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German Finance Capitalism: The Paradigm Shift Underlying Financial Diversification


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This article is concerned with the genesis of German financial liberalisation. A refined inventory of financial system change – including new meso-level data on finance pattern and the marketisation of banking – reveals a varied pattern of change across German finance. It is argued that this financial diversification can only be understood with careful reference to the underlying ideational factors. An analytical narrative traces how technocratic ideas of financial modernisation during the 1980s began to open up space for the political program of finance capitalism to absorb liberal and leftist discontents with insider control and bank dominance. Upon reaching a tipping point of discursive dominance, the program was distinctly adopted across the political economy as the result of compartmentally different political, ideational and structural factors; creating a non-hegemonic financial paradigm that became identifiable in the face of recent crises. By developing analytical steps that link incremental and dynamic theories of institutional change in a conceptual framework of belief shifts, the paper contributes to efforts of adapting existing models of change to complex domains and accounting for the dynamic nature of the paradigm-generating process. The findings inform the larger debate about internal capitalist diversity and the coherence of national economic models.
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German Finance Capitalism: The Paradigm Shift Underlying Financial Diversification
By Nils Röper
Abstract: This article is concerned with the genesis of German financial liberalization. A refined inventory of
financial system changeincluding new meso-level data on finance pattern and the marketization of banking
reveals a varied pattern of change across German finance. It is argued that this financial diversification can only
be understood with careful reference to the underlying ideational factors. An analytical narrative traces how
technocratic ideas of financial modernization during the 1980s began to open up space for the political program
of finance capitalism to absorb liberal and leftist discontents with insider control and bank-dominance. Upon
reaching a tipping point of discursive dominance, the program was distinctly adopted across the political
economy as the result of compartmentally different political, ideational, and structural factors; creating a non-
hegemonic financial paradigm that became identifiable in the face of recent crises. By developing analytical
steps that link incremental and dynamic theories of institutional change in a conceptual framework of belief
shifts, the paper contributes to efforts of adapting existing models of change to complex domains and
accounting for the dynamic nature of the paradigm-generating process. The findings inform the larger debate
about internal capitalist diversity and the coherence of national economic models.
Key words: Financial liberalisation; ideational institutionalism; financialization; paradigm
shifts; Germany.
Forthcoming in New Political Economy.
Financialization has become a fuzzy buzzword across the social sciences to describe the
tremendous change developed political economies have experienced over the past thirty years
(van der Zwan 2014). Due to deterministic, continuity-biased tendencies, existing
institutionalist comparative political economy (CPE) struggles to explain the causalities
underlying this financial liberalization, meaning a shift toward capital market- and
shareholder-oriented practices. A growing body of scholarship seeks to overcome difficulties
in accounting for agency and change by infusing institutionalist approaches with ideas as
explanatory factors (Hall 1993; Blyth 2002; Campbell 2004; Schmidt 2008). Building on
marginalist ideational (Carstensen 2011; Baker 2013) and historical institutionalist (Streeck
and Thelen 2005; Mahoney and Thelen 2010) innovations, I integrate the notion of tipping
points into conceptions of percolating change in a framework of paradigm shifts that allows
examining disparate patterns of liberalization. It is in this vein that I revisit the case of
German financial liberalization.
Germany is the central case study for the financial liberalization of 'coordinated'
economies. Relational banking, insider control, and low importance of capital markets
traditionally shielded firms from short-term market pressures. In the late 1980s, however,
waves of deregulation began to undermine German 'patient capital.' As German stock market
capitalization has doubled since 1992 and the corporate network ('Deutschland AG') has
effectively been dissolved, one is tempted to infer full-blown liberalization. On the other
hand, codetermination remains in place and the three-tiered banking system is uniquely
stable. More refined data are indispensible to make sense of this seemingly inconclusive
jigsaw; but these outcomes do not come with a genealogy sheet.
Dominant analyses steeped in the rationalist Varieties of Capitalism (VoC)
framework offer little conceptual leverage to elucidate the varied pattern of liberalization
(Hall and Soskice 2001; Vitols 2004). More recent works enhance our grasp of (German)
liberalization dynamics by specifying 'bifurcating' paths within finance (Deeg 2005, 2009),
potential political coalitions (Gourevitch and Shinn 2005; Höpner 2007), and typifications
(Hardie et al. 2013). Yet, there is no consensus about the nature of the change we see (Deeg
2010, 304), hinting at inefficiencies in causally 'linking outcomes with actors and with the
process that produced the outcomes' (Peters et al. 2005, 1284). The broad claim made in this
article is that existing institutional explanations need to be complemented with ideational and
political factors to understand why some parts of the German financial system have
liberalized, while others have not.
To preview my argument briefly, the finance capitalism paradigm originated as a set
of technocratic ideas of financial modernization such as financial product innovation,
developing electronic trading and boosting securities markets. This discourse and the ensuing
policy changes opened up space for actors to attach the 'minority discourses' (Schmidt 2002)
of 'bank power' and shareholder-oriented corporate governance to the emerging political
program of finance capitalism. The political space enabled new framing opportunities to
absorb liberal and leftist discontents with the old paradigm of insider control in a cross-class
coalition that made finance capitalism the dominant discourse by 1995. Upon this tipping
point, implementing actors—non-financial firms and banks—disparately adopted finance
capitalism as their behavioral guiding principle. This polymorphic evolution is rooted in the
nature of the discursive shift in the political arena, which omitted certain elements from a
complete liberalization to begin with, and ideational and structural factors dissuading
subgroups of implementers from 'financializing'. Finance capitalism became identifiable as
the new (compartmental) paradigm when neither the New Economy crash, nor the global
financial crisis sufficed to fundamentally delegitimize it.
I make this argument in five steps. First, I present a refined inventory of German
financial system change to uncover varying degrees of financial liberalization. Next, I briefly
show why existing conceptions of change in historical and ideational institutionalism struggle
to explain these disparate changes in the complex domain of finance, before I develop a
framework of transformative ideational change. This conceptual roadmap becomes the lens
through which I trace the emergence of the new German finance paradigm beginning in the
late 1980s up until its confirmation in the aftermath of the global financial crisis. I conclude
by discussing the implications of this research and ruminating on financial diversity as a
comparative financial advantage.
The German post war financial system is widely held to be the ideal-typical bank-based and
insider-oriented variety, constituting an institutional arrangement that shields firms from
short-term market pressures and thus ensures 'patient capital' (Hall and Soskice 2001). Firms
and households relied predominantly on bank lending rather than capital markets, often
through long-term relationships with a 'house bank,' and public banks playing an important
role (Zysman 1983; Deeg 1999; Vitols 2004). In the corporate network of personnel and
capital ties with commercial banks at the core ('Deutschland AG'), long-term blockholders
are dominant, and employees have a voice in corporate decision-making through a dual board
structure (codetermination). This network of insiders was underpinned by a legal code that
condones cartels, insider trading, opaque accounting standards, and low protection of
minority shareholders (Vitols 2004a). In order to quantify the changes this configuration has
experienced, data on finance pattern, banking and corporate governance will be inventoried.
