European Integration, Varieties of Capitalism and the Future of Rhenish Capitalism

Andreas Busch Department of Politics and IR, University of Oxford and Hertford College, Oxford Email: andreas.busch@politics.ox.ac.uk Paper for the DVPW Sektion Politik und Okonomie conference Die Politische Okonomie der Europischen Wirtschafts- und a Wahrungsunion Cologne, MPIfG, 34 December 2004 First draft comments welcome. Cite, but please dont quote without the authors permission

Contents
1 Introduction 2 Rhenish capitalism 2.1 The German system as a role model . . . . . . . . . . . . . . . . . . . . . 3 The decline hypothesis 4 Persistent variation of national economic models 2 2 5 6 8

5 Recent developments in the German economic system 10 5.1 Corporate nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 Hostile takeovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6 Conclusion 13

1 Introduction
The debate about globalisation and its eects on the capacity of nation states has been very much at the forefront of political science research over the last decade or so.1 At the heart of that debate is the question whether the process of growing economic integration forces nation states to adopt similar policies in other words, whether the future is one of convergence, or one of continuing diversity. So far, detailed studies of a variety of policy areas have urged caution with respect to the hypothesis of encompassing convergence and have emphasised more the persistence of national variation (Hay 2000) and the diverse responses to common challenges (Scharpf and Schmidt 2000). But these studies have looked at state policies. In recent years, however, a literature has sprung up that looks at national economic systems (or varieties of capitalism) and addresses the question of convergence or diversity at them: will globalisation lead to an assimilation in the characteristics of (so far diverse) national economic systems, or will they be able to maintain their independence? This paper will address that question with respect to Rhenish Capitalism in three steps. First of all, it will give a denition of Rhenish capitalism, before embarking on a review of the literature that deals with the future (and future viability) of this type of capitalism. Here, above all two positions will be juxtaposed: one that is best labelled a decline hypothesis, because it sees fundamental change (towards a dierent paradigm) as the inescapable fate of Rhenish capitalism, and a second one that analyses the situation of national economic systems as one of sustainable diversity. In the third part of the paper, selected empirical data will be used to confront both positions, and to make above all two arguments: on the one hand that the supporters of the decline hypothesis in many respects focus on the wrong kinds of developments; and that, secondly, decisions about the nature of national economic systems to a considerable degree are not market decisions, but political decisions and that therefore the viability and sustainability of Rhenish capitalism to no small degree depends on the ability to project its interests onto e.g. the European level.

2 Rhenish capitalism
But before we go deeper into the subject, let me start by explaining the concept of Rhenish capitalism. The phrase was coined by the French author Michel Albert in the early 1990s in a non-academic context, which is probably why it became popular very quickly (Albert 1993). The book Albert wrote was translated into many foreign languages, and thus Rhenish capitalism became a widely used shorthand formula for the German economic
1

For an introductory overview of the debate see e.g. Busch (2000).

system which is also how it will be used in the context of this paper. Albert distinguishes Rhenish capitalism from Neo-American capitalism, which he sees as a pure market system. In contrast, the German system is not a pure market system it is marked by characteristics such as substantial degrees of coordination and consensus. Rudolf Hilferding called it organised capitalism as early as 1915, and in the English language we often see it characterised as managed capitalism. As can be seen from the Hilferding quote, this system has deep historical roots that reach back far beyond the time of the Federal Republic into the second half of the 19th century. Alexander Gerschenkron classically described the conditions under which German industry emerged comparatively lately: industrialisation took place through heavy industries such as coal and steel, which required high capital investments. These in turn created close connections between large-scale enterprises and banks, resulting in the Hausbank model: A German bank, as the saying went, accompanied an industrial enterprise from the cradle to the grave, from establishment to liquidation throughout all the vicissitudes of its existence. (Gerschenkron 1966: 14) Hans-Ulrich Wehler (1995: 662680) describes in detail how the cooperation between big corporations and associations created the corporativism of late 19th century Germany, how the cartel movement aimed to impose order onto the dynamic (and volatility) of Germanys late industrialisation, and how this encouraged the rise of the intervention state (Interventionsstaat). Looking at the German economic system as it has come to be in the Federal Republic, one can still nd echos of these origins. The system can be understood as the interaction of four sub-systems: A system of nancing enterprises that can be labelled as bank-oriented, which provides long-term capital (also described as patient capital). In exchange, banks who provide it obtain inuence on the business often via seats on the supervisory board. The stock market in contrast to the American model plays only a minor role in corporate nance. The system of labour relations is characterised by a strong element of cooperation which to a large part rests on the comparatively strong role of associations. One result of this is a high degree of employment protection, which in turn leads to comparatively long periods of employment tenure. The system of training combines general and rm-specic skills which are often highly specialised. Relationships between rms are often characterized by an element of cooperation besides competition for example when agreeing on standards, where associations play an important role. Cross-shareholdings help to stabilize long-term supplier

