2006 - Year of Change

Klaus-Peter Müller
President of the Association of German Banks and
Chairman of the Board of Managing Directors of Commerzbank AG

XVIIIth German Banking Congress
25 April 2006
Berlin, Konzerthaus am Gendarmenmarkt

Not checked against delivery

I take pleasure in opening the XVIIIth German Banking Congress conference and extend a very warm welcome to you all, also on behalf of my colleagues on the Board of the Association of German Banks.

The last Banking Congress was held five years ago, in April 2001. How has Germany changed since then? Let’s take a look back: soon after the turn of the century the New Economy bubble burst and growth in Germany became weaker and weaker. The pressure for reform increased and the reform debate, which had started back in the 1990s, continued. But instead of bringing the breakthrough for reform, it created uncertainty – not only among citizens, but also among politicians. Following the political turmoil in 2005, the government ultimately saw no other way out than to call an early general election.

The mood of uncertainty was also reflected in the “capitalism debate” – a low point which threatened to completely deflect attention away from the real problems. Yet at the same time there were also also some rays of hope and first steps towards reform, such as the Agenda 2010, for example.

So where do we stand today? The sweeping change of the past few years continues unabated all around us. Globalisation is accelerating. Developments in, for example, the BRIC countries – that is, Brazil, Russia, India and China – are breathtaking. Competition between locations is becoming a major international business factor and a permanent challenge.

And people feel this. According to a survey conducted by our association, nine out of ten Germans are convinced that the political reforms of the past few years are not yet sufficient to solve Germany’s problems. So citizens are basically ready for change.

But this is only one side of the coin. For we are often our own biggest obstacle: 77% of citizens believe that Germans are generally too slow when it comes to treading new paths.

So, in 2006 as well, we still have both: the realisation that there is no alternative to reforms but also the reluctance to firmly implement them. To put it in footballing language in this World Cup year: it’s a draw. Pro-reformers and anti-reformers have both scored their goals during the past few years.

It all depends on the second half now, and the game has got to get better. Let’s show that in Germany we don’t – as predicted by the Economist in February – have to wait for a “Wunder”. Let’s show that we can do it on our own!

This is possible – and may I say in all modesty – the German banks have shown that it is possible.

“German banks – turning Japanese?” , asked Merrill Lynch in September 2002.

“Banks preparing for the worst”, reported Handelsblatt at the beginning of 2003.

And a respected management consultancy firm actually found in January 2003 that, quote,“The Frankfurt banking community is disentegrating.”

Yet not only do you find us, the private banks, sitting happily together today, you also find us in good shape – in much better shape than a few years ago at any rate. For behind us lies a period of extremely hard work. We have cut costs, removed risks from our balance sheets and restructured. I shall come back to this later.

First, I should like to look at what we in Germany can do in economic policy so that we can say in five years’ time, at the next Banking Congress: “Germany has made the transformation and is back on a path of strong economic growth again.” One thing is clear: We have to develop our own strengths and work on our weaknesses. The really big reforms have still to be tackled. To be blunt: The restructuring of Germany Inc. has only just started.

Repairing the foundations: Social market economy

But what does this mean in practice? Any restructuring work first calls for an inspection of the foundations. And a few cracks need to be fixed here. It is therefore up to our politicians and business leaders to continually strengthen public confidence in the social market economy, our main foundation. So I am pleased to note that approval of our economic system has risen again after reaching a low in May 2005.

While only 51% of Germans believed then that the social market economy was a success, the figure today is 61%. But I also realise that the approval rating in previous years was usually between 70 and 80%. And I am aware that in the east of Germany four out of ten Germans have no confidence in the social market economy.

This uncertainty shows that discussions like those that took place in spring 2005 do have an impact. So we shouldn’t be surprised that, when asked about the future of the market economy, 44% of Germans still call for more social protection by the state at a time when the public sector has quite plainly reached, or in fact exceeded, its financial limits.

Only one in three Germans wants more market economics and more competition. This is cause for concern, as the guiding principles of the social market economy are performance, individual responsibility, subsidiarity and competition. They are the key to new momentum and new growth in Germany. They show us the right approach on many issues.