The distribution of financial assets held by German households and non-financial
corporations (NFC) is a basic indicator to estimate financial systems' capital market-
orientation. Banks' share of financial assets decreased by 15 per cent between 1991 and 2012,
those of other financial intermediaries increased, while insurance companies remained steady
(see table 1). Both the collapse of the New Economy and the recent financial crisis merely
halted the otherwise steadily declining share by banks, which refutes suggestions of a
reversal toward bank-dominance (Vitols 2001). As almost two-thirds of financial system
liabilities are bank-held—compared to a quarter in the U.S. in the mid-1990s (Vitols 2005,
2)—the label 'bank-based' still applies.
Table 1: Distribution of German financial system liabilities in per cent
Source: Deutsche Bundesbank Financial Assets and Liabilities macro-economic time series, own calculations.
Data refers to third quarters. Extrapolated from Vitols (2004, 12) as of 2003.
How has this bank-dominance in financial intermediation developed vis-à-vis the size
of the stock market? The relative stock market capitalization displays a cyclical trend
reflecting the New Economy bubble and the global financial crisis, as is true for the U.S. and
France (see table 2). All three countries have developed a stock market size on a new, higher
'normal' that suggests a general shift in the centre of gravity toward market-finance. In
comparison with other advanced political economies, however, stock markets continue to
play a lesser role in Germany.1 The development of IPOs also indicates the absence of a
structural shift toward stock markets as the preferred channel to raise capital. The Neuer
Markt bonanza led to an upsurge in German IPOs from 1997 to 2000, decline until 2002, and
zero IPOs in 2003. The numbers picked up again thereafter and plunged in 2008, followed by
a tenuous recovery (see table 3).
Table 2: Stock market capitalization relative to GDP for Germany, U.S. and France
Source: Worldbank, World DataBank, Global Financial Development.
Table 3: Number of IPOs per annum
Source: Deutsche Börse
9" 9" 10"
6" 0" 5"
2" 1" 8" 12" 7" 9"
Under the impression of the New Economy bubble and the recent financial crisis,
German NFCs turned toward internal finance (Bundesbank 2012). The importance of bank
credits decreased over the past two decades: In 1991, bank lending represented 32 per cent of
overall credit, compared with 18 per cent in 2010. Correspondingly, non-depository financial
intermediaries like insurance companies more than doubled their share as creditors from 6
per cent to 14 per cent (Ibid., 9). The relative decline of bank credits experienced particular
acceleration during and immediately after both crises. Note that these changes did not
coincide with an increasing importance of market-based external finance.
The polymorphic nature of German financialization has been attributed to a
bifurcation of finance pattern depending on the size of firms (Deeg 2005, 2009). Albeit
intuitively persuasive, this explanation has yet to be corroborated with appropriate data. By
dividing NFC's balance sheet size by bank loans based on financial statements as provided by
the Bundesbank, I present the most reliable data on finance pattern by size and type of
company to date.2 The ratio indicates the overall importance of bank credit. During the late
1990s, it seemed as if SMEs would begin to tap capital markets (see table 4). The reliance on
loans, however, demonstrates a persistent difference between the Mittelstand and
corporations. The relative reliance on external credit within the four firm categories has not
changed significantly. Rather than bifurcating paths, the difference in financing between the
Mittelstand and large corporations has remained stable.
Table 4: Loans relative to balance sheet size by type and size of companies
Source: Bundesbank, own calculations from financial statements of German enterprises. Additional industries
included as of 2006.
The relative importance in lending across the German banking system's three
pillars—commercial, public and cooperative—is marked by remarkable continuity (see table
5). Stable structures, however, do not necessarily mean unchanged practices. Hardie et al.'s
(2013) concept of market-based banking draws attention the composition of banks’ balance
sheets. Funding and investment structures determine whether banks can provide patient
capital. Given the difficulties in obtaining relevant data,3 I capture market-based banking
through available proxies.
Table 5: Share of lending to non-banks by type of bank for selected years
Source: Bundesbank Macro-Economic Time Series, own calculations. Annual data refer to January. Values for
1980 and 1990 are hypothetically Euro-based.
Lending to non-banks and deposits of households are considered the most 'patient'
investment and funding alternatives, respectively. When looking at lending relative to
balance sheet size, a salient divergence in business models across bank types since the 1980s
emerges (see table 6). Savings banks and credit cooperatives have loaned continuously at
approximately 70 per cent of their balance sheets. Commercial banks on the other hand, have
decreased lending from two thirds in 1980 to a quarter of their balance sheets after the
financial crisis. The level of internationalization is another important characteristic of market-
based banking (Ibid., 710). Except for savings banks, all bank types increased lending to
foreign non-banks in the run-up to the crisis (see table 7). The liabilities side displays similar
developments; while all banking categories rely to a significantly lesser extent on savings
deposits of domestic households, the ratio of savings banks and credit cooperatives to
1980" 1990" 2000" 2004" 2008" 2012" 2014"
commercial banks has increased from 3:1 to 6:1 (calculations by the author based on
Bundesbank Macro-Economic Time Series).
Table 6: Lending to non-banks relative to balance sheet size by type of bank for
selected years
Source: Bundesbank Macro-Economic Time Series, own calculations. Annual data refer to January. 'Big Banks'
are also part of 'Commercial banks,' which also includes regional commercial banks.
Table 7: Lending to foreign non-banks as percentage of total lending to non-
banks by type of bank for selected years
Source: Bundesbank Macro-Economic Time Series, own calculations. Annual data refer to January. Data are
available as of 1999. Commercial banks include regional, big and branches of private commercial banks;
cooperatives include regional institutions and credit cooperatives.
1980" 1990" 2000" 2004" 2008" 2012" 2014"
2000" 2004" 2008" 2012" 2014"
Corporate governance can be encapsulated in stakeholder participation and ownership
patterns. The surging remuneration of board executives relative to labour costs hints at
increased shareholder-orientation: The ratio of average labour costs per capita to board
member salaries among DAX30 companies oscillated until 1995, after which it skyrocketed
from 14:1 to 53:1 in 2011 (see table 8). Relative trends of average labour costs per capita,
share prize and executive pay among DAX30 companies corroborate the emergence of
shareholder value. From 1996, share prizes and executive pay grew at a significantly higher
rate than labour costs and since the end of the Neuer Markt boom, executive remuneration
has seemingly become decoupled from firm profitability (Schmidt and Schwalbach 2007); an
interesting development in light of the dissemination of performance-related pay in large
German firms (Kurdelbusch 2002).
Table 8: Ratio of board member remuneration to average labor costs per capita for
DAX30 companies
Sources: Schwalbach (2011, 183); Weckes and Werner (2013)
The ownership structure of a company is often considered to be the central
determinant of patient capital. In the German case, the existence of blockholders is of
particular importance. Stock ownership of German companies has become increasingly more
international over the past decades. The overall share of foreign holdings has increased from
approximately 10 per cent in 1995 to 38 per cent in 2008 (Detzer et al. 2012). Throughout the
1990s, ownership concentration was largely stable, with mostly marginal change due to the
dissolution of the corporate network (Becht and Röell 1999; Faccio and Lang 2002;
Culpepper 2011). It was not until the early 2000s that ownership concentration began to
decrease due to the ascendance of foreign institutional investors (Fichtner 2015). When
extrapolating Vitols' (2004a) data on the largest shareholdings of DAX30 companies, one
finds that the number of companies with a blockholding stake has decreased from 12 to 10
(see table 9). The extrapolation also suggests a rising importance of institutional investors,
who were the largest shareholders in two DAX30 companies in 2003 and in nine by 2014.