corporate nance: bank oriented

industrial relations: cooperative

Rhenish Capitalism
rm relations: intertwined training system: highly specialised

Figure 1: The components of the Rhenish capitalism model relations, and interlocking directorships enable rms to gain detailed inside information about each The German system as a rolepublicity rules. other even without wide-ranging model What has been sketched out above is, in short, an economic system that relies to a considerable extent on non-market forms of coordination and builds strong networks. The constituent parts that were just mentioned, however, do not1965 independent of each Andrew Shoneld, Modern Capitalism, OUP exist other in fact, it is only through their functional interaction and their complementarity Will Hutton, The State Were In, Cape 1995 that they form a system or a model:
Capital does not have Patient capital (whichInvestment System to vie to maximize prot on a quarterly (Harvard Business Review, Sept.Oct. high basis) enables businesses to credibly commit to a 1992) degree of employment security, which in turn makes acquiring and investing into rm specic skills rational for both employees and employers since they do not have to be afraid of sunk investments.

Michael Porter, Capital Disadvantage: Americas Failing

Training standards that are the result of cooperation between rms add to this model, because they increase the likelyhood of nding suitable employment in the industry (for the employees) and of nding suitably qualied labour (for the rms). In addition, such cooperation makes it possible to obtain inside information abbout the performance of rms, which means that the correction mechanism of hostile takeovers in the case of failure (which is so typical of the American system) becomes as unnecessary as it is unlikely because of the prevalence of crossshareholdings (which are the root cause for the nickname Deutschland AG Germany, Inc. that has been given to the system). Safety from takeover-bids, in

turn, enables rms to take a long-term view of business development, which again is required for the patient capital and its long time horizons. (See Figure 1 for a graphic depiction of the system and its interaction). An economic system characterised by the aforementioned features will not exclusively focus on the interests of the owners, but add to that the consideration of the interests of all stakeholders such as employees, suppliers, customers and society as a whole. It is particularly well-equipped for competition in the area of diversied quality production (Streeck), which means incremental improvements in high-quality products with little competition through the price.

2.1 The German system as a role model

An economic system such as the one described here has often been hailed as a role model for their own economy by authors from outside Germany. The British economist and political scientist Andrew Shoneld was probably the rst, when he wrote his famous book in the 1960s about Modern Capitalism (Shoneld 1965). Shoneld was wondering why the West European economies had been performing noticably better since the late 1950s than both the United States and Great Britain, and he focused particularly on the institutional characteristics of the German system. He concluded that the better economic performance was caused by centralised economic decision making which, however and contrary to the French system of indicatove planning , was not carried out by the state, but by the private sector. He pointed out that the associations had great inuence and were thus able to look after long term interests, thereby fullling semi-public tasks2 (with banks taking on the role of prefects). This had been the case since German industrialisation and Shoneld pointed to the reemergence of the three German Big banks in the late 1950s in spite of the American occupying forces attempts at breaking them up.3 But the German system was not only seen as a role model in the immediate aftermath of the economic miracle. In the early 1990s, writers such as British journalist Will Hutton (1996) recommended the German system for curing the ills of British short-termism. A more sophisticated (if compared with Huttons bestseller less popular) appraisal of the German systems advantages was written by Harvard Business School economist Michael Porter (1992a, b) who described the U.S. economic system as one with deciencies in the allocation of investment capital both between and within rms. This constituted a comparative disadvantage putting at risk the long-term U.S. growth rate. Porter argued that compared with the German and Japanese economic systems the U.S. system put too much weight on short-term considerations, which worked as a disincentive for investment in intangible assets assets like worker training and re-training, research and development, organisational development and stable supplier relations that were becoming ever more important for competitiveness.
2

For the concept of parapublic institutions, in which associations play an important role, and which are considered a characteristic of the German political system, see Katzenstein (1987). 3 On the latter episode see for example Busch (2003: chapter 5.1) and Pohl (1993).

