Turning Savings into Growth: How Germany Can Unlock Long-Term Capital.

00:00:07: All right hello and welcome to a new episode of the sound of finance podcast by ZDB consulting.

00:00:15: And in today's episode we want to dive deep into the intersection politics and financial services, uh... We have talked about several hotly debated issues in German politics be it on going recession infamy zander from moving an additional private investments set up to tackle the investment backlog in Germany, and also a very actual topic reform of private pension provision.

00:00:47: To discuss all these topics I am more than happy to be joined by Arvid Koller.

00:00:52: he is managing director for Germany at The Association For Financial Markets In Europe, ASME for short.

00:01:00: And ASME represents europe's leading banks plays key role Shaping policy discussions around capital markets and financial regulation as well.

00:01:10: avid has long been closely involved in the dialogue between policymakers on one hand.

00:01:18: Financial industry of the other hand, how to actually strengthen germany's capital market?

00:01:25: How do you prove access to financing for businesses and investors?

00:01:30: so i would welcome to the podcast.

00:01:33: Thank you very much, Johannes.

00:01:35: Hello from Frankfurt!

00:01:36: And thank for the kind introduction and it's a real pleasure to be with you today and discuss all these questions and topics that you raised already.

00:01:46: I'm looking forward our conversation.

00:01:48: Yeah same for me.

00:01:48: Thank you so much.

00:01:50: So this episode directly refers to our recent study To give some background of man said he'd be published a study on the mobilization Of private capital in Germany.

00:02:03: So was the title.

00:02:05: and this study elaborated say key areas where the capital markets could make a difference in German politics.

00:02:13: Maybe to start broadly into the podcast from afterness perspective, your perspective why is the role of capital market such an important topic for Germany right now?

00:02:27: You remember, there was a joint study from us some two and half years ago on very similar topic.

00:02:33: So what has actually changed Arvid?

00:02:36: It's

00:02:36: the good way to segue into why we've done second studies.

00:02:41: so maybe let me start few years ago when we as AFME really started out reach decision makers in Berlin.

00:02:51: And the challenge back then was really to explain why your capital markets in Germany matter at all.

00:02:57: You know, and back then we were often faced with a question of... We have the existing German banking system.

00:03:05: most funding actually comes via bank loans while our capital market is important thing.

00:03:10: now we've seen that debate really transform.

00:03:14: so we have depression growth on competitiveness We have huge challenges on infrastructure and defense.

00:03:22: And I think having just come back actually from a week of meetings in Berlin, the questions are not so much why do we need capital markets or what is the role of capital markets?

00:03:32: In Germany's question as how do we really mobilise private capital?

00:03:37: So this was actually why we've then thought to do second study because the challenge has changed for economy and country And I think this is why it's been really useful to work together again and look at a few more recent challenges that we see.

00:03:55: You referenced the view of those right in the beginning, we off course see huge backlog on investment side.

00:04:02: Germany struggles to get innovation on road and transform its economy a lot of innovative companies in this country transforming to bigger companies into scale ups and unicorns.

00:04:18: And then at the same time there's a lot pressure on federal budget not least because off the pension system where i think about one quarter of the federal budgets helps destabilize the pay as you go system, The two of us are German, so we can safely say that.

00:04:39: But Germany is a nation of savers which was great on the one hand but were not really a nation productive saver.

00:04:47: So we do not fully utilize what We have in our savings account and still lack in terms of retail participation and inclusion in capital markets.

00:04:59: Let's look at all these challenges together And sit down again.

00:05:04: This why came to second study?

00:05:07: I couldn't agree more.

00:05:08: so i think it's great to hear really like state of the art insights from german politics, So our study highlighted a significant investment gap.

00:05:40: As Germany faces, you named them already major structural challenges from the energy transition to recent remilitarization fulfilling NATO goals digitisation and infrastructure as well.

00:05:56: so what would say how big is this challenge?

00:06:01: Talking about private capital why can't these traditional financing sources and our infamous on the phone alone meet this investment gaps.

00:06:13: I think that the challenge cannot be underestimated.