Table 9: Largest shareholdings in DAX30 companies in 2003 (grey shading) and 2014,
with blockholdings1 (in scattered shading).
% of shares
The Capital
Münchener Rück
Allianz AG
BlackRock, Inc.
Allianz AG
Capital Group
Quandt Family
Quandt Family
Generali S.p.A.
Barclays Global
Deutsche Bank
Black Rock
Deutsche Bank
< 5
Black Rock
Deutse Börse
The Capital
Black Rock
Deutsche Post
Deutsche Telekom
Black Rock
Fresenius Medical
Fresenius AG
Holding and
Henkel KGaA
Henkel Family
Henkel Family
Siemens AG
Dodge & Cox
Allianz AG
Sun Life
Allianz AG
Black Rock
1 Note that a blocking minority can be reached with a stake of less than 25% due to different types of shares.
Allianz AG
Münchener Rück
Bayerische H+V
Allianz AG
Krupp Stiftung
Krupp Stiftung
TUI (formerly
Source: Federal Financial Supervisory Authority Database. Data for 2003 from Vitols 2004a.
*Formerly DaimlerChrysler.
**Local private shareholders collectively hold blocking minority of 25%.
***Two blockholders for 2014: State of Lower Saxony and Porsche Holding.
****For all companies that had shareholders over 5% and still exist in the same form (also applies to the
average value).
This inventory of German financial system change amounts to a picture of seemingly
motley data points. Finance pattern and banking practices have become more financialized,
but to a limited extent by international comparison and with public banks continuously
playing an important role. The 'Deutschland AG' has effectively been dissolved
(Monopolkommission 2012), management remuneration has increased disproportionately,
stock ownership is increasingly international and dispersed, international reporting standards
are mandatory and value-based management control systems have become ubiquitous;
insider-orientation appears to be a matter of the past. On the other hand, blockholdings
continue to shield many companies, codetermination remains formally untouched and hostile
takeovers are a rare occurrence. It is hardly surprising that the polymorphic evolution of this
complex domain seriously challenges existing theories of change.
After rediscovering and liberating institutions from their status of being epiphenomenal over
30 years ago, neoinstitutionalism has taken a turn to the other extreme. Displaying
functionalist and structuralist temptations, the literature is widely criticized for a
deterministic view of institutions. In neoinstitutionalism's own 'marginal revolution,'
however, a growing body of historical institutionalist literature is concerned with concepts of
institutional change that account for incremental, endogenous dynamics. If institutional
change does not hinge on shock events, we must turn to reconfigurations of existing
institutional material and political conflict as endogenous sources of change (Orren and
Skowronek 1994). Different conceptions of change like conversion and layering aim to
capture recombining and reinterpreting prevalent institutions and blending them with new
ones (Streeck and Thelen 2005).
These conceptual advancements continue to collide with 'latent structuralism' (Hay
2008) and underspecified processes of interest formation. While actors are assumed to find
enough 'slack' to creatively interpret collectively reinforced regimes, it is hard to conceive
how these interpretations come about and translate into change. It is collective pressure
through which institutions structure actors' behaviour (Streeck and Thelen 2005). Interest
formation, and thus agency, is merely theorized as actors largely conforming to the prevalent
regime, except for a few experimenters at the margins. Streeck and Thelen implicitly recur to
a tipping point concept of change, while the underlying causalities remain unexplained.
Institutions viewed as collective expectations hinge on assumptions akin to strategic
coordination, in what Schmidt (2007, 18) refers to as a 'very soft rationalist version of the
micro-foundations.' Assuming experimentation outside of prevalent institutions means that
actors do not have fixed preferences and do not necessarily follow material incentives
deriving from the institutional setting. Ambiguity persists as to how, when, and why actors
move beyond the prevalent institutions, or rather, how they perceive their institutional
context (Hall 2005, 376).
An obvious starting point for more agency-attuned models is a reconsideration of
ideation that—despite the central role attributed to (re)interpretation in historical
institutionalism—is not explicitly conceptualized (Carstensen 2015, 306). Ideational
institutionalism essentially seeks to link people's thoughts with political and economic
outcomes. Agents' interests are no longer a derivative of structure, but social constructions
that depend on how actors perceive their surroundings. Hall's (1993) work on policy
paradigms is the foundation stone for recent ideational institutionalism.4 By dichotomizing
periods of 'normal' and paradigm-altering policymaking, Hall tends to underspecify
marginally transformative ideational change. Ideational institutionalists often trace ideational
change back to periods of acute crisis in quasi-punctuated models (e.g. Blyth 2002;
Lehmbruch 2001). Yet, change may take place in the absence of, for example, inflationary
shocks; the existing literature largely remains silent on the origins of ideational change in
such cases of what one may refer to as non-severe uncertainty. Such rigidity is exacerbated
by the often-implicit assumption of internally homogenous and mutually exclusive paradigms
(Carstensen 2015). It follows a tendency to view ideas as 'settled ordered configurations'
(Liebermann 2002, 701) that are perpetuated by mechanisms of ideational path dependence
(Hay 2008).
The challenge is to link incremental ideational change with the more rapid processes
of change in which these often culminate. Our understanding of the link between incremental
and more dynamic change remains underdeveloped. Streeck (2009) hypothesizes a
'dialectical' pattern of marginal change reaching a tipping point, but does not theorize how,
why, and when such a point is reached. What is missing is a framework to better capture the
origins of marginal ideational change and the transition to non-hegenomic, dynamic belief
shifts.5 This article seeks to contribute to filling this void by developing a conceptual
roadmap of transformative ideational change that accommodates both types of change in the
absence of shock events and their concomitant acute uncertainty.
Preferences turn heavily on prevailing theories about cause-and-effect
relationships and such theories are indispensable in the economic sphere,
since we do not see the economy with the naked eye but live in the imagined
economies constructed by economic theory (Hall 2006, 141).
The intellectual body of knowledge underlying financial liberalization—affirming the
superiority of shareholder- and capital market-oriented practices—comprises of a set of
economic theories ranging from portfolio theory (Markowitz 1952; Sharpe 1964), to efficient
markets theory (Fama 1965), the market for corporate control (Manne 1965), agency theory
(Jensen and Meckling 1976) and shareholder value theory (Rappaport 1986).6 Contrary to
other policy areas, these theories are neither antithetical, nor can they readily be implemented
by a relatively small network of actors. Whereas, for example, monetary theories largely
preclude interparadigmatic borrowing (Blyth 2013), selective adoption of shareholder value-
oriented practices in combination with nonliberal components is the norm (Deeg et al.
2016).7 An analysis of ideational change in financial systems needs to accommodate the
characteristics of this regulative domain8 that is marked by discrepancies between formal and
informal change (Culpepper 2005).