The main reason for this, according to Porter, was the uidity of U.S. capital: being provided primarily by institutional investors with broadly diversied portfolios, these investors were above all interested in short-term performance and lacking in incentives to obtain inside information about rms e.g. through seats on a companys board. They were therefore lacking inuence over rm decisions, which again made quick portfolio changes attractive if a companys performance suered temporarily. German and Japanese systems, however, were setting incentives for dedicated capital, which helped create stable investor relations and a long-term investment and planning horizon for rms.

3 The decline hypothesis

If the German economic system was admired by observers as the accounts of Shoneld and Porter have shown it was because of its superior performance prole. The latter, however, changed with the deep recession of 199395, and with the decline of its performance the reputation of the German system also tumbled. The German model, as it was put in a book title, moved from being a role-model to being a phase-out model (Beyer 2003b). An extensive literature has sprung up over the last couple of years on the decline of the German model, much of it written by present or former members of the Cologne Max-Planck-Institute for the Study of Societies, which is why one could easily label this position the Cologne decline hypothesis. In brief, it states that changes in constitutive areas of the German system are undermining the latters functionality and complementarity. Because these changes are uncoordinated (Beyer 2003a: 11), they have to have negative consequences, resulting in the winding up of Deutschland AG, to quote the subtitle of another book (Streeck and Hpner 2003). o Even more radical statements are being put forward by corporate law experts from American law schools: in an inuential and much discussed article, two lawyers from Yale and Harvard Law Schools declare nothing less but The End of History for Corporate Law (Hansmann and Kraakman 2004). The U.S. system, they assert, had established itself as the normative role model, and alternative models like the German one had failed. Let me briey sum up the main arguments being advanced to support this hypothesis: Corporate governance: The so-called market for corporate control has undergone wide-ranging change since the mid 1990s change above all in corporate strategy, especially in the nancial sector. Here, the focus is now on shareholder value, barriers for takeovers had been scrapped and cross-shareholdings largely abolished leading to a decline of organised capitalism or at least its disorganisation through systematic disposal of superordinated linkages (Hpner 2004). o Industrial relations: In the area of industrial relations, a substantial weakening of associational strength has occurred, both on the trade union and on the employer side. Streeck and Hassel (2003) talk of the crumbling pillars of social partnership and argue that the latter has developed from an asset of the German system into a liability. The reason for this is that both associations and the state are now

too weak to push through their own preferred strategies, but still strong enough to block other strategies. As a result, collective bargaining had turned into a policy oriented towards the interests of labour market insiders, but incapable of contributing to the solution of labour market problems and high unemployment as the failure of the Alliance for Jobs negotiations had made abundantly clear. Financial system: Banks had undertaken a change of strategy away from the Hausbank model towards one focusing on investment banking, and had divested their shareholdings in non-nancial rms, because conicts of interest had emerged.4 Investment banking was promising bigger prot, which is why banks sold their investments in corporations and gave up seats on supervisory boards as evident in the case of Deutsche Bank: in 1996, it held the chairmanship of the supervisory board on no less than 29 of Germanys top 100 corporations; only two years later, that number had shrunk to 17, and in 2001 the bank declared in its corporate guidelines no longer to seek any chairmanships on supervisory boards (Beyer and Hpner 2003). The banks, in other words, had also shifted to an exclusive focus o on shareholder value. Political reforms supported this development: in 1998, the KonTraG bill (Gesetz zur Kontrolle und Transparenz im Unternehmensbereich) was supported by all parties on the oor of the Bundestag originally an initiative of the Social Democrats who were still in opposition then. Joint criticism from the political left and the political right of the power of the banks5 meant that Deutschland AG no longer enjoyed any support in parliament. In 2001, budgetary changes resulted in the abolishment of capital gains taxation for sales of corporate investments a measure that provided a clear incentive to divest of the cross-shareholdings and blockholdings that had been characteristic of Deutschland AG. Finally, let us briey summarize the aforementioned position about the end of history for corporate law. The two U.S. authors argue that an international convergence towards a model exclusively oriented towards sharehoder interests is not only preferable and inescapable, but that it has already widely taken place. They therefore plead to call this model the standard model forthwith. The fact that this convergence is taking place worldwide Hansmann and Kraakman ascribe to the failure of alternatives, such as the labor oriented model (as they call Germany with its co-determination), and the state oriented model, which includes France and Japan. Bad economic performance and the end of socialism had eliminated the latter, the conict of interest between capital and labour (and the unrest springing from it) had rendered the German model uncompetitive. Both authors exclusively use corporate law literature for their sweeping assessment.
4

This had become very clear on the occasion of the attempted hostile takeover of Thyssen by Krupp in 1997, when Deutsche Bank advised the attacker Krupp while simultaneously holding a seat on the supervisory board of victim Thyssen. 5 For the historical roots of this criticism and precedents for such cross-party coalitions regarding the power of the banks see Busch (2003: 108109, 134135).

