This is not a gift to corporations – that goes for both the tax rate cut and the resulting net tax relief. Both are in fact urgently needed to improve Germany’s position in the competition among business locations. They allow investment and growth, they safeguard jobs and create new ones, and they are thus particularly in the interest of employees and all those looking for work.

This is why we call on the government and parliament to firmly implement the findings of the “Koch-Steinbrück Working Group” on business tax reform in the further legislative process.

A reform of taxation of private investment income is also overdue. It is now thirteen years since Austria successfully introduced a flat tax. Most EU member states have since followed suit. A flat tax is now at last to become reality in Germany as well.

However, despite the praise this decision basically merits, a flat tax will only unfold its full effect if it leads to a simpler tax procedure. For this reason, but not for this reason alone, the tax rate must be close to the base tax rate. This means that a 20 % rate would be advisable. Unfortunately, the “Koch-Steinbrück Working Group” has decided on a 25 % rate. Should it be adopted, the taxation of private investment income would have to be made attractive using other means of adjustment that the concept does allow. For example, completely or at least partly retaining the half-income procedure would be a possibility. Also, the flat tax should be introduced earlier than currently planned, namely at the same time as the business tax reform on 1 January 2008.

So, despite having the right approach, we haven’t yet reached the target. That goes too, and even more so, for the fifth benchmark: financial market policy. Let me say here quite clearly that, as far as REITs are concerned, politicians are about to knowingly pass up a great chance for the German financial marketplace. The introduction of REITs in Germany is overdue. It is a complete mystery why residential property has now been largely removed from the government bill.

No politician can seriously believe that residential property will no longer be bought or sold merely because German REITs are banned from acquiring it. After all, in addition to foreign REITs, private equity funds and hedge funds are standing by as investors.

All those in charge should be aware that if REITs are not licensed fully and quickly in Germany, we shall lose an important market of the future forever. After all, further sales of real estate are due soon, for example by local authorities and some federal states. The REITs debate during the past few months is nothing to be proud of. Some politicians actually pretended to be defending the interests of tenants although they were ultimately pursuing a completely different goal. The SPD should quickly make clear how they stand on innovativeness in financial market policy and who sets their course on this issue.

Private equity is another growth market. It is already an important source of funding, especially for Germany’s Mittelstand, its small and medium-sized business sector. The Mittelstand, as we all know, does not have enough equity on average by international standards, even if there are big differences between individual businesses.

The Bundesrat’s plans to amend the existing Act on equity investment companies can improve the legal framework for this sector. If legislators, as set out in the coalition agreement, introduce a private equity law, they should base the general tax conditions in particular on international standards so that our financial marketplace remains competitive.

Germany’s competitiveness as a financial centre is also what my sixth and final benchmark – banking policy – is about. As I have already mentioned, the coalition parties rightly see the financial markets as a motor of growth and employment. The banking industry, but financial supervisors as well, face numerous changes next year in this area.

On 1 January 2007, Basel II will be launched in Germany. The private banks are well prepared for it. The fact that the US doesn’t intend to introduce Basel II on schedule – and is now effectively no longer able to do so – shouldn’t prompt us to stray from the right path in Europe. At the same time, it is to be hoped that the US will return soon to the joint Basel II convoy.

2007 is also the year in which we will have to complete preparations for the Single Euro Payments Area (SEPA). As things stand today, it looks like the European directive required for this will no longer be adopted this year, in 2006.

The German EU Council Presidency will then “inherit” one of the most important European legislative projects of the past few years and will have to finalise the Payment Systems Directive as quickly as possible. This is the only way to ensure that SEPA is launched on schedule at the beginning of 2008.

The transposition and implementation of the Markets in Financial Instruments Directive (MiFID) is also scheduled for 2007. This directive requires us to examine all securities operations to see whether they comply with the rules set by Brussels. Not everything is new, and not everything will be different. Nevertheless, the MiFID places an enormous burden on the banking industry. We need a competitive framework throughout Europe, particularly in the interest of our customers. Put simply, this means that customers should be given the chance to buy financial products on other markets like in their home country. And German banks should be able to provide their services in other European countries under the same conditions as those at home. The preparations for implementation of the MiFID are underway and show that we are on the right track.

But we don’t need innovations and changes only where financial market products and supervisory rules are concerned. In addition, and above all, market structures need to be modernised. Only then can the banking sector fully unfold its positive effect on growth and employment.

There is a remarkable disparity in how this question is assessed: On the one side, there are the national and international experts – the International Monetary Fund, the OECD, the European Central Bank, the Bundesbank, the German Council of Economic Experts and others.

On the other side, we find the great majority of German politicians. And I ask myself:

Where – despite all the experience made during the past few years – does the belief that “walling off” helps come from?

Where does the mistrust of the market come from? After all, we all know how salutary the forces of competition were in the telecommunications sector, for example – for the benefit of customers.

Where does the reluctance to give the market and competition more scope come from?

From supposed gaps in the nationwide provision of banking products and services, although private and cooperative banks together (end of 2005: 28,416/14,401 + 14,015) have twice as many branches as the savings banks (14,413)?