Successful policies offer normatively acceptable ideas that also appear to be an
effective cognitive alternative in the perceived material interest of actors (Schmidt 2008,
307). Actors form preferences by making sense of their context, which is constituted by other
actors' behavior, prevailing institutions and ideas; taking a neo-Weberian perspective that
does not disregard material and institutional incentives, but views ideation as central to the
process of interest formation (Hall 2006). In order to make ideas analytically workable,
Campbell's (2004, 93-100) typology of programs, policy paradigms, public sentiments and
frames proves useful.9
The central question is how alternative programs emerge and replace existing
paradigms. Provided that advocates are well positioned to institutionalize a paradigm shift,
Hall (1993) postulates two processes to be at work: Bayesian updating in the face of
unresolved anomalies and constructivist social learning.10 Drivers of ideational change found
in the policy paradigm literature are the perceived exhaustion of the old paradigm,
ideological compatibility between the old and the new, powerful advocates, available foreign
models, and elite personnel turnover (Bönker 2005). Actors compete for ideas and material
interests within institutions through discourse (Schmidt 2010). Causally linking the
intertwined factors of change, the relational nature of political processes, and institutional
incentives is the analytical challenge at hand.11
Whilst exhaustively disentangling ideas and institutions clearly lies beyond the scope
of this article, I propose a conceptual roadmap for an agent-centred analysis of marginally
transformative ideational change. The ideal-typical evolution of a paradigm shift must not be
understood as a clear-cut sequencer, but rather stylized stages that structure the analysis of
the underlying political dynamics: A locally emerging, technocratic set of ideas opens up
space for these to morph into a political program, which then may or may not be adopted by
implementing actors as the new interpretative framework, which thereafter becomes
identifiable in the face of crises. During this complex process, protagonists of an idea may
become antagonists and antagonists may turn into reluctant or even active consenters.12
These Eigendynamiken belie rigid assumptions of purposive institutional design and
emphasize the evolutionary nature of the paradigm-generating process.
The Impetus
Ideas of change emerge as a reaction toward perceived insufficiencies of the prevailing
context. Such an initial set of ideas can be expected to be of technocratic nature and the
relevant circle of actors to be small and limited to those with an immediate stake in the first
and second order changes at hand. In the case of German financial liberalization, this impetus
can be traced back to commercial banks facing an altered competitive environment. As the
result of a 'gap between aspiration and achievement,' (Aoki 2001, 240) the discourse among
some actors thus changes. Berman (2001, 234) puts it aptly: 'Dissatisfaction can stem either
from an exogenous shock [...] or from gradual yet increasing disillusionment and the slow
delegitimization of existing beliefs. Both can serve to open up a political space into which
new ideas can be inserted.' The uncertainty perceived by actors often manifests itself in
economic terms, which undermines the sway of the current paradigm and opens up debate
about potential alternatives. Material incentives dominate to the extent that the old paradigm
had to be undermined in its material efficiency to unencumber protagonists from normative
Ideas Morph into a Political Program
The ensuing parametric changes open up space for the technocratic ideas to turn into a
political program by altering the opportunity structure for actors to bring 'minority discourses
waiting in the wings' (Schmidt 2002, 223) in a Lakatosian sense to the fore. Applied to the
case at hand, marginally fading scepticism vis-à-vis capital markets provided connecting
points for cross-ideological framing and a cross-class consensus. Technocratic ideas may
then morph into an increasingly complex policy prescription when actors of diverse
backgrounds seek to attach visions and beliefs that they perceive to be compatible. This may
occur through both 'coordinative' and 'communicative discourse' (Schmidt 2008). The more
central the protagonists and active consenters as the carriers of these ideas are, and the wider
they are spread ideologically, the more likely a program is going to succeed (Campbell 2004,
100ff.). Framing is essential to create perceived overlap across normative and material
dimensions and thus, cross-class coalitions. Even for 'quiet politics'-issues such as finance
(Culpepper 2011), public sentiments—especially in the form of media reporting—are an
important factor driving whether and which minority discourses are successful. A solid body
of empirical research suggests that, if successful, such a new program can muster a quasi-
hegemonic advocacy coalition remarkably swiftly (Sabatier 1998; Leifeld 2013). Identifying
tipping points is notoriously difficult; a possible key political event may be when a central
antagonist of (parts of) the program abandons her position, as the conservative parties did
when retracting the protection of banks' insider position.
Program is adopted as the Dominant Discourse
Whereas an emerging political program and shifting discourse may be necessary conditions
for substantive institutional change, they do not automatically translate into altered
behavioural pattern among the implementing actors. Implementers, such as firms and
households, are responsible for the practical materialization of the program.13 Especially in
regulative domains such as finance, the majority of implementers can be expected to
anticipate the formation of a new political program when deciding whether and to what
extent to adjust their behaviour. The tipping point of a 'winning' new program in the political
arena thus should, if only slightly, precede the tipping point among implementers, as evinced
by the pattern of German firms embracing shareholder value upon the political tipping point.
Implementers conceive of their own perceptions regarding the program and compare them
with the reactions of others (Culpepper 2005, 182). During this belief-formation, the number
of actors in support of a program affects its likelihood to persuade others (Hedström and
Swedberg 1998, 21), which makes 'cascade' (Laitin 1998) type of rapid dynamics likely.
Even though tipping points are usually the territory of rationalist models, they do not
contradict more evolutionary conceptions of change. I expect these different belief shifts (or
the absence thereof) to be messy and non-linear. Yet, the larger pattern of adaptation is still
likely to be somewhat punctuated, for once the program dominates the political arena, all
actors need to absorb it in some form, leading to distinct processes of preference formation.
Actors re-evaluate their context based on the change they anticipate; this is a process that
pertains both to their own semiosis vis-à-vis the emerging program and the 'fictional
expectations'—i.e. 'present imaginaries of future situations' (Beckert 2013, 325)—about
alterations in the contextual opportunity structure.
Program is not adopted as the Dominant Discourse
Most conceptions solely pertain to 'successful' paradigm shifts and tend to downplay the
commonly non-hegemonic nature of political change. The analytical challenge is to discern
why certain groups or subgroups of implementers have or have not adopted the new program.
Disentangling this requires a close examination of the nature of the discursive shift, the
interest formation of different implementers, and their institutional context. The empirical
challenge is to discern causal pathways by identifying subgroups of actors and carefully
matching their preference formation processes with relevant aspects of context (Falleti and
Lynch 2009). Only then can we uncover the underlying causalities of disparate changes such
as bifurcation. Among the questions to ask are: Did the political program already exclude
certain groups or aspects that one would consider part of a true shift toward, for example,
liberalization? Did some of the discontents with the old paradigm not apply to certain spheres
of the political economy? Did identifiably different ideational or structural factors prevail in
some pockets? In the German case, fundamentally changing codetermination or the role of
public banks was precluded from the discourse of change. As a result of this structural
continuity in banking as well as ideational reservations, SMEs continue to have a relatively
low proclivity to 'financialize.'