They might prot from a more interdisciplinary approach and a visit to a social science library where they would likely not only discover foreign trade statistics instructive with a view to German competitiveness, but also a substantive and growing literature on the persistent dierences between national economic models which implicitly puts question marks behind the hypothesis of the decline of the Rhenish model and even more the one about the end of history.

4 Persistent variation of national economic models

This literature is multi-faceted, which is why it can only be summarized briey here in its main developments. However, two things seem to be of particular interest: on the one hand, this literature is truly interdisciplinary comprising contributions from sociologists, economists, and political scientists; and on the other hand, there is a growing dierentiation of concepts and an active debate going on in this eld. As a consequence, this area of academic investigation has over the last ten years or so grown from more journalistic beginnings into a branch of systematic empirical and theoretically well-founded social science research. Let me briey mention and characterize the most important contributions to that debate. The French economist and then President of Assurances Gnrales de France (AGF), e e Michel Albert (1993), started the whole debate about classifying market economies with his book Capitalism against capitalism, and it is perhaps no coincidence that that it started briey after the demise of Communism, when market economies had won a resounding victory over planned economies. Albert distinguished in his book between a Rhenish and a neo-American model of market economy, and he left no doubt which of the two he preferred: on grounds of superior economic and social performance, he considered the Rhenish model preferable and advocated its adoption for France. His book, a popular treatise, was primarily written to make that point, since he considered France at a crossroads where it had to make a decision between the two models. While his book is decidedly non-academic and is open to a number of criticisms (such as an unsystematic inquiry and only anecdotal evidence in addition to many errors in detail), it undoubtedly hit a nerve and became popular very quickly as well as translated into many languages. It often still serves as a reference point for the debate, as not least the term Rhenish capitalism demonstrates. Dutch economist Pieter Moerland certainly brought more academic rigour to the debate in his article in the Journal of Economic Behavior and Organisation (Moerland 1995). He distinguished between a market oriented (= Anglo-Saxon) and a network oriented type of capitalism, dividing the latter into three subtypes which he termed Germanic, Latinic and Asiatic.6 Moerland was the rst to focus on questions of rm organisation, alternative disciplinary mechanisms and problems of agency. He considered broadly dispersed ownership as typical of Anglo-Saxon systems and argued that this both increased information costs and made hostile takeovers the main disciplinary instrument in the case of rm failure; conversely, in network systems ownership was typ6

For another, similar classication see De Jong (1995).