Federalism

Take the reform of our federal system, for example. The progress needed in many areas has failed to materialise during the past few years because the powers of the federal government and the states are so entangled that they have repeatedly produced a political stalemate.

The government has now – at the second attempt – managed to launch a reform of federal structures. This is good news – and can be booked as an achievement of the Grand Coalition. But it is by no means grounds for complacency. For one thing, it would be fatal if the measures now underway were to be subsequently killed off by endless discussion.

For another thing, the power of federalism, the power of competition for the best solutions, can only unfold if we launch the second phase of reform: If we reorganise not only legislative powers but also our “financial constitution” – that is, financial relations between the federal government, the states and local authorities.

Mixed financing, combined federal and state taxes and the revenue equalisation scheme – all these things have always been created with the best possible political intentions. Ultimately, however, they are a serious obstacle to economic growth.

Decision-making power and financial responsibility should be put in one and the same hands. The level which passes a law must take over the related tasks and also carry the costs. You can only call the tune if you pay the piper!

Limited tax autonomy for the states should not be a taboo. A reform of federal financial relations must have top priority. The sooner we manage to open negotiations on this, and then obtain results, the better.

Financial policy

This takes me right on to economic and financial policy. The biggest challenge in the foreseeable future is the consolidation of public finances. For the pressure for action is considerable:

• The federal government and a number of states can – if at all – only present constitutionally correct budgets with great difficulty. If the federal government wants to comply again with the limit on debt laid down in Article 115 of the Constitution, it will have to virtually halve its borrowing requirement.
• Government debt continues to rise and will probably be close to 70% of GDP this year. According to the Federation of Taxpayers, it is increasing by €2,113 every second.
• And, finally, there is still the danger of Germany violating the terms of the Stability and Growth Pact this year for the fifth time in succession.

And now that Ecofin has toughened the deficit procedure, a great effort is needed if, as promised in the German stability programme, the deficit next year is not to exceed the 2.5% mark.

Sound public finances are a basic condition, a conditio sine qua non, if we are to regain the capacity to act at political level. And this is what people expect: Three-quarters of all Germans believe it is important for Germany to comply with the terms of the EU stability pact. Without this pact – and Europe did not do itself any favours last year in my opinion by allowing its so-called “flexibilisation” – European Monetary Union cannot work in the long term.

The founders of the stability pact knew this. But during the past few years some politicians have had to be reminded that stability and growth do not contradict, but foster, each other.

Consolidating public finances is naturally an enormous and unenviable task for any finance minister or municipal treasurer. But the path is clear, and citizens themselves are pointing the way: 71% of Germans believe that government spending must be cut.

But why do politicians always look at the revenue side first? Why – with government debt still at 47% of GDP – don’t we have the courage to closely put all government tasks and government spending under scrutiny?

Why don’t we recognise that the competition-based private sector can do a lot of what the state does better and more cheaply? The cornerstone of any good financial policy is concentration by the state on its core tasks. More room for private enterprise and more competition – these are again the guiding principles here.

Wherever it makes sense for the public and private sectors to act hand in hand, public-private partnerships are an option. In other countries this is an option that is being used with great success. Germany has some catching up to do here, and that’s why we are pleased to note the signals the government has given on the subject of PPPs.

Tax policy

The example of financial policy shows that the state needs to reconsider its role. That goes for tax policy as well. Tax policy should focus less on purely fiscal and distributive goals and be geared much more strongly to strengthening economic growth.

A reform of corporate taxation has top priority. This is a reform for more growth and employment – and thus a reform also and in particular for employees, especially for all those looking for a job.

The blueprints for a reform have already been presented, and time is tight: it is important that the government fixes the key items of a bill by the summer break. Only then can the reform make it into the Federal Law Gazette in summer next year.

And only then will companies have enough time to prepare for the changes that would come into effect from January 2008. So that the reform of corporate taxation can have a real impact, we need lower tax rates and net tax relief. German companies have one of the highest tax burdens internationally. This is why if we don’t go far enough here – although I fully appreciate the revenue authorities’ current budget problems – there will be no impetus to growth and employment.