The New Paradigm Becomes Identifiable
Upon the program's marginal build-up and its disparate adoption as the new dominant
discourse, its status as the new paradigm has to be confirmed. As paradigms are often
unarticulated, they become identifiable in the face of challenges; for example, when a crisis
such as the global financial crisis conceivably questions the fitness of the new discourse and
actors overwhelmingly seek to adjust rather than to replace it: 'If the beliefs or attitudes of
political actors remain relatively constant past the point where conditions have changed, then
we should be able to say with some confidence that these beliefs or attitudes can no longer be
reduced to the material factors that shaped their emergence and have therefore become
institutionalized' (Berman 2001, 239-240). Paradigmatic verification may also manifest itself
in the form of the new program's knock-on effects in other institutional domains where
similar ideational processes occur. In order to demonstrate the advantages of this conceptual
roadmap, I now turn to its argumentative application to the case of German financial
Surprisingly, Germany had the most developed stock market in Europe around the turn of the
twentieth century (Krahnen and Schmidt 2004, 7) with more publicly listed companies than
the US in 1914 (Erhard et al. 2004, 2). After the banking crisis of 1931, however, German
elites grew sceptical of finance capitalism and implemented a regulatory regime that resulted
in a financial system dominated by banks and corporatist structures (Vitols 2001, 12). The
underlying paradigm of this institutional configuration rests on a set of normative and
material beliefs in self-control, informal corporatist and inter-capital coordination and long-
term strategies. Since the advent of the country's industrialization, corporate Germany
displayed a 'penchant for the organized and deliberate, not the blind hand-to-hand encounter'
(Shonfield 1965, 247). Experiences with 'mild cartel-like arrangement' (Hardach 1981,
148)—commonly with banks as the nucleus in their triple role as owner, lender and
underwriter—have shaped an economic paradigm that, in Hirschman's (1970) terms, tends to
favour voice over exit. Tracing how these beliefs have been challenged and changed is key to
understanding financial liberalization. This brief historical reconstruction of the German case
along the lines of the five stages outlined above cannot be dispositive, but usefully
The Impetus: Financial Modernization
Coordinated finance became contested terrain after the 1974 recession. Commercial banks
were increasingly under pressure as large corporations began relying more on internal finance
and savings banks had started competing more aggressively over lending to SMEs in the
1960s and by transforming themselves into universal banks (Esser 1990). Liberalization
efforts by the EU subjected German banks to more international competition, while
corporations started turning to foreign banks for financial services (Deeg 1999). In this
context of (non-severe) uncertainty, commercial banks decided to strategically refocus on
investment banking. High transaction costs and a federalist regulatory structure of self-
governance, however, exacerbated these efforts (Deeg and Lütz 2000). Bureaucrats at the
Federal Ministry of Finance found themselves disbarred from international fora; de-facto
legality of insider trading and regulations strongly favouring insider shareholders were at
odds with the agenda of international policymakers (Lütz 2002). With commercial banks and
bureaucrats facing competitive and collaborative pressure about similar issues, the 'Frankfurt
coalition's'14 advocacy for a modernization of the stock exchange system and oversight
readily found political support.
Albeit clearly material-interest driven, a long cognitive process preceded picking up
this set of ideas that one may refer to as financial modernization. Instead of immediately
turning toward a more Anglo-American business model, commercial banks looked for
alternatives within the old institutional arrangement, for example by regaining ground in
lending to SMEs (Deeg 2005, 179). Pursuing financial modernization in the form of financial
product innovation and electronic trading was by no means the only or an obvious choice.
Only once banks lost confidence in the patient capital paradigm, these change agents induced
a new discourse to challenge the institutional arrangement in place. The recession between
1979 and 1982 further delegitimized the old paradigm, for the overreliance on bank finance
was blamed for the ensuing wave of corporate bankruptcies (Story 1996, 385). A widely
shared political consensus emerged that saw the deregulation of the financial sector as a
factor of competitiveness, source of economic growth and employment, and essential in
bringing 'equity culture' to German households.
At this stage, ideas about financial modernization do not yet constitute a political
program. The protagonists did not have a broader paradigm shift toward finance capitalism in
mind, as will become obvious below. Financial legislations, such as the German Stock
Exchange Law in 1989 and the First Financial Market Promotion Law in 1990, were passed
almost unanimously and 'apolitically' without much debate or meaningful inclusion of
stakeholders other than from the financial sector. Even though the 1994 Second Financial
Market Promotion Law, which mandates a centralized supervisory agency and for the first
time prohibits insider trading, and the 1997 Third Financial Market Promotion Law meant a
break with aspects of the old insider system, the reform was widely perceived as a mere
necessity of modernization. Whilst a wider range of stakeholders was now involved, financial
modernization was a technical update within the logic of the old paradigm (Beyer and
Höpner 2003) with no apparent political antagonist. Consensual in nature and parametric in
dimension, financial modernization still crucially opened up political space for paradigmatic
Financial Modernization Morphs into Finance Capitalism
The controversially debated corporate governance legislation (KonTraG15) marks the formal
shift from coordinated finance to a Germanized version of finance capitalism. With minority
shareholder protection bolstered, insider trading prohibited, corporate transparency increased,
and the insider power position of banks curtailed, we observe a paradigm shift in the sense of
Hall (1993); not just the instruments, but the overall policy goal had changed toward
shareholder- and capital market-oriented practices. Existing accounts largely fail to
appreciate the link between the parametric reforms of financial modernization and the
paradigmatic changes in the corporate governance regime.
Financial modernization reforms started to conspicuously bear fruit by the mid-1990s.
In the middle of a bull market and with an increasing inflow of foreign capital from
institutional investors, the government successfully framed the 1996 privatization-IPO of
Telekom as the 'people's stock'. While the last privatization of this magnitude with
remarkably similar political intentions—Volkswagen in 1961—was widely perceived as an
imprudent government initiative to encourage risky speculation (Der Spiegel 1961), the
Telekom IPO was accompanied by public euphoria and resulted in half a million new equity
holding households (Frankfurter Allgemeine Zeitung 1997). TV-shows and print publications
on private investing started popping up, talk of 'equity fever' proliferated and 'shareholder
value' became the buzzword of the year (Die Zeit 1996). The latter indicates that public
discourse began to move beyond pure financial modernization and into the politically more
sensitive waters of corporate governance reform. In the face of corporate scandals and slow
economic growth, the media grew increasingly critical of 'bank power.'
Institutional feedback effects and public sentiments opened up political space for the
minority discourses of 'bank power' and the demands for more shareholder-friendly corporate
governance more generally to gain ground. Since at least the 1970s, the conservative parties
(CDU and CSU) had been warding off liberal demands by the FDP and the Monopoly
Commission to dissolve the powerful position of banks at the core of the 'Deutschland AG'.
This critique of monopolies and cartels—especially 'bank power'—as detriments to
democratic economic systems is also a longstanding position of the German left (Hilferding
1910). It was not until 'modernizers' such as Hans Martin Bury made it a core position of the
new Social Democratic economic platform, however, that this sentiment gathered steam as a
political program with cross-class appeal. Based on the shared consensus underlying financial
modernization, Social Democrats were now able to frame finance capitalism as an economic
rationale that does not counterpose the normative foundation of the social market economy
leitmotif. In light of vanishing scepticism vis-à-vis capital markets, we observe 'a conversion
of ideas [...] that redefined what it meant to be leftist in the context of an organized economy'
(Höpner 2007, 411).