00:06:16: so i'm one of the figures that you've come up but we've also seen it from the german federation.

00:06:23: industry is the germany needs to mobilize one point four trillion euros by by twenty thirty to modernize across infrastructure and also beat the energy transition.

00:06:35: We also know that we need to mobilize more than three hundred billion euros a year annually just on net zero itself, so I think the challenge is very clear in one of many graphs you had in this study was some listeners may have already seen because it Printed by Friedrich Merz on a huge poster and he showed it to the CDU CSU, The Conservative Parliamentary Group last year.

00:07:04: And it shows that government consumption continues to rise.

00:07:09: private investment is weakening in GDP growth pretty much since twenty nineteen-twenty has completely stagnated.

00:07:20: I think that's a nice description of his fears when he tries to fall asleep.

00:07:28: And this outlines the challenge at a macro level, right?

00:07:34: Johannes you mentioned how we can tackle it and i think this is where capital markets come in.

00:07:43: You mentioned the special budget lines, the five hundred billion and the Sondervermurgen which are essentially public money to solve issues of an investment backlog.

00:07:54: But if we look at this I think it's a good first start that can help address this backlog but cannot fully solve these things in Germany economy.

00:08:06: so what do you really need is thinking ways how-to How to include private capital, how to free private capital and really use capital markets.

00:08:18: And you identified quite a few mechanisms in there Johannes which are particularly relevant... ...and I thought were helpful.

00:08:27: do want maybe go through those bit?

00:08:31: Yeah sure of course they're all these governmental projects where private capital cannot help at all.

00:08:37: right when it comes Defendant resilience we're talking about topics where the private investors should not know about that details.

00:08:47: so this is kept secretly for a parent reasons.

00:08:52: But on the other hand we have net zero ambitions with half national infrastructure and indeed there are quite efficient capital market mechanisms, reaching climate neutrality.

00:09:09: there are dedicated climate and social bonds on the european level.

00:09:15: Similarly on a European level for broad spectrum of projects we have these cross-border growth funds where capital is really pulled from different member states into larger font dedicated to several project within the whole EU, But of course, there are also these projects off national or federal interests rate for which they're on the one hand.

00:09:41: The Federal Special Purpose Vehicles so-called SPVs for short, uh... ...which issued for particular project.

00:09:53: and it's helpful to find projects where a securitization becomes possible being stock market type vehicle or mechanisms, so for instance a bridge of the german auto barn all over.

00:10:11: Other energy web renewable energies.

00:10:14: there we have situation where you can create sort-of yield and investment yields.

00:10:21: if u are mobilizing private capital to build a bridge or renovate a bridge that will be your concrete capital.

00:10:29: flow from the truck is told crossing the bridges, so yield is created and there's a motivation to invest your money in it because you get back with five or ten percent yields.

00:10:45: This must be ultimate goal of every capital market mechanism.

00:10:50: for apparent reasons I guess but maybe its interesting from here how on different levels initiatives are forming?

00:11:02: think about the capital market union on European level but also on the so-called Deutschlandfonds, national levels.

00:11:12: Maybe you could enlighten in your audience what is going and how promising these mechanisms or vehicles can be?

00:11:23: Sure Johannes!

00:11:24: You mentioned quite a few Already of course switch which the study identified in which i think are really helpful whether it's blended finance vehicles also green bonds securitization that you mentioned.

00:11:37: But then there is things at germany can do a national level and they are just helpful.

00:11:41: we've seen the deutschland form, which is exactly kind of platform tries to bring in public an private money so around thirty billion with public guarantees Which is great first step i think to mobilize.

00:12:00: Needed funds.

00:12:01: on the other hand if we compare this with number you mentioned earlier one point five trillion one point four trillion needed by twenty thirty there's still a huge gap off of the capital that is required and this was probably why do need this european dimension as well?

00:12:17: where, capital markets.

00:12:24: Now we're speaking in Brussels about the savings and investment union, which really aims to make sure that breaking down some of the national barriers that trap capitals so that capital can move more freely into or more efficiently within Europe but also that tries to attract capital to the EU?

