The Little Bang Approach.

• Author: ENGELEN, KLAUS C.
• Position: German economy

Germany keeps reforming its financial sector bit by bit.

Whenever Berlin's top-finance officials appear at international meetings these days, they bear a message foreign investors should like: There is no reform fatigue in Germany, Europe's largest economy!

After enacting radical changes to income and corporate capital gains taxes in 1999, the center-left government of Chancellor Gerhard Schroeder is moving on with other far-reaching reforms to modernize the German economy. That was the theme that Finance Minister Hans Eichel put forward at the Davos World Economic Forum. And that was the good news that Caio Koch-Weser, Schroeder's state secretary of finance, brought to the Palermo meeting of G7 finance ministers and central bank governors.

First, a new pension reform passed the Bundestag, the lower chamber of parliament, in January. Its aim is to stabilize the state pension system and supplement it with a new privately funded pension system that will strengthen German capital markets.

Second, on January 25, Eichel's ministry shocked the financial world by unveiling a bold financial regulatory reform plan that it had drafted in secrecy. It would establish a single agency to supervise banking, securities, and insurance. At the same time, the Berlin government put forward a reform concept to streamline the Bundesbank, a once powerful institution that still has a staff of sixteen thousand but has lost its main task of setting monetary policy to the European Central Bank (ECB).

Third, the government is helping public sector banks--in particular Landesbanken and Sparkassen--to reach a compromise solution with the EU on the thorny issue of state guaranties in the form of statutory guaranty obligation (Gewahrtragerhaftung) and maintenance obligation (Anstaltslast). According to the private banks, this type of state support constitutes an illegal subsidy in violation of the EU Treaty. This will require a far-reaching restructuring of Landesbanken and the savings bank sector and put the sector on the road to at least partial privatization. The state guaranties for Landesbanken and Savings Banks--so reads the complaint of the competing private banks--give public banks significant financial advantages when it comes to raising debt and equity.

By proposing a new centralized institution--a Federal Agency for Financial Market Supervision located in Bonn and Frankfurt--the German finance minister regained the reform momentum he appeared to have lost and dealt a stunning blow to the Bundesbank's aspirations to get the Bundesaufsichtsamt fur das Kreditwesen (BAKred) under its roof. By proposing a central management structure for the Bundesbank, Eichel wants to enhance Germany's role in ECB decision-making. Eichel's reform concept is very clear: Strengthen the Bundesbank's position in the ECB but let a separate agency supervise the financial markets.

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