Given its long pedigree, the timing of the 'power of banks' minority discourse making
it to the political agenda becomes essential. When, for example, Der Spiegel raised the issue
in a 1971 cover story—'Uncontrolled Power: Banks in Germany'—nothing much came of it
politically. In 1989, a parliamentary working group of the conservative-liberal coalition on
the subject also did not yield any meaningful changes, due to opposition by the conservatives
(Esser 1990, 18). After ventilating their 'anti-financier populism' (Cioffi 2002, 365) during
the parliamentary debate of the 1990 First Financial Market Promotion Law, Social
Democrats interestingly discussed issues of financial modernization separately from those
pertaining to corporate governance. Instead, the SPD held a hearing on the 'Power of Banks
and Insurers - Competition in the Financial Sector' (8.12.1993), which led to drafting the
1995 Transparency and Competition Law. During the heated parliamentary debate about the
proposal, conservatives denied any negative economic effects of the 'Deutschland AG,' with
one MP even referring to the Social Democratic 'theory of bank monopoly capitalism' as a
'conspiracy theory' (Bundestag 1995, 3079).
This rhetorical defence by conservatives notwithstanding, the tipping point for the
bank power minority discourse, and thus finance capitalism, had already come. In the same
week, the governing parties initiated another parliamentary working group on the subject,
which eventually drafted the paradigmatic 1998 KonTraG legislation. This party-internal
tipping point is corroborated by an unusual occurrence of public disagreement between two
members of the same party (CDU): In an op-ed, MP Dieter Murmann criticized the 'bank
power' rhetoric as a populist 'phantom debate' and defended the traditional German system of
universal banking and corporate governance (Frankfurter Allgemeine Zeitung 1995a, 12),
which MP Wolfgang Schulhoff rejoined, submitting 'the system of mutual shareholdings and
control is in a deep and self-inflicted crisis of credibility' (Frankfurter Allgemeine Zeitung
1995b, 9).
The changing position by commercial banks was a major reason for the conservative
parties to abandon defending the old bank-based system. The government referred to
Deutsche Bank's announcement of retreating from their industrial holdings when first
presenting the KonTraG draft (Frankfurter Allgemeine Zeitung 1996). Essentially, the
conservative parties were protecting somebody, who did not want to be protected anymore.
After commercial banks put financial modernization on the agenda and championed the
initial waves of deregulation, the finance capitalism program went further than banks had
anticipated when the need to dissolve the 'Deutschland AG' became imminent. Commercial
banks even sought to obstruct parts of financial liberalization, such as the introduction of
money market funds (Frankfurter Allgemeine Zeitung 1992) and initially fought the anti bank
power coverage in 1994 with an extensive public campaign arguing that they exercised proxy
rights in the interest of their clients for whom they are 'patient, long-term shareholders' (Die
Zeit 1994; Der Spiegel 1995). Soon, however, big banks barely participated in the public
debate and for the most part silently accepted the hostile rhetoric.
It is not as if banks caved in or happily resigned from their privileged position as
lender, owner and underwriter. Due to pressure by international investors, banks reluctantly
gave up their position as the nucleus of corporate Germany (Deeg and Lütz 2000). In 1990,
Commerzbank CEO Walter Seipp still vociferously warned members of the Bundestag what
a retreat from blockholdings would signify: 'If today you restrict or forbid stake holding for
German banks, […] then you have Jimmy Goldsmith […] [to] demonstrate you how to buy,
sell and strip industrial stakes in a market economy on the American model' (as cited in Story
1996, 377). Rolf Breuer, CEO of Deutsche Bank from 1997 to 2002, as early as 1992
asserted his continuous support of the self-control principle when bemoaning that an
international 'credibility problem' forces them to retreat from the corporate network (Lütz
2002, 239). Deutsche Bank and others had to accept that liquid capital markets are hardly
reconcilable with an insider-controlled corporate network. This reluctant consent, however,
soon turned into full embrace of finance capitalism. Divesting off the industrial shareholdings
provided the necessary liquidity to expand into investment banking, which promised higher
returns on equity (Frankfurter Allgemeine Zeitung 1998). Deutsche Bank became a global
player in investment banking, assertively engaged in 'financialized' practices like share
buybacks and in 1997 even supported a hostile takeover of a firm on whose supervisory
board it was represented (Beyer and Höpner 2003, 185). Banks' altered 'fictional
expectations' in conjunction with shifting public sentiments and a forceful cross-class
advocacy coalition, contour the political space financial modernization in part created and
help explain the timing of finance capitalism's tipping point of discursive dominance.
Even though the KonTraG did not go as far as capping industrial ownership of banks
at five per cent, as demanded by the SPD, it contains many a Social Democratic position and
reads as an unequivocal endorsement of shareholder-oriented corporate governance. The
liberal-Social Democratic coalition demanding further liberalization also found expression in
an amended version of the KonTraG that the North Rhine-Westphalian minister of economics
Rainer Brüderle (FDP) introduced through the Bundesrat with the SPD's support. Its ability
to absorb liberal and socialist discontents vis-à-vis 'bank power' explain why finance
capitalism's political moment had come. Financial modernization provided the connecting
point for fundamentally socialist ideas from what has been referred to as the fourth volume of
Das Kapital (Hilferding 1910), to become compatible with liberal, pro-competition positions.
This cross-ideological appeal is particularly remarkable, because SPD and FDP did not
manage to agree on any meaningful measures to curtail 'bank power' when in a coalition
government between 1969 and 1982—the crucial difference being the fading scepticism
apropos of capital markets. The full circle of big banks—from agenda-setting protagonists to
partial antagonists, reluctant acceptance and, finally, catalysts of finance capitalism—
demonstrates the limits of purposive institutional design and the Eigendynamiken that unfold
during a paradigm shift with actors interacting in a fluid context.
One may be tempted to tell this story from a functional vantage point. It is well-
established that higher levels of corporate transparency and increased minority shareholder
protections are functional preconditions for outsider investors to operate and thus, for deep
and liquid capital markets; just like modernized stock exchanges and a financial product
innovation. Deducing that political actors rationally internalized and pursued this agenda,
however, would belie the ideological, non-linear genesis of the underlying political process.
Only once we explicitly include ideational dimensions of interest formation, that may still be
rational and material-driven, can we explain why the two main defenders of the old
paradigm—commercial banks and the conservative parties—abandoned their positions.
Finance Capitalism is adopted as the Dominant Discourse
With finance capitalism as the dominant political discourse, it is time to trace when, whether
and to what extent the program is adopted by whom. Let us first consider large non-financial
firms as central implementers of finance capitalism. While it is well established that this
'subregime' (Deeg 2005) has largely shifted toward finance capitalism, the timing and
underlying causality remain understudied. Case studies of German corporations attest to a
non-linear implementation of shareholder value practices (see e.g. Vitols 2002; Streeck and
Höpner 2003; Börsch 2004; Goutas and Lane 2009) for a variety of individual motives
(Beyer Hoepner 2003, 181). Yet, we can identify a pattern in the rhetorical adoption of
shareholder value in annual reports. Fiss and Zajac (2004) extract the shareholder value
orientation of the largest 100 German corporations and find that in 1990 no corporation
embraced shareholder value in their reports, while more than 60 per cent did so in 2000.