00:12:45: And here I think there are sit outside the pure capital markets world.

00:12:53: So we have had some very recent proposals on an EU Inc essentially harmonizing corporate rules to ensure that there's a EU level corporate structure, so-called twenty eighth regime um... That would insure quicker company registrations also via digital channels.

00:13:14: I think personally it is really important to look at harmonising and solvency rules.

00:13:19: If you're an outside investor looking at the EU right now, often still see many different national rules and regulations.

00:13:28: I think if we can move some of that to the level it makes easier for investors in Europe make it more attractive on one hand brings capital but also allows them within the EU get to where it needs to be in the most effective way possible.

00:13:53: Yeah, thank you Arvid for these insights.

00:13:56: so at least I got a feeling that many things are going into the right direction.

00:14:01: there also this ongoing debates within e-six circle of largest economies and European Union about capital market union.

00:14:10: but i think So far we've missed one topic being innovation.

00:14:16: so in the current debate around this on top of moving and all these.

00:14:21: Yeah fueling investments yeah that's under from itself is seen in Berlin as a way to stimulate investment.

00:14:29: and you stimulate growth.

00:14:31: gdp grows in long run but, At least in the study we came to the conclusion that spending alone into infrastructure at zero and so on,

00:14:42: can

00:14:43: risk become a short term booster right?

00:14:46: The Keynesian rationale behind public investments put some money into this system.

00:14:54: Some growth will follow but it does not necessarily end up with sustainable grow.

00:15:02: I'd be interested what structural changes are needed to ensure Germany achieves a durable GDP growth, right?

00:15:11: Rather than just a Strohfeuer as we say in Germany.

00:15:15: A flash of the pan which is solely driven by public funds.

00:15:20: I think that's very good point Johannes and indeed if We look at the Public Money thats coming In That's Helpful.

00:15:27: Thats The First Step.

00:15:29: But Without Any Private Investments And Private Capital We will just not meet the financing needs, but there are other challenges I think deeper issues which relate to innovation and also productivity.

00:15:42: And this is where we then maybe get a sustainable growth.

00:15:46: if you think about new technologies or business models?

00:15:50: How do they really make use of what we have in Germany as well as Europe for innovation?

00:15:57: This is something that we can look at when it comes.

00:16:00: I was looking at the companies in the German DAX.

00:16:05: The other day those forty companies and you know a lot of these are still companies founded on the eighteen or nineteen hundreds, what we really lack is company's in there which have been found it than last twenty years active new technologies one real tech company as AP.

00:16:25: We don't, for example have a company that specializes on AI just to think of sector which is currently off course and everyone's mind.

00:16:35: So I think this something where we can really look at why the reform agenda has to be broader than simply looking public budgets in these special budget lines which poor money.

00:16:48: rightly so relevant issues.

00:16:51: but this as well... having in mind the sustainable growth that you mentioned?

00:16:59: Yeah, absolutely.

00:17:00: So innovation is a topic which is often excluded from all these political discussions.

00:17:08: I mean he's mentioned the DAX companies.

00:17:12: looking at their business models.

00:17:14: we are risking to turn into an industrial museum of Germany or the technologies about yeah... From the twenties and nineties century.

00:17:25: So there is still a strong industrial base in chemical industries and automotive, no doubt.

00:17:32: but China's lurking would I found interesting?

00:17:38: In our study was that innovation itself isn't the problem But be the ecosystem is where innovative ideas can grow.

00:17:48: so now study.

00:17:50: we took a look on the global innovation index, GII and compared Germany with United States.

00:17:59: And it turned out that the innovation index itself is not really different.

00:18:05: I mean the ideas are there.

00:18:07: There's yeah The highest number of patents in the world exactly in Germany.

00:18:12: It's twenty five thousand patterns within one year.

00:18:19: two thousand.

00:18:20: The universities are still strong, Max Planck Society is one of the world's most renowned scientific communities.

00:18:31: So the ideas out there they're even these startup scale-ups in artificial intelligence.