A fundamental reform in the real sense is only possible if we abolish and replace trade tax, a tax that is relatively unknown outside Germany. This could be achieved most easily as part of the reform of federal financial relations I mentioned earlier.

A key move in this connection would be the introduction of a profit-oriented local corporation tax levied by local authorities, as proposed by the Stiftung Marktwirtschaft (an economic policy think-tank) for example. The business community has been calling for such a reform for some time.

But not only the taxation of companies needs to be reformed. A new way of taxing private investment income is also called for. It is a question here of ensuring that, for the good of the economy as a whole, we maintain or actually increase Germany’s attractiveness as a financial marketplace in the competition for international investors. We are pleased that policymakers also intend to take action here.

The banking industry – along with the government of the state of Hesse, the council of economic experts known as the Sachverständigenrat and the rest of the business community – have been calling for a long time for a moderate, flat withholding tax on interest, dividends and private capital gains. Everyone would benefit from such a tax:

• Citizens would be able to understand tax law better again in this area.
• Investors would have more legal and planning certainty.
• And – as experience made by other countries shows – the state wouldn’t have to worry about losing out fiscally.

And, finally, highly bureaucratic control systems would become superfluous. For example, there would be no longer be any justification – from a fiscal standpoint at any rate – for the dubious procedure giving authorities automated access to account information.

A withholding tax on private investment income would be a step towards more growth. The same cannot be said of another step we face in the near future. For the increase in VAT by three percentage points next year will definitely have repercussions for the economy. But policymakers have made the decision, as they believe there is no way round such an increase, and we must respect this.

We will at least assume that – wherever possible – the additional revenue will not be used to plug the holes in the budget but to improve the structure of the tax system and lower non-labour costs. Tax policy is a broad field. One issue, a “wealth tax”, is something I don’t really want to talk about. I don’t want to ask

• how fair such a tax would be and what effect it would have,
• whether the revenue collected would justifying the trouble taken to collect it, and
• how it would be assessed from a constitutional standpoint.

Instead, let me just ask: Can symbolic policies really help us? Is there really a place for class conflict terminology in our social market economy of the 21st century?

Less bureaucracy / better regulation

What would really help Germany, ladies and gentlemen, is less bureaucracy and less regulation. But we don’t just need to cut red tape. We shouldn’t allow any new red tape in the first place – except where it is shown to be absolutely essential. But is it absolutely essential for parliament to be dealing in 2006 with “whether the planned Act reforming shoeing regulations and amending animal protection rules takes adequate account of different forms of hoof and claw care?

Is it absolutely essential for the states of Mecklenburg-Western Pomerania and Bremen to have to pass a Cable Railway Law at the behest of the European Union? And is it absolutely essential for companies to have to get privately-owned coffee makers used by employees on their premises checked? Believe it or not, every coffee maker has to be checked before being used for the first time and then every six months “by an electrical expert or other trained person using suitable checking equipment”.

Despite all the bizarre bureaucratic excesses to date, progress has also been made – take, for example, the European Commission’s “better regulation” approach. Often the best regulation is no regulation at all. What often makes more sense is voluntary codes of conduct by market players or temporary rules that can be abolished if they fail to stand up in practice.

Where regulation appears inevitable, legislators must determine the costs for the parties affected and show that these are reasonable. The standard costs model planned by the government is the right approach. For banks in particular, less red tape is of central importance. Virtually no other sector is as heavily regulated as the financial sector. This is why we welcome it that the government intends to reduce regulation in the financial sector “in a dialogue with market participants”.

When it comes to another target, “as is” implementation of EU rules, words and deeds don’t yet fully correspond, however. Look at the Anti-Discrimination Directive, for example. A positive signal, on the other hand, is the establishment within the Federal Chancellery of a so-called Normenkontrollrat (a council which will determine how the costs of bureaucracy can be assessed and what opportunities there are to cut costs). Reducing bureaucracy must be given top government priority.

Labour market

An internationally competitive tax system and less regulation are two cornerstones of a strategy to take Germany towards higher economic growth. So that this growth can also be reflected in more employment, we first need to remove obstacles on the labour market in particular.