Whereas the share of firms embracing shareholder value marginally increased from 0 percent
in 1990 to 10 in 1995, more than half did so by 1998 (ibd., 506). This remarkable coincident
of the political tipping point and the take-up in rhetorical espousal by firms suggests a strong
causal link. The appropriation of the idea by political actors dating back before the
overwhelming espousal by firms makes it plausible that managers acted in anticipation of
political support.
NFC managers appear to be natural protagonists of financial liberalization, as they
can expect more independence of banks, higher remuneration and more finance flexibility. In
other countries, however, managers fought reforms such as the KonTraG, which mandates
managers to be more transparent about their finances and makes them more accountable to
the supervisory board. This makes it a process of semiosis that is endogenous to managers as
a group and individuals. After German corporate managers were initially reserved in their
support of financial liberalization, they soon became active consenters. The shifting political
discourse and central 'signallers' such as Daimler-Benz CEO Jürgen Schrempp—Germany's
'high priest of shareholder value' (Financial Times 2005), who outspokenly redefined his
company's mission as serving its shareholders rather than the public at large—resulted in
what one may refer to as a cascade-like 'joint belief shift' (Culpepper 2005). A generational
shift in management may be an important contextual factor, for changing educational profiles
and shorter job tenures make managers more susceptible to the underlying profit-maximizing
rational of shareholder value (Höpner 2001, 21; Fiss and Zajac 522). Yet, these changes do
not help to pinpoint the sudden ideational shift we observe. Even if one maintains a
materialist explanation of managers simply striving for higher pay, this does not explain the
timing and underlying processes that led to their acting on this perception of self-interest.
Rather than generational changes or increasingly dispersed ownership, managers' re-
evaluation of context crucially derives from the altering expectations about the shifting
political climate. Labour representative Küller (1997, 520) shrewdly observed that the
political discourse about finance capitalism was about the 'hegemony in the minds of
investors and managers.'
In a corporatist institutional arrangement, one could have expected labour to mobilize
against shareholder-oriented practices both on the political and firm level. After reacting
hostilely when the shareholder value mantra first entered public discourse, however, labour
unions became largely supportive and grew increasingly convinced of parts of finance
capitalism's underlying economic rational. While deregulatory reforms make hostile
takeovers more likely, extended opportunities of tapping financial markets were seen to
increase the chances of job-creating investments (ibd.). Driven by the fear of losing the
global battle for competitiveness, labour became an active consenter to the communicative
rather than the operative adoption of shareholder value (Höpner 2003, ch. 5). Unions looked
to strengthen their position within the finance capitalism discourse through stronger
supervisory boards by means of more transparency and management accountability (Cioffi
and Höpner 2006). They demanded the introduction of international accounting standards to
make away with opaque German reporting standards. In the wider context of labour market
dualization, i.e. unions representing 'insider labour' (Barker and Rueda 2007), the
combination of uncertainty and endogenous reinterpretation of the program at hand, explains
unions' converted understanding of codetermination as 'comanagement' (Jackson 2005).
Importantly, the fundamentally nonliberal institution of codetermination was never seriously
put in question and no relevant actor sought to attach it to the finance capitalism program.
Program is not adopted as the Dominant Discourse
It is not for a lack of political will that smaller German firms remain comparatively
'unfinancialized.' Beginning in the 1980s, policymakers widely identified the
undercapitalization of German SMEs as a competitive disadvantage. Encouraging SMEs to
tap capital markets became a key objective of most major financial reforms. Most notably,
legislations in 1987 and 1994 established the 'Geregelter Markt' as a new segment at the
Frankfurt stock exchange and the new quasi-type of enterprise 'small stock company',
respectively; both aiming to facilitate public listings for smaller firms. This political goal of
financializing the Mittelstand was shared across the political spectrum and underpinned by an
outspoken scepticism toward its overreliance on bank finance, as exemplified by a
conservative MP during the GkADA parliamentary debate: 'External finance through bank
loans with their known need for collateral [...] may lead to critical liquidity problems'
(Bundestag 1994, 17988). The question remains why political will and policy change failed
to translate into altered behaviour among implementers.
A central reason for this continuity is the stable role of public banks. Historically,
most European banking systems consisted of three pillars, but only in the 'special German
case' have the legal and institutional structures remained largely unchanged since the 1930s
(Bülbül et al. 2013, 16). Owned by municipalities and districts, and given their dual role as
charitable organizations and local lenders to households, SMEs and public bodies, savings
banks have a deeply entrenched political power base. Despite the widely shared political
enthusiasm about deregulatory financial reforms, liberalizing public banks, a conceivably
logical step toward finance capitalism, never seriously reached the political agenda. When in
the early 2000s commercial banks started complaining more vociferously about savings
banks' privileged position—they are, for example, protected from takeovers—political parties
unanimously defended the structure of the banking system. Legislative proposals in 2003 by
the CDU, Greens, and the governing coalition in unison referred to the three-tier structure as
a historical factor of financial strength and stabilization that is of tremendous importance for
the Mittelstand.
German policymakers could have relied on a powerful ally and useful scapegoat for
blame avoidance in the European Commission (Schmidt 2009), had they truly wanted to
liberalize the banking system. Instead, defending public banks to this day continues to be a
core element of German economic EU policy. The three-tier structure is a fixture of the
German finance paradigm that was not seriously delegitimized so that no space opened up to
allow initiating substantive institutional changes. Instead of structural changes, we see
modernized practices amongst public banks. Rather than eroding relational banking,
increased transparency requirements have modernized the mode of coordination of the
historically rooted long-term lending (Bluhm and Martens 2009).
This structural continuity partially explains why German SMEs have little incentive
to financialize. Further structural and ideational idiosyncrasies of the German corporate
landscape also play a role. Even though German SMEs markedly compete on a global scale,
their business model is not subject to similar globalization pressures as firms on the diverging
path, for they tend to be industrial niche specialists that mostly rely on retained earnings and
usually do not strive to diversify or expand to a similar extent. In addition, a certain
Mittelstand-identity factors into this reluctance to financialize. Already post-war economics
minister Ludwig Erhard submitted in 1955 that the Mittelstand is not merely a quantitative
category referring to SMEs, but 'an expression of a state of mind and an attitude toward the
socio-economic and political process' (as cited in BMWI 1997). In this context it is
auspicious to consult the impressive body of empirical research on the German familial
sector. The German case stands out for its unusually large share of big family-owned firms
(Lehrer and Celo 2016, 732), which makes it particularly interesting, as functional issues of
small firms accessing capital markets can be assumed to play less of a role. This is important
for the explanation of non-adoption of the finance capitalism program, for ‘[g]eneralizable
differences between the strategies of family and nonfamily businesses can only be found in
the field of finance. Due to their striving for independence, family businesses do prefer
(internal) equity financing’ (Schlömer-Laufen et al., 2014, 11). It follows that the familial
sector is an important driver of financial bifurcation (Lehrer and Celo 2016).
