Germany torpedoes EU dreams of being a financial superpower

An Italian bank making a big move to buy into a German bank sounds like exactly the sort of tie-up Europe’s leaders have spent years crying out for, so the EU can rear more home-grown heavyweight corporate champions to compete with rivals from the U.S. and Asia.

Now that UniCredit this week actually made a swoop on Commerzbank, however, the devotees of deeper EU integration look set to be disappointed as Berlin’s domestic interests — once again — outweigh pan-European dreams.

German Chancellor Olaf Scholz’s instant condemnation of UniCredit’s “unfriendly attack” suggests that ambitions for the cross-border scaling-up of the EU financial sector will remain, as they have been for a decade, just empty talk.

“All member states, not only Germany, are calling for greater financial integration, but when faced with potential takeover of national champions they start having ‘second thoughts’,” said Italian MEP Irene Tinagli, a former chair of the European Parliament’s economy committee. 

The fear in Berlin is that the Italians, should they take a bigger stake in Commerzbank than the German government, could sap lending to Germany’s prized Mittelstand, the small-and-medium sized manufacturers that are viewed as the backbone of the economy.

This hostility from Scholz is infuriating politicians and economists from other EU countries who have long accused Germany of prioritizing its own interests to the detriment of the European single market. Many cast Berlin as an arch villain during the Covid crisis and Ukraine-related energy shock of 2022 when its protectionist instinct was to massively subsidise its domestic industry without regard to damage to the internal market, particularly in smaller EU countries that could not afford to compete with such largesse.

“It would be a very bad signal for the integration of the European financial market … if this was blocked not on the basis of shareholder evaluations, but on the basis of purely political and protectionist considerations,” said Giovanni Sabatini, senior advisor at Grimaldi Alliance, a law firm, and former head of the Association of Italian Banks.

“The more we succeed in creating large banking groups in Europe that are close in size and weight to their U.S. competitors, the better for the competitiveness of the European economy,” Sabatini added.

Banking Union

Building scale and interconnection between the finance sectors of EU countries has been the goal of European leaders for a decade, and goes by the name of Banking Union. That means, in part, allowing mergers to build large banks that span borders and are not tied to the fortunes of their home country governments — a nexus that cost the region dear a decade ago.

Given banks’ dominance of Europe’s financial sector, Banking Union, is inextricably bound up with the EU’s Capital Markets Union project. In his recent report, former European Central Bank President Mario Draghi pointed to the fragmented financial landscape as a drag on growth and on wealth creation . The largest U.S. bank, JPMorgan Chase, is worth more than the top 10 European banks combined.

A more consolidated European banking sector would raise efficiency and could cut the cost of capital for businesses, Draghi wrote, by doing more to turn the massive savings piles of Europeans into investment.

“We need to have these mergers,” said Karel Lannoo, who heads the Brussels-based CEPS think-tank. “We should be extremely happy that there is somebody like [UniCredit CEO Andrea] Orcel. He has proved he can do it. He has more than doubled UniCredit’s market value — even before Commerzbank came into play.”

But Scholz on Monday said he was opposed to a takeover after the Italian lender said it acquired the rights to another 12 percent of UniCredit stock through derivatives, raising its stake to around 21 percent. That would make it the bank’s biggest shareholder, ahead of the German government.

Unfortunately, said Tinagli, “[The] Banking Union … seems to be worthwhile only if one is a predator and not a prey.” 

Communications disaster

“Following on the heels of the Draghi report, this is a communications disaster,” former ECB Chief Economist Peter Praet told POLITICO.  Pointing to the experience of Belgium, where French and Dutch banks have moved in, Praet said he didn’t see how a takeover would pose any risks to the German economy.

Praet cautioned that elements of the deal may still be unknown, but argued that, even if the German government had good reason to oppose a takeover, it should have communicated them more soberly, instead of delivering the “sort of chaotic, too passionate, too emotional reaction” that questioned the rationale of cross-border consolidation.

Some Germans, at least, agree.

“The German government’s actions have failed to meet either national or European interests,” said Stefan Berger, a German MEP with the center-right European People’s Party (EPP) group. 

Even Germany’s liberal finance minister, Christian Lindner, meanwhile, appeared to distance himself from Scholz’s hard line on Tuesday. Asked what the government could do to stop a takeover, he replied: “That is a matter for the management and board of Commerzbank.”

What’s sauce for the goose…

Much like Germany’s Lufthansa buying a struggling Alitalia from Rome, some say UniCredit should be given the chance to buy its weaker German counterpart. Italy’s Deputy Prime Minister and Foreign Minister Antonio Tajani said there was a “free market in Europe” and called out what he saw as double standards. 

“If one transaction makes sense in eurozone banking it’s this one,” added Nicolas Véron, a banking expert with the think-tank Bruegel, adding that it was particularly a good deal for Commerzbank shareholders. The bank’s shares are up 20 percent since UniCredit’s approach.

But Stefan Wittmann, a union representative and a member of Commerzbank’s supervisory board, pointed to the possible downside. He said it would likely lead to widespread job losses, something that’s happened at other banks taken over by Orcel.

Wittmann also cited UniCredit’s large holding of Italian government bonds. Sudden volatility in the Italian financial markets could “have a domino effect” on the German economy if the deal goes ahead, he warned. 

Véron pushed back against that argument, pointing to the fact that UniCredit is already more geographically diversified than many European banks. At the end of June, Italy accounted for only 35 percent of UniCredit’s €108 billion sovereign bond holdings and 38 percent of its €383 billion loan book, with Germany and Central Europe together accounting for more.

Scholz may want this problem to just go away — indeed, with his political coalition beset at all sides and his future at the head of the Social Democratic Party (SDP) in jeopardy, he has bigger things on his mind. But, judging by Orcel’s past (he successfully sued Santander for millions after it reneged on an agreement to hire him), he is not one to give up easily.

Nor is he likely to be forced to. The ECB will soon be processing a request from UniCredit for permission to raise its stake to as much as 30 percent. While it is bound by procedure, Draghi’s successor Christine Lagarde made little attempt to hide her support for the idea at her last press conference, saying: “Cross-border mergers have been hoped for by many authorities, and it will be very interesting to see that process unfold in the weeks to come.”

Given that elections to Germany’s federal parliament are only a year away, Orcel may just have to bide his time. 

“My view is that it’s a long game,” said Bruegel’s Véron. “One way to look at it is: Which of the two has more staying power, Andrea Orcel or Olaf Scholz?”