Restrained Markets for Corporate Control in French and German Banking and the Depth of the Sovereign Debt Crisis

The current sovereign debt crisis highlights the importance of the position of national governments. The hesitations displayed by these key EU member states, especially Germany, to fully committing early on to provide financial support to the Greek economy faced with a serious credibility problem on bond markets have contributed to increase the financial costs of rescue packages and, perhaps more importantly, also failed to stem the contagion of the sovereign debt crisis to other southern periphery economies. In this paper, we argue that the position of the French and German governments was shaped in great part by the size of their banking sector which itself reflected the presence of restrained markets for corporate control in the two countries. Through different institutional routes – state activism and use of deviations from the one share-one vote standard in France; ownership concentration and friendly acquisitions in Germany – the prominence of takeovers in French and German banking has been limited. The relative marginalization of takeovers meant that an important mechanism of corporate restructuring was absent which, in turn, has contributed to the large size of domestic banks in the two countries. The absence of an active market for corporate control has magnified in importance the negative consequences associated with potential financial losses of French and German banks as well as exerted a preponderant influence on the responses of their governments to the sovereign debt crisis.