shareholder model is now the standard model

Study Albert 1991 Moerland 1995 Soskice / Hall 2001 Schmidt 2002 Amable 2003

number of empirical theoretical number types data sophistication of cases

2 2 (+3) 2 3 5
Deutsche Bundesbank Monatsbericht Mrz 2003

+ + ++

+ ++ ++ ++

low low medium medium high

Figure 2: Important contributions to the debate on varieties of capitalism ically concentrated, shareholders therefore faced greater incentives in favour of becoming informed insiders, and consequently had more inuence on Whrenddecisions. letzten drei Jahren Aktienrm der Baisse in den emissionen hat sich zudem die Hall and Soskice The publication of the edited volume on Varieties of Capitalism by Anzahl der inlndischen brsennotierten Unternehmen verringert; (2001) certainly was a milestone in the debate, not only because it provided 003 Aktien- a it with dennoch war der Kurszettel mit 1 name (at least in political science), but primarily becausegesellschaften Ende Januarsophisticated it provided a 2003 lnger als % Mitte der neunziger Jahre mit weniger theoretical grounding for it. Building on theories2001 2002 the economics of information als from and Gebiet 1996 700 Notierungen. Mageblich fr diesen Aninstitutional approaches, Hall and Soskice put28 the58 rm in stieg war der einstige Boom von Brsengnthe centre of their analysis. Deutschland 31 Euro-Raum 34 69 46 gen am Neuen Markt; in anderen MarktsegThey distinguish two types of market economies which they label coordinated (commenten wie dem Amtlichen Vereinigte 129 137 105 prising such countries as Germany, Staaten Sweden, Switzerland, the Netherlands Handel oder dem and Japan) Geregelten Markt sank hingegen die Anzahl Vereinigtes Knigreich 127 150 108 and liberal (the Anglo-Saxon countries: U.S.A., United Kingdom, Canada, Australia der gelisteten Gesellschaften. Auch die MitJapan 70 59 54 and New Zealand). Their model isEurostat (Bruttoinlandsprodukt), World Fedethe rst to emphasize telaufnahmen am Aktienmarkt fielen of the the complementarity nach Quellen: dem Boom in der zweiten Hlfte der neunziration of Exchanges (Jahresendstnde der Aktienmarktconstituent partial systems (nance, industrial relations, training, inter-rm relations) kapitalisierung). 1 Prognosewerte fr das Bruttoger Jahre zwar wieder deutlich zurck. Im inlandsprodukt. for the performance of the system as a whole, distilling from that their hypothesis of langjhrigen Vergleich scheint sich der Trend Deutsche Bundesbank zur Aktienfinanzierung aber convergence comparative institutional advantage. From this hypothesis it follows that fortzusetzen. Frhjahr 2000 erreichte der Marktwert der should be unlikely, as it would requirebrsennotierten Aktien knapp 1,7 comparative advantages. Their der Aktienforegoing existing Von einer greren Verlagerung der gesamt- Zahl deutschen gesellschaften volume applies the approach to a wide variety Bruttoinlandspro- areas which range from labour wirtschaftlichen Finanzierungsbeziehungen Billionen 3 oder 82 % des of policy an den Aktienmarkt kann which bislang dennoch means dukts, verglichen mit 22 % Ende 1995. Nach market and corporate governance to employers preferences in social policy, noch nicht gesprochen werden. Die Unterdem Hhepunkt der Hausse im Mrz 2000 that it combines theoretical and empirical inquiry. Grund der nehmenslandschaft in Deutschland ist tradiging die Marktkapitalisierung auf Vivien Schmidt (2002) limits her inquiry to Europe and distinguises here sowie kleitionell stark durch Einzelkaufleute between steilen Talfahrt der Aktienkurse allerdings ne und mittelgroe Personengesellschaften stark zurck. Am Jahresende 2002 betrug der three types of economic models: market capitalism (the United Kingdom), managed geprgt. Die deutschen Kapitalgesellschaften Kurswert der deutschen brsennotierten Akcapitalism (Germany) and state capitalismnoch 647 Mrd 3 In wiederum werden berwiegendshe der (France). a triple case study in anatiengesellschaften nur lyses the dierent adjustment paths with which these countries react tound der GmbH & Co. Rechtsform der GmbH the challenges oder 31 % des Bruttoinlandsprodukts und ist KG gefhrt, whrend Aktiengesellschaften seitdem noch weiter gesunken. Damit liegt of globalisation and Europeanisation, describing the processes in great detail and put1)

Aktienmarktkapitalisierung in Relation zum Bruttoinlandsprodukt im internationalen Vergleich

das Gewicht der Aktienmrkte aber nach wie vor deutlich geringer.

diese Relation zwar immer noch hher als

noch eine weitaus geringere Rolle spielen.

Mitte der neunziger Jahre, bevor die auergewhnliche Aktienhausse eingesetzt hatte. Im Vergleich mit anderen Industrienationen, die sich wie etwa die USA (105 %) oder Grobritannien (108 %) traditionell durch eine ausgeprgte Aktienkultur auszeichnen, ist

Nur whrend des Booms Ende der neunziger Jahre nahm die Anzahl der Aktiengesellschaften deutlich zu. Insgesamt hat sich dieser Trend zwar auch danach fortgesetzt, aber in stark abgeschwchter Form. Zugleich verlagerte sich die Emissionsttigkeit von den br-