00:18:38: I think about this black forest labs.

00:18:42: you might have heard about this start-up which was recently sold to the US producing there.

00:18:49: The best generative AI with respect to pictures in the world and it's just gone and not contributing too, to that German economy anymore.

00:18:59: similarly for photovoltaics industry some ten years ago or even a computer which was invented by conrad susan and some others, so it's always the same problem.

00:19:13: I think a key number we should look at is not this innovation index.

00:19:16: but ideas are there with still the land of the sinkers or maybe also poets?

00:19:24: But venture capital investment particularly in percent of GDP becomes very apparent why we're lacking behind for instance The US, so there's zero point zero.

00:19:42: seven percent of GDP is actually venture capital invested in Germany.

00:19:49: for the

00:19:49: U.S.,

00:19:50: it's even in terms off the GDP relative numbers its more or less eight times higher.

00:19:59: So I would from after this perspective what role could deeper capital markets Play in strengthening a startup and venture ecosystem in germany?

00:20:11: how can we make these ideas to unicorns.

00:20:15: You're absolutely right.

00:20:16: it's not that we are lacking the idea of the talent but where we're lacking financing path from good idea to start up to scale-up then ultimately hopefully two unicorn.

00:20:30: so company that has one billion plus valuation essentially, One figure and you'll forgive me for quoting something that's not from our study, but from the cookies in no year report.

00:20:42: The five reports would want to figure that stuck with me from that is it?

00:20:46: In the past years fifty years Europe has produced only a few firms with market cap above ten billion.

00:20:54: US has hundreds of them.

00:20:58: all existing six trillion Euro companies are in the U.S.. So I think its that really shows where the problem lies and maybe to think of solutions, we might need first dig a bit deeper into underlying problems.

00:21:15: So if you look at Germany economy that also comes out in this study very well I think Germany remains structurally very bank centric meaning there's lot.

00:21:25: companies are still first and foremost financed by our bank loans.

00:21:30: This has served the economy very well for many decades, particularly of course in the middle stands the SMEs.

00:21:38: So we can see that thirty one percent nearly one third or four corporate financing and Germany comes from loans.

00:21:45: but if you compare them to US it's more than three times share right?

00:21:52: I think this is where.

00:21:53: look at other countries not just the

00:21:55: U.S.,

00:21:56: UK also France.

00:21:59: These countries are much better when it comes to utilizing capital markets.

00:22:04: Sweden, I think is also a fantastic case to look at.

00:22:07: they're doing exceptionally well in using capital market.

00:22:12: the druggy report i think had a number and there which effected on that which showed that sweden have more listings than stock home.

00:22:22: then Germany France Spain and the Netherlands together over last ten years or so in those figures really bring it home.

00:22:31: So you already mentioned that point about lack of vc funding, this is what we need to look at.

00:22:38: but this also why do i need to be looking deeper capital markets across the funding ladder right so how to ensure they are more public private co-investment small cross border vc as well.

00:22:50: i think that's one important one better secondary markets for private shares, simpler IPO pathway.

00:22:57: We have the EU listings act which is coming in and it's being implemented.

00:23:01: so this something that could really help.

00:23:03: So there are many practical mechanisms to ensure we move from scale up phase to a face where companies list and also achieve these high valuations of course means I think We avoid this trend where more and more companies your harness as you mentioned.

00:23:23: Black forest who either gets sold off to the US or two other countries, I'm all they list abroad.

00:23:32: so it can think of very traditional German companies like Birkenstock are.

00:23:37: you can also thing of other ones like by on tech will of course sit with a headquarters too very close to Frankfurt where i am.

00:23:45: but Ultimately, if you list as a company abroad there is the risk that going forward.

00:23:50: You also move more and more of your company over their.

00:23:54: why is it?

00:23:55: Why do companies are listed broad?

00:23:57: because a lot of times particularly in the US they achieve higher valuations.

00:24:03: There's much more In-depth ecosystem there supports at listing.