• Let’s give companies more scope locally for adopting a wage policy approach geared to their specific needs – and employers will use this scope responsibly together with works councils and workers.
• Let’s get rid of obsolete features of labour law such as the Günstigkeitsprinzip (so-called “Favourability Principle”, under which collective bargaining agreements can depart from the regulations laid down by the law by providing more favourable terms than the legal minimum and under which individual contracts of employment can in turn be more favourable than collective bargaining agreements) and the Allgemeinverbindlichkeitserklärung (whereby the applicability of an existing collective agreement can be extended to include employees and employers not bound by the agreement). Let’s forget about new experiments such as “combi-wages” – and labour market momentum will pick up. I make no bones about the fact that I also question the sense of minimum wages.
• And, finally, let’s loosen job protection rules, and companies will be more willing to hire new employees. The recent debate on this subject, where progress was already in sight, has set us back again and unsettled the business community.

Social security

If we are to create new jobs in Germany, we need not only more flexibility on the labour market, but also a fundamental reform of the social security system. And the people of Germany know this: 59% expect greater conflict between the old and young generations in our society if we fail to solve the problems of financing pension and health insurance.

We must not allow a situation to arise where the young become resentful of the old. As far as provision for old age is concerned, policymakers have already laid some groundwork. The establishment of funded private and company pension schemes, and now the planned raising of the retirement age are milestones which deserve recognition.

At the very top of the agenda for this legislative term is a reform of health and long-term care insurance. We have seen already seen a few blueprints for this major project but as yet no final construction plan.

One of the drafts, a compulsory insurance scheme for everyone with the deceptive name “citizens’ insurance”, is, in any event, ill-conceived. This model would merely force more sections of the population to pay into the current scheme, but without solving any of the system’s inherent problems.

For three things are indispensable and here, too, personal responsibility and competition play a key role.

• First, severing the link between health and long-term care insurance and wages.
• Second, extending private, funded provisioning.
• And third, strengthening competition among healthcare providers.

This is a growth market. It’s time we started to talk about this aspect of healthcare policy instead of focusing exclusively on the threat posed by the prospect of spiralling costs.

According to a survey carried out by Roland Berger, the health sector generates over 12% of domestic product and this could rise to 15% by 2020. We can exploit this growth potential. This shows that demographic change can also open up opportunities if we are only prepared to embrace new ways of thinking.

Education policy

New ways of thinking are needed in another field, too: education policy. Education and knowledge are more important than ever before when it comes to an individual’s job prospects in the labour market – and to a country’s economic prospects in the international marketplace.

So the PISA findings were naturally a cause for concern. One in two Germans has doubts by the efficiency of our education system.

But what’s to be done? I believe we need a two-pronged approach. Firstly, we need to strengthen competition and make educational establishments more autonomous. Schools and universities that are able to develop their own profile and pay their staff on the basis of performance will lead to greater diversity and quality in education than under a standardised system. And second: non-specialist schools must teach more basic economics than is the case today. Eight out of ten Germans agree with me on this point.

The Association of German Banks has long advocated including economics in the school curriculum. We already support teachers and pupils by making available a range of economics teaching material which is also recommended by state ministries of education. Credits earned by pupils in our school projects are sometimes recognised in the Abitur (German school-leaving examination which qualifies for university admission). All of this is a practical contribution towards increasing economic literacy. This is how we see and practise our social responsibility!

The economic cycle: using this window of opportunity for reform

Federalism, tax and financial policy, better regulation, the labour market, social security and education: Germany’s reform agenda is certainly a long one. But it’s not simply a wish list of the business community and still less – as sometimes claimed – of lobbyists motivated purely by their own interests. It’s a to-do list that needs to be worked through systematically and with discipline.

The economic cycle currently offers us a favourable environment to do so. Despite the brief pause in growth at the end of 2005 we can still expect an upswing this year. The world economy continues to boom, incoming orders at German companies are rising and glimmers of hope are beginning to appear on the job market, too.