From the concern about Mittelstand credit financing, although small and medium-sized businesses are an important customer segment for all three banking groups and today need much more than only traditional loans?

It is the private banks that lead the way in innovative corporate financing. They have first-class networks and specialist know-how on international markets and provide an increasingly important service by helping small and medium-sized businesses expand abroad.

In eastern Germany, with its smaller-scale business structure – my last example, although I could list others – the private banks are the market leader in corporate lending, having provided loans to the tune of around € 2o billion by 30 June 2006, as against € 8 billion by the savings banks. The latter incidentally make available only around half of their deposits as loans, whereas the figure for the private banks is 165 %.

To put it briefly, there is no reason, no good reason at any rate, to retain the still much too high public share of the German banking market. On the contrary, there is everything to be said for modernising the banking sector and finally launching the structural reforms needed in this connection.

Sometimes what is necessary forges a path itself – the way it is currently organised, the public banking sector has long since reached its limits: The regional principle is at odds with customers’ demand for offerings from online banks. The vertical integration of savings banks into Landesbanken is seen by the rating agencies as the business model with the most promising future. Landesbanken are opening up to private investors. Savings banks have to merge to be able to achieve economies of scale. The private legal form of the Aktiengesellschaft (stock corporation) in particular has proved to be the most effective one for such alliances.

And given our tight public finances, I ask myself: How long can the local authorities, the savings banks’ owners, defend closing kindergartens and libraries and accept at the same time that the capital they have tied up in a savings bank does not even yield the same rate of interest as a savings book?

And how long can these local authorities carry, and how long do they want to carry, the risk of banking business? In Mannheim, Wiesbaden, Geldern and elsewhere they have already made experience – painful experience – in this respect. No wonder more and more local and regional politicians are thinking about changes.

I am convinced that the public legal form is not the right one to guide the savings banks into a bright future. And I can only warn against the strategy of taking the conflict with the European Commission over the protection of the name “Sparkasse” under Section 40 of the German Banking Act to extremes. Germany needs a quick, out-of-court settlement here. The private banks have no interest in this dispute being carried over into Germany’s EU Council Presidency. On the other hand, German politicians must ask themselves whether they are not allowing themselves to be used here and forced into a row with Brussels that they cannot win.

A look at the rest of Europe is helpful at any rate. For example, the president of Südtiroler Sparkasse, Norbert Plattner, said a few weeks ago at a conference here in Frankfurt that the earlier Italian combination of tradition, public ownership and commitment to the public good had led at many savings banks to “inefficiency, political influence and modest profits”. Some of these shortcomings, Mr Plattner said, were displayed by the savings banks in Germany as well. He urged them to become more flexible and to consider adopting the legal form of the “savings bank stock corporation” along Italian lines.

And this is only one of many very similar voices from the European savings bank camp that make clear how isolated the German savings bank sector now is in Europe.

What we need is an efficient banking system and strong banks – no matter whether they are cooperative banks, savings banks or private banks – which compete fairly with each other to provide German companies and citizens with the financial services they need and in this way help to boost growth. This is the benchmark for the grand coalition, one it actually set itself.

Ladies and gentlemen,

Banks are right to take a realistic approach to the things that affect their business. When I mentioned earlier that we expected more from the grand coalition’s first year, this wasn’t ignoring the fact that politicians always also have to obtain majorities to do what is necessary – the emphasis being on obtain, not come across.

We are in fact taking stock of the situation after an objective analysis of what Germany, of what politicians must do to keep pace and move forward at European and international level.

A little progress here, but a lot of standstill there – this is not enough at any rate. A pension at 67 on the one hand, but a health system reform that is not a real reform, or only a reform placebo, on the other. A commitment to the financial market on the one hand, but a tortuous debate on REITs on the other. The goal of making Germany an internationally competitive financial centre on the one hand, but sticking to rigid banking market structures on the other. This means we are blowing hot and cold but not moving forward. We are at best simply marking time.

The progress made is too modest and too slow. Overall, the “more freedom” rule has not yet been adopted. Instead, the grand coalition is engaged in a political tug-of-war – and ultimately it is testing whether “more government” maybe does work after all. The upshot is that we are passing up chances that may never come along again and that we are losing time we don’t have.

Germany was once a stage further in the reform debate. The Agenda 2010 and the results of the jobs summit were progress and played their part in the current upturn and the slight improvement on the labour market. The same can be said of the CDU’s Leipzig Party Conference resolutions. All this could have been the launching pad for a wide-ranging process of reform – but unfortunately it wasn’t.

Meanwhile, the competition among business locations continues. Leaving aside global developments, our European neighbours have left us behind in many areas.

This is why, at the risk of not sounding particularly original, we need fundamental structural reforms more than ever. We need more market, not more government. The forces of reform in Germany, especially in the government, must prevail despite the opposition they face internally and externally. This is clearly not easy politically, particularly within the grand coalition, and will include unpopular measures. But there is no way around it, as standstill takes us nowhere.