00:24:09: so then more we can do to keep these companies here too encourage them to this tier to encourage them to rely on deep and liquid capital markets in europe the more we also reinforce this trend.

00:24:22: because these companies then also of course.

00:24:26: I create their own ecosystem here.

00:24:28: i think it's a very complimentary way of supporting market.

00:24:31: yeah,

00:24:38: re-sync things on a European level.

00:24:41: You mentioned the cross border venture capital, which is decisive instrument but only holds when we have harmonized tax regimes and fund passporting rules and standardized investments that could really enable these pan-European funds.

00:25:01: But maybe to open up.

00:25:05: third topic of today's podcast It is more on a national level.

00:25:10: We've talked about the European growth in general but Germany also facing an additional problem which it's known for quite awhile, demographic change and this goes hand-in-hand with required reform of the pension system.

00:25:31: and on the public side, I think we have to be patient for some more month until government presents.

00:25:39: The idea is two to reform the pay as you go system but off course we have a second and third pillar in our German pension system.

00:25:52: there's a deep connection to the capital markets as well, because recently the AVD for short was announced by German politics will be launched at the beginning in two thousand twenty seven.

00:26:11: So how could generally the broader participation and capital markets contribute to more sustainable retirement savings?

00:26:22: In Germany facing the demographic challenges

00:26:25: I think already mentioned one figure right at the beginning, which is that around quarter of federal budget is essentially subsidizing the pay as we go pension system.

00:26:35: That we have here in Germany means those who are currently employed and therefore paid taxes but also paying to the pension system essentially pay directly what pensioners receive once population has retired.

00:26:54: we rely on those in the workforce then to pay-in at the same time.

00:27:00: With an aging population and a smaller work force, of course that system gets under lot pressure.

00:27:07: it is already under huge pressure.

00:27:10: I think that pressure will only grow.

00:27:12: this also means if you think broader about German economic systems which mean federal budget has more constrain flexibility in terms of what the government can invest and we need to think across all three pillars off the pension system.

00:27:32: Now as after me i would say that pension system is not them our bread butter work.

00:27:38: we focus on capital markets but it does such an important sector, But then also be because that can, if you look at capital markets really make a big difference.

00:27:58: A big difference in terms of what those who save right now to plan for the retirement can expect to see once they retire but also when it comes to creating pools off liquidity?

00:28:11: That's been complimentary way again.

00:28:14: help the economy helped these startups and scale ups could receive more funding.

00:28:20: I think the pieces are all connected here.

00:28:24: From a pillar one perspective, so the public pension system we saw in last government's attempts to open that up to capital markets and invest small proportion into a capital market-based fund?

00:28:40: That would be good idea or first step but also seen.

00:28:45: We essentially can just look across the border to Sweden, where reforms thirty years ago were around.

00:28:58: I think two and a half percent of public pension savings get invested into pension funds which are then acted from capital markets have created huge pools of liquidity.

00:29:10: And they've really helped those who are looking to retire in Sweden too do so without fear.

00:29:18: So, I think we can look at other European countries.

00:29:21: We can of course also look to the UK or US on first pillar but need do something.

00:29:27: and then you mentioned the Altersforsorge Deport which is a private pension reform again really huge step in Germany because it's very positive that the government has pushed this over-the line, we see no capital guarantees there.

00:29:46: We're moving to define contribution system so I think it's helpful because ensures those who save up practically get benefits of their work.

00:29:58: but i also should look across other pillar which basically means occupational pensions and thinking how on include capital markets in the equation.

00:30:13: if you do that across all pillars i think u can really make a difference and really create pools of liquidity which in turn will help the economy grow.

00:30:24: And that's also this kind of sustainable growth over very long time.

00:30:28: but we need to think about one thing.

00:30:34: is your assessment, I just for the poor because you should rework that after government made some last minute changes before it comes into force?

00:30:46: so what would be your assessment of the others?

00:30:49: for the people how is going to work and will it be a success.

00:30:53: Yes, so indeed we did the whole calculation.

00:30:57: We took a proposal from government and put all the tax legislation on order special rules into account?

