Germany under siege

Date: 28 March, 2019 - Blog

¨Postwar Germany abandoned military-based power politics and foreign adventurism and concerned itself primarily with economic development¨. Project Syndicate. Feb 2019. Fischer – former Foreign Minister and Vice Chancellor (from 1998 to 2005)


Cracks in Fortress Germany

Following WWII, Germany focused on its economic development to reenter the Democratic West and recapture its political sovereignty. It has brilliantly achieved these two objectives. But over the past couple of years, Trump and Brexit have started disrupting the foundations of the German model. The unrivalled prosperity of the country may prove a story of the past.

Germany is facing a growingly hostile landscape

Blame Anglo-Saxon ¨perfidy¨, really?

The two Anglo-Saxon pillars of European defense are faltering, leaving Germany on the front-line with a growingly assertive Russia. This should, in principle, help born a common defense in Europe. But, in practice, Macron calls in that direction face serious obstacles: a) Germans became pacifists after 1945 and b) France status of a nuclear power – and permanent member of the UN Security Council – is barely transportable. Nevertheless, European sovereignty is a major issue. Berlin, whether or not intended, will be obliged to address it.

The German Socio-Economic (participative) model thrived over past decades. German capital goods, machine tools, and cars belong to world class. This development has actually ¨ discreetly¨ been sponsored – if not ¨subsidized¨ – by the German State, through advantageous re-financing, help for exports, not to mention selective tariffs. Euro, a much weaker currency than the DM was, also provided for a competitive boost. Things have dramatically changed lately. Beyond the inevitable upcoming cyclical slowdown, ¨De-globalization¨ will disproportionately affect the export-based economic models of Germany and China. Trump will further target Berlin. Brexit could seriously damage German’s exports to the UK. For sure, the Government’s excellent financial shape would allow for ambitious investment / restructuring plans. But the political will and vision still need to follow…

The Golden age of Germany, the power house of Europe, might be counted…

Champion, what champion?

German banks do not belong to the top league, be it in terms of size, quality, or profitability. At first glance, Deutsche Bank and Commerzbank’s merger looks like a defensive union. There are actually fundamental reasons to criticize it:

  1. German banks have a bad record at mergers and integrations. Indeed, Deutsche bank and Commerzbank pathetically failed with Deutsche Post Bank and Dresdner bank. The beauty of the German participative model – and social peace – shows its limits, when downsizing and layoffs become inevitable
  2. The merged entity would become too big to fail, if not to bail… i.e. highly systemic. Politics will therefore continue to play an unnecessary role, potentially interfering with a sound bank strategy
  3. The German banking system is in a very bad shape. The toxic domination by Sparkassen (saving) and cooperative banks, entertaining dubious links with local politicians, must end. Just like in Japan, zombie companies are practicing mis-pricing and mis-allocation of capital. Germany can’t become a healthy banking place, without this deep restructuring.

Like in the ¨Wedding of the Carp and the Rabbit¨, this marriage is doomed from its start  

The tentative mega-bank merger is emblematic of Germany’s incapacity to revisit its socio-economic model

  • Stay underweight and very selective with German equities, particularly in battered sectors, despite seemingly attractive prices
  • Nimble investors could take advantage of tensions in selected fixed income instruments. The issue of solvability will take some time before to emerge…