30

ting forward a theory that connects interestingly economic processes with political institutions. The latest addition to the debate is the book by French economist Bruno Amable (2003). It is built on a comprehensive data set and starts from a critique of Hall and Soskice, namely that their binary system cannot accomodate some countries such as France or Italy which fall between the categories of coordinated and liberal system. Amable therefore extends his inquiry to 21 countries, on which he collects and analyses data, and he arrives at ve dierent types of economic systems, which he labels market based, continental European, Social Democratic, Mediterranean and Asian. Built on the results of factor and cluster analysis, his ndings seem robust and wellfounded. To sum things up, one can say that the literature mentioned above has certainly made a strong point in favour of the existence and persistence of dierent national economic models or varieties of capitalism , even if the debate is still in ow and no agreement exists concerning the precise typology of these dierent systems. Does that mean that the proponents of the Cologne decline hypothesis are wrong? Do the exaggerate the change? I think that at least their assertions about the impending death of Rhenish capitalism are premature and perhaps, to paraphrase Mark Twain, greatly exaggerated. For it remains unclear in their work whether the change they so assiduously describe really hits the core of the systemic functionality of the German economic model and causes it to fail. In addition, I would argue, at least two criticisms can be made against the Cologne hypothesis concerning the stability and robustness of their results: On the one hand, many of their conclusions are based on the behaviour (and changing behaviour) of a select group of big entetrprises (such as Deutsche Bank, Allianz and concerning hostile takeovers Mannesmann). These, however, are not typical of the German economy, where the Hausbank relationship is still central to many small and medium sized enterprises. Indeed, this Mittelstand (rms below 500 employees and with a turnover of less than 50 mio. Euros) comprises a relatively bigger share of the German economy than say in Britain or the United States, and it accounts for around 70% of employment and about half of gross value production of the enterprise sector. On the other hand, the results are based on a period of observation which in many respects is an exception rather than the rule namely the years of the last stock market bubble of the late 1990s and early 2000s, which has now given way to normalisation. A crucial test will therefore be whether they will be conrmed during more normal times.

5 Recent developments in the German economic system

Restrictions of space do not allow me here to embark upon a fully edged empirical test of the various symptoms of the decline hypothesis. But since the emphasis on strategic

10

Bundesbank Monatsbericht Mrz 2003

Aktienmarktkapitalisierung in Relation zum Bruttoinlandsprodukt im internationalen Vergleich

das Gewicht der Aktienmrkte aber nach wie vor deutlich geringer. Whrend der Baisse in den letzten drei Jahren hat sich zudem die Anzahl der inlndischen brsennotierten Unternehmen verringert; dennoch war der Kurszettel mit 1 003 Aktien-

Aktienemissio

% Gebiet Deutschland Euro-Raum Vereinigte Staaten Vereinigtes Knigreich Japan 1996 28 34 129 127 70 2001 58 69 137 150 59 2002 1) 31 46 105 108 54

gesellschaften Ende Januar 2003 lnger als Mitte der neunziger Jahre mit weniger als 700 Notierungen. Mageblich fr diesen Anstieg war der einstige Boom von Brsengngen am Neuen Markt; in anderen Marktsegmenten wie dem Amtlichen Handel oder dem Geregelten Markt sank hingegen die Anzahl der gelisteten Gesellschaften. Auch die Mittelaufnahmen am Aktienmarkt fielen nach dem Boom in der zweiten Hlfte der neunziger Jahre zwar wieder deutlich zurck. Im langjhrigen Vergleich scheint sich der Trend zur Aktienfinanzierung aber fortzusetzen.

Quellen: Eurostat (Bruttoinlandsprodukt), World Federation of Exchanges (Jahresendstnde der Aktienmarktkapitalisierung). 1 Prognosewerte fr das Bruttoinlandsprodukt. Deutsche Bundesbank

Frhjahr 2000 erreichte der Marktwert der Von einer greren deutschen brsennotierten Aktien knapp 1,7 Figure 3: Comparative stockmarket capitalisation ratios, 19962002 Verlagerung der gesamtBillionen 3 oder 82 % des Bruttoinlandsprowirtschaftlichen Finanzierungsbeziehungen dukts, verglichen mit 22 % Ende 1995. Nach an den Aktienmarkt kann dennoch bislang

Zahl de gesellsc

change in the nancial sector Hhepunkt der Hausse im Mrz 2000 noch nicht gesprochen werden. Die Unterdem away from the Hausbank model in favour of investment banking plays such a central die Marktkapitalisierung auf Grund der considered in this section: nehmenslandschaft in Deutschland ist tradiging role in it, two aspects shall be
steilen Talfahrt der Aktienkurse allerdings tionell stark durch Einzelkaufleute sowie klei-

Is there evidence for stark zurck. Am Jahresende 2002 betrug der a large-scale shift in German corporate nancing, awayPersonengesellschaften from ne und mittelgroe a bank-based model towardsder stock market-based model? geprgt. Die deutschen Kapitalgesellschaften a deutschen brsennotierten AkKurswert
wiederum werden berwiegend in der tiengesellschaften And what changes are there in thenur noch 647 Mrd 3 area of corporate governance, particularly in Rechtsform der GmbH und der oder 31 % des Bruttoinlandsprodukts und ist the question of hostile takeovers which seem so important for the German model? GmbH & Co. seitdem noch weiter gesunken. Damit liegt diese Relation zwar immer noch hher als Mitte der neunziger Jahre, bevor die auerge-

