Strong Firms, Weak Banks: The Financial Consequences of Germany’s Export-Led Growth Model

Abstract

The financial foundation of Germany's manufacturing success, according to the comparative capitalism literature, is an ample supply of long-term capital, provided to firms by a three-pillar banking system and 'patient' domestic shareholders. This premise also informs the recent literature on growth models, which documents a shift towards a purely export-led growth model in Germany since the 1990s. We challenge this common assumption of continuity in the German financial system. Export-led growth, characterised by aggregate wage suppression and high corporate profits, has allowed non-financial corporations to increasingly finance investment out of retained earnings, thus lowering their dependence on external finance. This paper documents this trend and shows that business lending by banks has increasingly been constrained on the demand side, reducing the powerand relevanceof banks vis-à-vis German industry. The case study suggests a need for students of growth models to pay greater attention to the dynamic interaction between institutional sectors in general, and between the financial and the non-financial sectors in particular.

The Financial Consequences of Export-led Growth in Germany and Italy

“…Not all analysts are convinced, however, that Germany is structurally engineered for macroeconomic success. In a recent essay in German Politics, Braun and Deeg (2019) show how German reliance on export-led growth may be self-defeating insofar as it encourages non-financial firms to liberate themselves from the longerterm influence of German banks. Their argument is that German export-led growth derives from the longer-term investments in manufacturing that result from close bank-firm relationships and 'patient capital'.…”

“…This argument is familiar to anyone who has studied the 'coordinated market economy' variety of capitalism (Hall and Soskice 2001, 22-24). What Braun and Deeg (2019) note, however, is that the longer-term coincidence of fast productivity growth and continuous wage moderation encourages firms to finance investment out of retained earnings while banks look to book assets elsewhere. My goal is to expand on that insight by highlighting both the longer-term consequences for German financial stability and the lack of close parallels with the Italian case.…”

“…The situation Braun and Deeg (2019) describe shares attributes with the diagnosis provided by Siebert (2005). Ultimately, firms become net savers (as they accumulate retained earnings), banks focus their attention abroad (because they have more difficulty booking assets domestically), and the German economy finds itself relatively short of investment in physical capital.…”

“…The paper has six sections. The first uses recent contributions by Braun and Deeg (2019) and Blyth and Matthijs (2017) to locate this argument within the debate about institutional complementarities and economic performance. The second section sets out a theoretical framework that highlights the role of 'patient capital' in Germany's 'variety of capitalism' and export-led growth model.…”

German Public Banks, Financial Competition, and Crisis: Institutional Change in German Banking and Financial Vulnerability Before the Global Financial Crisis

“…It likewise provides financial context for IPE and Neo-Mercantilist analyses of the consequences of Germany's export-led development model, and its consequences for Europe. (Braun and Deeg, 2020;Stockhammer and Onaran, 2011;Fuller, 2018) Second, it contributes to the burgeoning field of Critical Macro Finance, which argues that transitions to market-based finance are destabilizing, and that state mechanisms and market power can favor particular interests over others. (Gabor, 2020) By investigating the role that the German government played in gradually prioritizing large private banks' interests through the elimination of protections for Landesbanks, it shows on a national level how interest groups and receptive governments can generate financial and economic instability with dispersed consequences.…”