View from City Road: System blessed with flexibility

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The Independent Online
New expression of that tired old theory that Britain's poor industrial performance is all down to the City and the way we organise our financial system is found in a report published yesterday by the Anglo-German Foundation, an institute founded and funded by the two governments.

If only we could begin again with a shiny, new, high-efficiency German financial system in place of our own unreliable banks and capital markets, then how much better our industry would be, seems to be the general message. Heard it before? Of course you have and it has to be said that the report's author, Andy Mullineux of the University of Birmingham, fails to add much to the debate, let alone prove the point.

He starts with the familiar if now dog-eared comparisons. In Germany, there is much more government intervention, including subsidised loans, as well as lower bank interest rates; there is also a much lower corporate failure rate. Britain should therefore adopt the German structure of intervention and focus it on a government- backed small business bank, capable of managing its relations with customers in a more sensitive and supportive manner than the clearers.

Put aside the question of whether German financial structures have actually helped industry - they probably have but the case is far from proven; ignore also the multi-billion subsidy British banks have given to failed industry and commerce through bad debt provisions. The real question is whether German methods would make any difference when transplanted.

Even in Germany, the close and subsidised relationship between regional banks and local business has been under fire for years. The German savings banks offer long-term loans at low margins. But they make negligible returns on their enormous, municipally owned capital.

Measured in terms of the opportunity cost of the capital this is tantamount to a direct municipal subsidy. Yet its cost to the taxpayer is never admitted and its effectiveness is at least questionable.

Much more important to the general health of German industry is stable and low inflation. This has been the real driving force behind the success of small and medium-sized businesses in Germany. Long-term cheap loans are a consequence, not a cause, of such an environment.

British business and its bankers have tended to stick with short-term overdrafts, widely admitted as a bad financing method. But this is not entirely a one-sided deal - businesses don't want to be locked in when experience tells them UK interest rates behave like a yo-yo.

The British financial system, including its capital markets, has a flexibility that Germany lacks. Add that to a long-term low-inflation environment and our markets may yet surprise us with the effectiveness of their response to British corporate needs.

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