KG gefhrt, whrend Aktiengesellschaften noch eine weitaus geringere Rolle spielen. Nur whrend des Booms Ende der neunziger

5.1 Corporate nancing

If the German system was shifting from a bank-based model towards one dominated Jahre nahm die Anzahl der Aktiengesellschafwhnliche Aktienhausse eingesetzt hatte. Im by the stockmarket, this would have anderen Industrienationen, die to show both in the development of stockmarket hat sich dieser ten deutlich zu. Insgesamt Vergleich mit capitalisation and in the development of bank (105 %) to the corporate sector. The former Trend zwar auch danach fortgesetzt, aber in sich wie etwa die USA loans oder Growould have to grow (not only in absolute terms, but also in relation to GDP), the latter Zugleich verlastark abgeschwchter Form. britannien (108 %) traditionell durch eine would have to shrink. For ausgeprgte Aktienkulturevidence. both, there is little auszeichnen, ist gerte sich die Emissionsttigkeit von den brAs gure 3 demonstrates, German stockmarket capitalisation did indeed increase substantially towards the end of the 1990s, but after peaking in March 2000 it also de30 clined strongly. This reects the bursting of the aforementioned stockmarket bubble, and looking more closely at the numbers one can see that they have now approximately

11

Bank loan versus capital market financing1

80

70

Euro area Germany France Italy

100

90

United States Japan United Kingdom

60

80

50

70

40 90 92 94 96 98 00 02 90 92 94 96 98 00 02

60

1 Bank

loans to the corporate sector as a percentage of the sum of such loans and short- and long-term securities issued by corporates. For the United States, excluding mortgage credit. Source: National data. Graph VII.12

especially in the United States, and also by the development of the European bond market following the introduction of the euro in 1999. In addition, with Figure historical loans to the reportedly sector bond yields near 4: Banklows, many firms coporatechose to lock in low funding costs and avoid rollover risk by substituting bonds for short-term credit, including bank loans (see Chapter VI). This shift to longer-term finance reached the levelwas the mid-1990s again.7 The weight banks to German stockmarket is still, of also encouraged by a reduced willingness of of the provide backup lines of credit for commercial paper issues a development linked to in the Bundesbanks words, substantially lower than that in the United States or the improved assessments of the risks posed by such lines. United Kingdom aboutmarket for syndicated business loans, banks shifted a substantial a third of the capitalisation ration in these countries (Deutsche syndicated loans In the Bundesbank 2003). of credit risk to non-bank investors including insurance companies, amount Looking at themutual funds, pensionbank loans to the corporate sector, we nd little change development of funds, hedge funds and securitisation vehicles. In recent years such investors accounted for about a tenth the volume of US there as well. As gure 4 (from the 2003 annual reportofof the Bank for International syndicated credits, and the credits they accepted were significantly riskier than Settlements) demonstrates, banksshare VII.3). The loansweaker percentageofof corporate nancing those held by the (Table of bank much as a performance these is on a long-termcredits presumably reflected the greater risk appetite of non-bank and theas downward trend in the United States, Japan investors, United Kingdom, well as whereas in Germany sales of distressed loans by banks wanting to limit the deteriorationthe comparatively it remains stable. And it remains stable on in their own loan portfolios. Indeed, the fraction of secondary market activity in clearly highest levelsyndicated loan market accounted for continuing importance of banki nance in a clear indication of the by transactions in distressed loans the the German corporate sector. Wein the last few years. increased considerably can therefore conclude that evidence points much more

clearly in the direction of stability and that there is little proof for enuring signicant change.syndicated credits1 US
Share of total credits (in %)2 Memo: Percentage classified 3 Total credits

5.2 Hostile takeovers

US banks

Foreign Non-banks Total credits US banks Foreign Non-banks banking ($ bn) banking organisations organisations

