ONE a potential merger between a German bank and an Italian rival would not normally generate much interest beyond the business pages. But these are not normal times. Italian bank UniCredit recently provoked a political backlash in Germany by acquiring a 21% stake in German lender Commerzbank. Even Chancellor Olaf Scholz weighed in, calling the Italian move “an unfriendly attack”. The importance of this series goes far beyond the Italian and German financial world.
News of the acquisition came just weeks after the publication of a report by Mario Draghi, the former president of the European Central Bank, on how to tackle the EU’s declining competitiveness vis-à-vis the US and China. The former Italian Prime Minister warned that the EU faces “slow pain” unless it takes radical action. One of Draghi’s most important recommendations was the need for deeper financial integration. In that context, German hostility to any tie-up raises serious questions about Berlin’s political commitment to broader European reforms.
From a commercial perspective, a merger between the two banks makes obvious sense. UniCredit is Italy’s second-largest lender with existing international operations, and it has done a remarkable job of restoring its profitability after the Italian banking system’s near-death experience in the wake of the global financial crisis, when it was overwhelmed by bad debt and concerns. on the future of the single currency. In contrast, Commerzbank, despite being one of the biggest lenders to the Mittelstand (the small and medium-sized family-owned businesses that are the backbone of the German economy) is a perennial underperformer and has long been seen as a takeover target. UniCredit already owns one of Germany’s largest banks, HypoVereinsbank, so a merger should provide significant cost savings.
From a European perspective, a tie-up is clearly also attractive. Politicians have long complained that while Europe may have a common currency, it lacks a common financial system. More than 20 years after the launch of the euro, and despite post-crisis efforts to create a banking union, the banking system remains deeply fragmented along national lines, with very little cross-border lending. That puts Europe at a competitive disadvantage, denying the bloc any continent-wide economies of scale, while high costs and weak profitability have contributed to chronically weak loan growth. American JP Morgan has a market capitalization that is greater than the five largest EU banks combined.
So why the hostility in Germany to a UniCredit takeover of Commerzbank? Some of that reflects irritation at the way the Italian lender has gone about collecting its stake.
In September, UniCredit launched an attempt by the German government to transfer part of the stake it had acquired in a post-crisis rescue package to the stock market. UniCredit bought the offered 4.5% stake under Berlin’s nose to add to the 4.5% it had already stealthily acquired. UniCredit says it believed German authorities were aware of its plans and its acquisition was welcome. Since then, UniCredit has acquired a further 12% stake and is seeking European Central Bank approval to increase its stake to 29.9%. That would put it in a strong position to launch a full takeover at some point in the future.
Nevertheless, much of the opposition reeks of pure protectionism. Unions have raised the specter of major job losses if a takeover is allowed to go ahead. Meanwhile, Bettina Orlopp, Commerzbank’s chief financial officer, claimed in an interview that a takeover would lead to Commerzbank losing customers. She also raised the prospect of German savers being exposed to the risk of an Italian debt crisis, given UniCredit’s large holdings of Italian bonds. German politicians from across the political spectrum have insisted that Commerzbank should remain independent and in German hands as a domestic competitor to Deutsche Bank, the country’s second largest nationwide lender. Berlin has said it no longer plans to sell any more of its stake, making a full takeover impossible.
Yet some of these arguments cannot be examined. Greater banking integration in the euro area will lead to greater efficiency and improved profitability, which in turn will enable banks to lend more, not less. Meanwhile, post-crisis reforms mean banks are now required to maintain much higher levels of capital and are intensively monitored by the European Central Bank, significantly reducing the risk of bankruptcy. Moreover, if Berlin was really concerned about spillover risks to domestic savers from cross-border banks, it should support the creation of a pan-European bank deposit guarantee scheme. Instead, Berlin has consistently blocked this important step to complete the banking union because it involves a pooling of financial risks.
But there is a price to pay in Europe not accumulates risks – and it increases all the time. As the economy stagnates, it becomes more difficult for governments to reduce debt and deficits, leading to rising populism and increased political fragmentation. This in turn makes it more difficult to tackle existential risks such as threats to European security and the climate crisis. Germany’s leaders claim to support efforts to deepen European integration. But too often Berlin has been an obstacle to progress and bowed to domestic self-interest. The irony is that the biggest victim has been the German economy itself, which is now at the epicenter of Europe’s stagnation crisis.
No wonder the rest of Europe is watching Berlin’s reaction to UniCredit’s move on Commerzbank closely. Draghi’s 400-page report contained hundreds of recommendations to improve Europe’s competitiveness, many of which will force governments to confront difficult trade-offs. If Germany’s leaders fall at this first hurdle, what chance does Europe have?