The important thing now is for policymakers not to be tempted by these first harbingers of economic spring into taking their foot off the reform pedal. The opposite is needed: the window of opportunity for reform is now open. Let’s make use of the tail wind offered by the economic cycle. Let’s make this year, let’s make 2006 the year of change and the year of breakthrough for reform! Should we fail, 2007 will be the year of truth or, to be more precise, the year of unwelcome home truths:

• because we must be prepared for repercussions from the VAT hike,
• because a slowing down of the world economy could hit an exporting nation like ours particularly hard
• and because our violations of the stability pact and Article 115 will probably finally come home to roost.

The Mittelstand

Germany’s Mittelstand companies are also benefiting from the current economic recovery. According to the Bonn Institute for SME Research, these make up 99.7% of all firms in Germany that are subject to VAT. To me, this suggests two things:

First: what is good for the economy as a whole is good for the Mittelstand as well. It makes at most limited sense to differentiate between the two. And second: no bank can afford to ignore the Mittelstand: this vast client segment with its huge potential for growth. This makes it all the more welcome that the banks’ corporate lending business is picking up again, and that this includes loans to Mittelstand companies.

The demand for, and volume of, corporate loans rose again last year at the private banks after a long dry spell. In the former East Germany, the private banks have for years – unnoticed, moreover, by politicians and the general public – led the market in corporate lending. That’s all I wish to say on the issue of the Mittelstand’s access to credit. But the point here is about much more than loans: SME funding is undergoing a phase of fundamental change.

Loans are and remain the principle source of funding for Mittelstand companies. It is, however, far more important today than ever before for a bank to be able to assess reliably the opportunities and risks of the investment associated with a loan. More than ever, transparency and communication are the basis of lending.

And this is reflected in lending practice: a survey by the Kreditanstalt für Wiederaufbau (German development bank) shows that the now widespread use by banks of internal rating systems is making it easier again for small companies, in particular, to access credit.

The Achilles’ heel of Germany’s Mittelstand companies, however, is their low equity capital base. This is why the Mittelstand must make greater use of external capital. The banks are ready to assist their Mittelstand customers by offering them both expertise and new innovative products – such as mezzanine financial instruments, a mixture of debt and equity capital. Here, too, much is in a state of flux and everyone involved – the banks, Mittelstand companies themselves and policymakers – have to rethink their strategies. On the road to the future we need to find new solutions.

Reforms in the banking industry

This applies also – indeed in particular – to the banking industry. We private banks are well used to regularly coming up with new solutions. For many difficult years we have been repositioning ourselves. Our earnings have stabilised and some banks are able to post respectable results. But we still have a long way to go.

Our competitors in the rest of Europe haven’t been standing still either. Where profitability is concerned, the German banks still have ground to make up. So it’s now important to increase earnings. We must – and shall – evolve even more quickly, continue to modernise and reduce costs by achieving economies of scale.

European level

We can no longer do this on our own. We need the support of financial markets policy. Not to give us one-sided advantages. But purely and simply to ensure that competition is free and fair. More and more financial markets policy is being set at European level. But not all European markets function as a single market.

Integration of the retail banking markets

Just imagine how the German car industry would fare if, in order to sell the same model across Europe, different bumpers, seats or brakes had to be fitted in every single country to satisfy the national requirements there. This is exactly what happens in retail banking.

The European Commission wants to rectify this situation by moving forward the integration of retail markets. This is good news, because it will strengthen Europe’s position as a financial centre. The Commission is focusing on consumer protection because the rules that apply in this area differ especially widely. Though this is a plausible strategy, everyone involved should always be guided by the concept of the “responsible consumer” and not impose excessively restrictive requirements on products.

Above all, the ground rules must be clear. The minimum harmonisation approach applied to consumer protection up to now has not proved successful because national implementing legislation diverges too widely. What we need is legal certainty and this means: Common EU-wide rules for cross-border banking and financial services which, at the same time, allow diversity and flexibility in product development. Only under these conditions can customers benefit from the integration of the retail markets and only then will European banks have a stronger competitive position in the international arena.