If the German stockmarket has 7 low degree 2.8 capitalisation, this means that German a of 2000 48 45 1,951 2.6 10.2 3.2 2001 46 comparatively 8 46 2,050 5.2if foreign shares are used as a currency. 4.7 14.5 5.7 corporations are cheap to buy 2002 45 45 10 1,871 6.5 7.3 22.6 8.4 A German rm listedand undrawn commitments. Dollar volume of credits held by each group of institutions as of a comparable on the stockmarket is rated at only a quarter Includes both outstanding loans a percentage the total dollar volume of credits. British rmofper unitthe total dollar volumeDollar volume ofonlyclassified substandard, doubtful or loss bypner and Jackson of turnoverofand at credits a sixth per employee (H o examiners as a percentage of credits. 2001). The ofreason offorFederal Reserve System. Source: Board Governors the this divergence is that while a British rmVII.3 Table exclusively focuses on protability, for a German rm, protability is only one goal among several others such as turnover, market share and employment. What makes a German rm strong on 131 product marketsBIS 73rd Annual Report it on the market for corporate control. thus weakens The European Commissions attempt, driven by the desire for capital market integration, to harmonize the rules for corporate takeovers, therefore was a threat to the German system. It had been on the Commissions agenda since the early 1990s and
1 2 3

Interestingly enough, all markets grew and shrank in unison their rank order never changed. This is another argument against substantial change, even during the bubble years.

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was subject of intense negotiations. In 2001, the Commission launched a draft directive based on British rules which included the abolishment of all defense mechanisms against takeovers (such as restricted voting rights for shares, golden shares or multiple voting rights for certain classes of shares).8 The German government fought against this proposal, but was voted down three times in the European Council of Ministers by a margin of 14:1. A massive political mobilisation, however, ultimately led to a close defeat of the proposal in the European Parliament. Further consultations followed, and in December 2003 the Italian Presidency proposed a compromise in which all regulations concerning defense mechanisms for takeovers optional for member countries an almost complete reversal of the original proposal. The Commission consequently vehemently opposed this compromise, but in view of the Councils unanimous position was no longer able to withdraw its original proposal.

6 Conclusion
Starting with the controversy about the viability of Rhenish capitalism and challenging the decline hypothesis with the recent literature on the persistence of dierences between national economic models, this paper has demonstrated that while changes do take place in the German economic model, evidence for fundamental and long-term change is not strong so far. But since being so vocal in my criticism of the decline hypothesis, I do not wish to make the same mistake and predict unchangeable stability of the German model. For indeed, there is change and there are challenges, but it is so far unclear whether such change will aect the core of the German model and disable the positive complementarity of its sub-systems its comparative institutional advantage. Evidence from corporate nance, as this paper has demonstrated, does not seem to support the notion that a stronger focus on investment banking by the Big Banks has adversely aected the system as a whole. The episode at DaimerChrysler in July 2004, when management demanded cost cuts in the order of 500 mio. Euros per year and an agreement was reached within a week, combining cuts for employees with long-term employment guarantees, would also lead one to conclude that patterns of interaction and exchange may be very deeply entrenched and not be aected by a decline in organisational strength on both sides of industry even though theoretical considerations would lead one to expect less cooperation and growing radicalisation as a result of less encompassing (Olson) organisations. The view that the German system is changing, but that it is not undergoing systemic change is also supported by recent management studies and economics literature (see for example Goergen et al. (2004), Hackethal et al. (2003), Terberger (2003)).9 On top
8 9

On the case of the EU takeover directive, see e.g. Berglf and Burkart (2003) and Cernat (2004). o Considering the small, but detectable normative bias the latter two authors have in favour of an Anglo-Saxon style system (a modern system, as the rst authors put it, while the second writes about limited success of German reforms), these assessments are particularly interesting.

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of that, the Anglo-Saxon system may lose some of its shine not only because of the obvious system failures such as Enron or WorldCom, but also because recent academic studies have raised serious question marks about whether the Anglo-Saxon system really works as it is supposed to work particularly the nexus between corporate governance and economic performance (see OSullivan (2000), Becht et al. (2003: section 7.1)). If the Anglo-Saxon model loses the social hegemony it undoubtedly possessed since the mid1990s,10 German businessmen as much as politicians and the general population may awaken from the comfortable gloominess into which they have settled recently and assess their economic system more objectively. They will then likely nd that economic systems are far less at the complete mercy of anonymous markets then if often assumed in public discourse about globalisation, for many important decisions concerning economic systems are political decisions. One example is legislation on the European level. If there is interest in keeping Rhenish capitalism alive, then this will to a considerable extent depend on the ability to project the interests connected to its viability onto the European level. The case of the EU takeover directive demonstrates that this can be done successfully.

10

It should be noted that already Albert spoke of the star quality, excitement and charm of the neo-American model, which he contrasted with its inferior performance (Albert 1993: ch. 10).

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