00:31:06: And maybe this was already there biggest problem of our I just was already poor.

00:31:12: it took me quite awhile to set up this Excel table until you run some sensitivity analysis.

00:31:21: Maybe the good news.

00:31:23: First, it came out that the Altersforsorge Depot which is quite a lot backed with public money basically taxed money supporting your investments at the capital markets... It's quite fruitful in long run and could outperform your ETF savings plan in many, many scenarios.

00:31:46: Be it the years until retirement be at the assumed annual ETF return.

00:31:52: so how well is the world economy performing?

00:31:56: In the coming decades there's often a ratio between alters farthogody poor and ETF savings plan bigger than one.

00:32:08: So this was quite good.

00:32:09: I would say It's huge step forward if you compared with these poor yields of the restart.

00:32:17: But like I said, their lacking simplicity did not only make it problematic to set up this calculation tool but also for all population which is quite capital market averse.

00:32:33: confronting the population were such complicated way.

00:32:38: becoming active at the capital markets Is not the right way.

00:32:42: i would say this is what we can learn from countries like sweden for like switzerland and so on.

00:32:48: It's

00:32:49: not your harness if i may interject.

00:32:51: you make an excellent point because it again a step in the right direction but it almost again seems like very german of doing things which is going to write away by making extremely complex.

00:33:07: and i think, You looked at it from the perspective of somebody who really spends a lot time on this to reinvest any tax benefits received again and then as a success.

00:33:20: but that requires active participation.

00:33:24: And one thing I myself noticed having lived in UK for example is, And one other thing i found really interesting in the study is that you kind of looked across all off the themes that we today discussed.

00:33:45: In terms of effectiveness, in terms what helps them most and both on the pension side an also the retail investment site.

00:33:54: one of the points that can read through is that tax incentives matter uh... and they are one of fastest and quickest and easiest ways to really get people active and to get them to say for their retirement or to really use their savings and more productively invest these.

00:34:16: couldn't agree more, so in the end all people are rational economists to some degree.

00:34:25: They do not want to be bothered by this complexity of German tax law about complex refunding processes and also payout procedure which is again very complicated when it comes versus asset managers and so on.

00:34:47: So this is something we have to finally learn, make it simple and then things will work out.

00:34:55: maybe looking at the time I mean there are many tough and hardly debated topics that we encounter today And hopefully the audience also realized That they are closely interwoven.

00:35:08: Maybe other than you looking ahead if you had to prioritize just one or two, let's say original reforms that could truly unlock private capital in Germany.

00:35:22: Be it regulation of pension policy, capital markets and general... What would they be?

00:35:27: And what would you suggest the German cabinet?

00:35:30: Would you suggest Friedrich Merz, Mr.

00:35:34: Klingbarl, Mrs.

00:35:35: Reiche all these guys?

00:35:39: Well, we discussed a lot of challenges but we also touched on quite a few things that can be done and there are always more than two.

00:35:48: If you had a silver bullet... That could solve all these issues immediately.

00:35:54: We could have done so very quickly already.

00:35:56: But I think overall if we think about all this complementary parts of the puzzle we should make use of that.

00:36:05: And one off the charts, but has really stuck with me from this study is when it shows what German households do with their money and over the last twenty years to share that German household having savings in deposits.

00:36:20: so on the savings account for example have not changed at seventy percent right?

00:36:26: I think this describes us quite well as a nation where we're quite risk-averse A lot of the times for good reason, but I think now we have a chance to change this in positive way.

00:36:41: If i had just choose two things let's try increase retirement savings and household participation in capital markets.

00:36:51: make it more simple.

00:37:03: takes away some of the huge pressure on public finances.

00:37:07: So that's one and two, you won't be surprised to hear from someone who is looking at Brussels in the EU so much office day-to-day life.

00:37:18: Let us look at European scale let really progress savings investment union free up trapped capital and ensure that there are stronger funding channels,

00:38:02: See you soon in the next episode.

00:38:04: Sound of finance and goodbye to you, Arvid!

00:38:07: Thanks

00:38:07: for having me.