The long-discussed move by UniCredit, Italy’s number one bank, to seek control of Germany’s Commerzbank is a watershed for Germany and Europe. Whatever happens following the announcement that UniCredit has built a 21% stake in Germany’s second biggest stock market-quoted lender, the episode marks another huge test for embattled German Chancellor Olaf Scholz.
It adds to a spate of political and economic worries assailing Europe’s biggest economy. The dispute between Germany and Italy over UniCredit’s takeover manoeuvres – branded by Scholz an unfriendly act – threatens to inflame relations between two of the Big Three member states of the European Union.
A compromise could still be found. But the hostility developing in Italy and Germany could scupper any meaningful steps towards completing banking union and capital markets integration, which all sides say is necessary to drag Europe out of its malaise.
Piquantly, the drama places in opposing roles two personalities with contrasting parts in the European sovereign debt crisis in the mid 2010s. Jens Weidmann, president of the Bundesbank in 2011-21, is supervisory board chairman of Commerzbank, while Pier Carlo Padoan, Italian finance minister in 2014-18, chairs UniCredit.
Germany’s banks have dramatically lost weight and importance compared with other euro area member states in the past 30 years. They have largely failed to integrate domestically while rivals abroad have grown bigger and more profitable through mergers in their home markets.
Germany now stands accused of favouring European banking integration only on its own terms. Scholz – especially in his former function as finance minister – has frequently urged more cross-border activity in European finance, including through common deposit insurance. But Europe’s premier economy appears to be seeking to hide behind protectionist barriers when one of its own institutions becomes a target.
Mario Draghi backs capital market integration
The UniCredit-Commerzbank affair has erupted in the days after Mario Draghi included capital market integration in a report advocating a long list of reforms to raise Europe’s competitiveness against the US and China. The former Italian prime minister and president of the European Central Bank warned the EU faced an ‘existential’ threat and ‘slow agony’. Draghi’s call for €800bn a year in new investment has raised hackles in Germany because he advocated part of this should come from common EU borrowing. The German government regards this as potentially damaging for budgetary discipline as well as the country’s own credit rating.
On top of these external issues, the saga is exacerbating internal tensions within Scholz’s fractious three-party coalition. These centre on the minority Free Democratic Party, in charge of the finance ministry, which is seeking to bolster its profile after multiple failures in regional elections. In view of the FDP’s key role in orchestrating the botched sale two weeks ago of part of the government’s stake in Commerzbank, the affair could provide one more reason for a possible coalition break-up before next September’s planned general election.
There have been allegations of poor communication and incompetent management of the 10 September book-building exercise under which the Berlin government sought to offload a portion of its 16% stake built up during the 2008-09 financial crisis. Apparent lack of safeguards to thwart a block purchase allowed Andrea Orcel, UniCredit’s deal-hungry chief executive, to acquire relatively cheaply a strategic 4.5% stake. An additional 4.5% bought through derivative transactions, together with further purchases, again through derivatives, revealed on 23 September, have given the Italian lender a stake potentially higher than the Berlin government’s.
A stake beyond 10% would require approval by the European Central Bank, where a decision is expected in coming days. If a green light is not forthcoming, the derivative trades would have to be unwound.
UniCredit’s encroachment no surprise
UniCredit’s encroachment on Commerzbank is no surprise. What is surprising is that the German government, in a seemingly perpetual state of disarray, was not better prepared. Under then chief executive Alessando Profumo, UniCredit in 2005 acquired Germany’s second biggest bank, Munich-based HypoVereinsbank. This remains a rare example of substantial cross-border euro area banking expansion. Profumo commented later that the feat was facilitated by European integration, as well as by German government mistakes after unification in 1990, which weakened the banking sector and allowed a relatively cheap acquisition.
The first stirrings of UniCredit interest in Commerzbank came in 2017. Two years later, UniCredit, under CEO Jean-Pierre Mustier, who took over in 2016, prepared a bid as an alternative to the domestic merger that Commerzbank was negotiating with Deutsche Bank. Fabrizio Saccomanni, an old ally of Draghi, a former Italian finance minister and veteran official at the Banca d’Italia, became chairman of UniCredit in 2018. He and Mustier favoured a scheme to combine Commerzbank with HVB and maintain the merged bank HQ and a stock market listing in Frankfurt. Saccomanni, who died suddenly in 2019, was adamant that any takeover bid would be on friendly terms. Both deals – domestic and cross-border – failed to materialise.