Cross-border mergers

But something else is necessary to achieve this, too: we need larger units. This means that all the barriers currently standing in the way of cross-border mergers must be dismantled. Otherwise European banks risk falling even further behind in the consolidation process, particularly compared to their US counterparts.

This also worries the European Central Bank. Gertrude Tumpel-Gugerell, a member of the ECB Executive Board, has stated, and I quote: “Regulative barriers and differences in standards for banking products and infrastructures continue to impede cross-border mergers and acquisitions.” We welcome the fact that European policymakers want to take action here. The issue has been taken up by the European Commission and the European Council of Finance Ministers.

SEPA and Basel II

Another important element in creating a single market for financial services is the Single Euro Payments Area. We must not allow the significant progress already made in this area to be put at risk. I know that all the other major German banking associations agree with me on this.

Only if there is consensus in the banking industry throughout Europe, too, will we be able to launch the SEPA by 2008. And only then will be able to achieve our objective of self-regulation. This was reiterated by the European Banking Federation early this month. Responsibility on the part of the banks and competition in the interests of their customers – this is what SEPA is all about.

On another issue of current interest, the new capital adequacy rules under Basel II, it is important, above all, to ensure that equal conditions of competition apply. This means, as far as Europe is concerned: The European directive implementing Basel II must be transposed in all member states simultaneously and in full. And turning to our friends in America, I would urge them to conclude the political debate on Basel II, which began in the US at a very late stage, and close ranks again with Europe.

National level

Ladies and gentlemen, as important as the decisions on financial market policy taken in Brussels are, it’s equally important for Germany to do its homework, too. “One of the most important conditions for higher growth and employment is the international competitiveness of Germany as a financial centre.” This is what it says on page 73 of the coalition agreement of November 2005 between the CDU, CSU and SPD. No previous German government has ever made such a clear statement to this effect and I think I can safely say on behalf of all the associations in the Zentraler Kreditausschuss (joint committee of leading German banking associations) that it is a signal we warmly welcome.

In an even broader initiative, the “Initiative Finanzstandort Deutschland”, all the important players on Germany’s financial markets work together with the aim of enhancing Germany’s position as a business location and strengthening the economy as a whole.

With great success. I have already touched on a few of the many issues which the IFD addresses, such as the taxation of private investments, the financing of Mittelstand companies or the “as is” implementation of European rules.

REITs

A further point close to our hearts is the introduction in Germany of real estate investment trusts. REITs, listed real-estate investment vehicles, would lend important momentum to the German property market. Policymakers can and must make a decision on REITs without delay if this opportunity is to be seized, not lost. Otherwise, the markets will develop elsewhere.

A level playing field on the German banking market

If Germany wants to be a permanent player in the premier league of financial centres, there is, however, another condition that must be met. There must be a level playing field on the German banking market.

In sport, the need for this is self-evident. What kind of football match would it be if one – but only one – team wasn’t allowed to cross into their opponent’s half of the pitch? Yet there is a comparable situation in the German banking market. Public-sector banks are permitted to acquire private banks – and they do so. But the reverse continues to be impossible.

The private banks’ team might be accused of bias when discussing this point. So let’s take a seat in the stands and ask the spectators what they think. Let’s consider the issue from an academic and international perspective.

Professor Beatrice Weder di Mauro, a member of the Sachverständigenrat has stated quite categorically: “Consolidation within the pillars [of the German banking industry] … has done little to bring about greater efficiency. … Legislators must therefore permit consolidation not only within the individual categories, but across them, too.”

The message from national and international experts is plain: there is no alternative in the medium term to dismantling the three-pillar system. For not only the Sachverständigenrat, but the European Commission, the European Central Bank, the Deutsche Bundesbank and the International Monetary Fund, too, have all made their position perfectly clear.

As recently as this January, the IMF spoke out yet again in favour of opening up the German banking system and argued that such a step would also boost growth in Germany. The structure of the banking system is, moreover, not only an internal matter for the financial services industry. The owners of public-sector banks must surely also have an interest in their banks earning returns in line with market conditions.

For many an impoverished local authority it would be a source of financial relief if its savings bank yielded a decent profit; it would be a source of deliverance if it were allowed to sell it.

