A potential merger between a German bank and an Italian rival would not normally elicit much interest beyond the business pages. But these are not normal times. The Italian bank UniCredit recently provoked a political backlash in Germany by acquiring a 21% stake in the German lender Commerzbank. Even chancellor Olaf Scholz weighed in, calling the Italian move “an unfriendly attack”. The significance of this row runs far beyond the worlds of Italian and German finance.
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 address the EU’s declining competitiveness against the US and China. The former Italian prime minister warned that the EU faces “slow agony” unless it takes radical action. One of Draghi’s key 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 wider European reform.
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 debts and concerns about the future of the single currency. Commerzbank, in contrast, 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 yield significant cost savings.
From a European perspective, a tie-up is clearly attractive too. Policymakers have long bemoaned that while Europe may have a single currency, it lacks a single 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 lending growth. America’s JP Morgan has a market capitalisation greater than that of the five largest EU banks combined.
So why the hostility in Germany to a UniCredit takeover of Commerzbank? Some of it reflects pique at the way the Italian lender has gone about amassing its stake.
In September, UniCredit gatecrashed an attempt by the German government to offload on to the stock market some of the shareholding it had acquired in a post-crisis bailout. UniCredit bought the 4.5% stake on offer from under Berlin’s nose, to add to the 4.5% that it had already stealthily acquired. UniCredit says it believed the German authorities were aware of its plans and its acquisition was welcome. Since then, UniCredit has acquired a further 12% of the shares 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.
Nonetheless, much of the opposition smacks of pure protectionism. Unions have raised the spectre of big job losses if a takeover is allowed to proceed. 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 other large nationwide lender. Berlin has said that it no longer plans to sell any more of its shareholding, making a full takeover impossible.
Yet some of these arguments do not bear scrutiny. Greater eurozone banking integration will lead to greater efficiency and improved profitability, which in turn will enable banks to lend more, not less. Meanwhile, post-crisis reforms mean that banks are now required to maintain far higher levels of capital and are intensively supervised by the European Central Bank, significantly reducing the risk of failures. Besides, if Berlin were genuinely worried about the spillover risks to domestic savers from cross-border banks, it should back the creation of a pan-European bank deposit guarantee scheme. Instead, Berlin has consistently blocked this vital step to complete the banking union because it entails pooling financial risks.
But there is a price to be paid in Europe for not pooling risks – and it is rising all the time. As the economy stagnates, it becomes harder for governments to bring down debts and deficits, leading to rising populism and increased political fragmentation. That, in turn, makes it harder 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, bowing to domestic vested interests. The irony is that the biggest victim has been the German economy itself, which is now at the epicentre of Europe’s stagnation crisis.
No wonder the rest of Europe is watching Berlin’s response 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 Europe?