UniCredit regained interest in Commerzbank soon after Orcel, who succeeded Mustier in 2021, shifted focus away from further domestic banking consolidation centred on the troubled lender Monte dei Paschi di Siena. In his latest manoeuvre, Orcel has teamed up with Padoan, who like Saccomanni has long experience of dealing with Germany.
Latest Italian action more aggressive
The latest takeover action seems more aggressive than in the past. The Italian government, which this week has criticised Berlin’s rejection of UniCredit’s overtures, appears to want a new bank to be based in Milan, not Frankfurt. Commerzbank and the German government rule this out. A flagship German financial asset would come under control of an entity with large-scale exposure to the Italian government, which Berlin regards as a poor sovereign risk.
Weidmann, a former chief economic adviser to Chancellor Angela Merkel, in his 10-year spell as Bundesbank president was a major critic of Italian risk stemming from the country’s high public sector debt.
Over the past decade Itay’s debt to gross domestic product ratio has risen as high as 155% but has since fallen to around 139%. It is still more than double Germany’s relatively parsimonious 64%. At one time Weidmann raised the ire of Italian officials by proposing that private bank holdings of Italian bonds be subject to a capital levy in view of the low rating of Italian debt. Weidmann would have made a credible ECB president in 2019, but his bid for the job was blocked above all because of opposition from Draghi and French President Emmanuel Macron, who told Merkel months before the decision that her former adviser had no chance of getting it. As a result, Christine Lagarde took the top slot at the ECB and Weidmann announced his resignation from the Bundesbank in October 2021.
A possible compromise in coming weeks could see revival of the 2019 Saccomanni-Mustier plan under which UniCredit could take control of Commerzbank, merge it with HVB and keep a combined structure in Germany. UniCredit would maintain its HQ and listing in Milan. Private minority holders of Commerzbank would see their shares listed in Frankfurt.
The last 25 years have seen sporadic attempts to consolidate German banking, where private lenders face entrenched competition from state-owned savings banks and widely spread co-operative banking networks rooted in local communities. In 2000, a much-heralded merger between Deutsche and Dresdner Bank was abandoned because of opposition from Deutsche’s London-based investment bankers. In 2008, a second-best merger between Dresdner (which had been taken over in 2001 by the Allianz insurance group) and Commerzbank was consummated – but, beset by the financial crisis, the link-up never produced desired results.
How Helmut Schmidt’s surmise has worked in practice
German officials with long memories comment on the paradox. UniCredit’s market capitalisation is now three times larger than Commerzbank’s. But the disparities in the two countries’ credit ratings seems to rule out a straightforward merger with a single ownership structure. In 1993, former West German Chancellor Helmut Schmidt – one of the original architects of monetary union, warned that Germany’s (at the time) relatively large banking groups had to be cut down to size because they would stoke up dangerous enmity among neighbouring countries.
‘Without a common currency,’ Schmidt wrote in the heavyweight weekly Die Zeit, ‘the D-Mark would over time play the leading role and the German banks and insurance companies would accomplish a market-dominating position well beyond our borders, producing irritation and envy among others – and with malign political consequences for us [Germans].’
Three decades later, Schmidt’s successors have to grapple with the political consequences. As Schmidt wished, developments after the advent of the euro have undermined Germany’s banking structures. The former chancellor would not however, have welcomed the new constellation: Germany is still coming under pressure from abroad, this time not because of strength but because of weakness.
The larger picture is still more disturbing. As the Draghi report points out, despite monetary union, Europe suffers from acute fragmentation in many fields of industry and finance. In the banking sector, the most obvious sign is in market capitalisations. JP Morgan, the premier US bank, has a stock market value equivalent to the total of the top 12 euro area banks. The combined capitalisation of UniCredit and Commerzbank is €80bn – 15% of JP Morgan’s. As the Draghi report makes clear, Europe has a long way to go before it has any chance even of narrowing the gap. Catching up would now seem impossible.
David Marsh is Chairman of OMFIF.