I cannot help but point out that, with the exception of German politicians and the affected banking associations, all and I mean all those in positions of responsibility have spoken out in favour of dismantling obsolete structures. The importance of upholding the three-pillar principle is not made any less a myth simply by repeating it often enough. Naturally, no municipal or local authority can or should be forced into a sale. But they can and must be in a position to decide for themselves when, how and to whom their banks are sold, if they so wish.

Where do we stand today? The phasing out in July 2005 of the state guarantees known as Anstaltslast and Gewährträgerhaftung and the conclusion of most of the state aid cases brought because of the transfer of housing assets to the Landesbanks have set many balls rolling. They are rolling still and necessity is proving to be the mother of invention. The market is increasingly forcing public banks to go down new roads – there is evidence of this everywhere.

Old certainties no longer hold true: the so-called regional principle (which prevents savings banks from competing with one another) is beginning to break up, as is the traditional division of responsibilities between Landesbanks and savings banks. Even questioning the inviolability of the public legal form is no longer taboo. And in a number of federal states legislators are taking initial steps to amend their savings banks acts.

But this process is not in itself enough to shift the development of Germany’s financial services markets into top gear. The Landesbanks still have rating and thus funding advantages. Regional savings banks acts still act as protective fences which are no longer necessary – if, indeed, they ever were in the first place. One such fence is Section 40 of the German Banking Act.

It protects an unjustified monopoly on the use of the name “Sparkasse”, as current events surrounding the sale of Bankgesellschaft Berlin show. Conditions of fair competition will exist only when lawmakers ensure that any buyer of the Bankgesellschaft may continue to use the name “Sparkasse” if it so desires.

We can only urge the European Commission not to let itself be led astray by spurious arguments and to continue to insist on a non-discriminatory sale. Germany will not be able, in the long term, to lay claim to protectionist special treatment which hinders consolidation in the German and European banking markets. The objective outside view from Brussels or, at the very latest, time will show this to be the case.

Conclusion: There is no alternative to reform

In reforming the banking market, as with all reforms, we need to make more rapid progress if we don’t want to fall behind. The former German president Gustav Heinemann once said that he who is opposed to change will also lose that which he is at pains to preserve. This is truer than ever.

We must not let up our efforts to conduct constructive debates about reforms and then be rigorous in pushing these reforms through. There is no alternative strategy. True, the reform agenda is long and demanding. It ranges from social and economic policy to the banking system, and from European, through national, to regional and local level.

And if the banks turn the spotlight not only on our own industry, but also on economic policy as a whole, there is a good reason for this. Growth is important for Germany and it is important for the banks. Without reforms to deliver more growth, the banks’ long-term prospects cannot be good.

Yet we have, I am convinced, the energy as well as the wherewithal for reform. To summarise, our main tasks are now:

• to get Germany in shape to face global competition,
• within Germany, to place more trust in the power of competition and the market
• and, where need be, to create conditions of fair competition.

Let’s work together to achieve these goals.

Reforms in and for Europe

Many of the challenges we face are of an international and European nature. The same applies to many of the responses we need to supply. One important response is to boost Europe’s competitiveness. I look forward to hearing what our Chancellor has to say on this subject this afternoon.

But beforehand, Hans-Gert Pöttering, Chairman of the Group of the European People’s Party and European Democrats in the European Parliament, is going to explain that these challenges concern not only the European Economic Community, but also our community of values. Welcome Hans-Gert Pöttering!

We all know that Europe is not currently in the best of shapes. Yet we also know that the road to a Europe that can guarantee peace, security and prosperity is a marathon demanding tactics and endurance.

And we know that Europe is crucial to the interests of Germany – not only, but also, from an economic point of view. For this reason, Germany must play its part to make Europe a success. It would send out a positive signal if the German Presidency of the Council in the first six months of 2007 were accompanied by reform and fresh growth in Germany – and by good news with regard to the stability pact. This would move Europe forward.

It would give me great pleasure if we could use the XVIIIth Banking Congress for a constructive dialogue about how we can move Germany forward. About how we can lend greater momentum to change and exploit the enormous potential of this country and its people.