Traditional Mittelstand firms barely sought listing on the Neuer Markt or issue so-
called 'Mittelstand bonds.' Tapping capital markets is widely considered a remedy of last
resort when in dire need of external funding—creating negative reputational feedback effects
with investors, which were only reinforced by the collapse of the Neuer Markt. If external
funding is sought, bank loans, in particular from public banks, are the preferred channel by
German family-owned firms (Wallau and Lamsfuss 2013, 21). Lehrer and Celo (2016, 738)
hypothesize against the background of Streeck's (2009) dichotomy of institutions that due to
their local and social embeddedness, the German 'familial sector has conserved traditional
Durkheimian institutions of solidarity and mutual obligation to a much greater extent than the
financialized sector, which has largely replaced Durkheimian institutions with Williamsonian
ones through the growing contractualization of relationships'. This ideational dimension in
the form of Mittelstand-identiy is an important addendum to existing explanations of
bifurcation or non-liberalization that solely focus on the size of firms.
The New Paradigm Becomes Identifiable when Challenged
It remains to be examined whether the program of finance capitalism has matured into the
new subregime's dominant paradigm. Deregulatory reforms of the red-green government in
the early 2000s—inter alia abolishing capital gains taxes altogether and thus expediting the
dissolution of the company network (Cioffi and Höpner 2006, 479)—solidified the political
shift toward finance capitalism. What marks the enshrinement of the new financial belief
system most conspicuously, however, is financial liberalization's widely unexpected knock-
on effect into the social policy arena. The 2001 Pension Reform Act broke with the
'Bismarckian' paradigm by introducing tax-subsidized, funded schemes for occupational and
private pensions (Lamping and Rüb 2004). Concentration of assets in pension funds ensues,
whose long-term positions incentivize 'corporate engagement' as advocates of practices
associated with shareholder value (Lazonick and O’Sullivan 2000; Clark and Hebb 2004).
The differential growth of the second and third pension pillars layered on top of the
government pillar (Hinrichs and Kangas 2003) underscores the long-term political
commitment to finance capitalism.
The litmus test for whether a program has become a paradigm is the reaction by
policymakers in the face of challenges. The first setback for finance capitalism was the burst
of the New Economy bubble in 2000. By 2002, the Neuer Markt's market capitalization had
dropped to 4 per cent of its peak value and the Telekom 'people's stock' dramatically dropped
in value as well. For the first time not just professional investors or wealthy individuals, but
middle-class households incurred losses from speculative equity trading. Despite accusatory
reporting by the media, policymakers demonstrated strong commitment to finance capitalism,
arguing that the crash was the result of a yet immature version and implemented reforms that
aimed to further increase transparency standards (Vitols and Engelhardt 2005); examples
include the 2002 Fourth Financial Market Promotion Law and the 2003 Investment
Modernisation Law, which controversially legalized hedge funds. Remarkable consensus
about the future objectives apropos of the Finanzplatz Deuschland prevailed across the
political spectrum. Public sentiments apparently neither circumvented the new paradigm by
means of constituency legitimacy (Campbell 2004), nor did a new elite discourse trickle
down to the public (Lehmbruch 2001). Instead, public approval facilitated the political
emergence of finance capitalism in the 1990s, whilst the issue area is too 'quiet' (Culpepper
2011) for electoral mobilization to fundamentally challenge the elite discourse. In a loose
application of Schmidt's (2008) terminology, 'coordinative' trumps 'communicative
What later unfolded into the global financial crisis, impacted the German financial
system at an early stage and represents a challenge of a higher order of magnitude.
Increasingly market-based banking had resulted in great exposure to the American mortgage
market (Hardie and Howarth 2009; Hüfner 2010).16 German banks accounted for 9 per cent
of global write-downs, which is roughly a quarter of all European write-downs (Hardie and
Howarth 2013). The spreading liquidity drain barely affected savings banks and cooperative
banks due to their more conservative business model, which may explain why the crisis did
not impede the real economy as much as in other countries (Ibid.). The seemingly obvious
lessons from the crisis may lead one to expect the financial crisis to signify an 'important
break' for national financial systems' trajectories (Deeg 2010, 331) and underlying belief
systems (Quaglia 2010). Unlike after the New Economy bubble, commercial banks and
Landesbanken have indeed begun to 'definancialize' their funding and lending practices.
Hardie and Howarth (2013, 124) suggest a 'potential reduction in market-based banking in
Germany as a result of the crisis.' In line with an overall European trend, commercial banks
seek to refocus on 'boring banking' (Financial Times 2015). Deutsche Bank has committed to
a 'change of culture' toward less investment banking and more traditional banking activities
with modest profitability benchmarks.
These post-crisis adjustments, however, do not mean a return to the patient capital
paradigm. Instead, the crisis has reinforced the new paradigm of coordinated finance
capitalism, which is interspersed with nonliberal elements. Whereas the German government
and the EU implemented more stringent financial regulation, the finance capitalism paradigm
has not been fundamentally put in question.17 Recent corporate scandals elucidate the extent
to which the legitimacy of the insider corporate governance regime has been undermined.
Whilst scandals at more shareholder-oriented firms such as Deutsche Bank were perceived as
individual failure, Volkswagen's emissions scandal was readily traced to its insider-
dominated corporate governance system (Röper 2015).
Making sense of change that is disparate both in terms of its nature and speed in complex
policy domains such as finance is a major challenge for ideational-institutionalist scholarship.
By developing concrete analytical steps that link incremental and dynamic theories of
institutional change in a conceptual framework of paradigm shifts, this article contributes to
efforts in this vein. The proposed conception of change departs from punctuated views of
transformative ideational change occurring only during periods of immediate crisis, while
acknowledging tipping points as markers of rapid, non-hegemonic change. Instead of merely
tracing chosen antidotes to perceived failures of prevailing belief systems back to pre-
existing schools of thought, it emphasizes the dynamic nature of the paradigm-generating
process that corrects the common conceptual misperception of unmalleable programs
seemingly conjuring up on the political agenda. Rather than a descriptive periodization
framework, the proposed framework enhances efforts of uncovering the workings of
technocratic ideas morphing into increasingly complex policy prescriptions that may reach
discursive dominance to become the new paradigm. This conceptual roadmap may prove to
become a useful tool to theoretically enhance the intensive process tracing that this type of
analysis requires.
The provided data substantiate the disparate extent of German liberalization and
inform the larger debate concerning consistent national capitalist models versus internal
diversity (Lane and Wood 2009). The polymorphic nature of change fits uneasily with
institutionalist explanations and requires the analyst to link them to their underlying
ideational processes and political conflicts; an effort to which this paper's analytical narrative
contributes empirically. Technocratic ideas of financial modernization enabled liberal-leftist
aspirations of liberalization to morph into the political program of finance capitalism. Careful
process tracing allows pinpointing the political moment of the program reaching discursive
dominance when conservatives abandoned their opposition. How technocratic, politically
consensual and parametric changes opened up space for the paradigmatic discourse of
outsider-oriented corporate governance, elucidates the underlying causalities and timing of
the transition from marginal and rapid change. The changing role played by banks throughout
this process—from agenda setter to antagonist and catalyst—underscores the evolutionary,
non-purposive nature of paradigm shifts. This enhanced understanding of the political
discursive shift toward finance capitalism and the motives driving its implementers, shed
light on the compartmental non-adoption of finance capitalism—thereby explaining financial
diversification and the German version of finance capitalism with codetermination and public
banks as partially nonliberal fixtures.
This diversified variety of German capitalism has come to be perceived as the 'model
everyone wants' (Financial Times 2012a), with the 'German political economy [as] one of the
clear "winners" in the post-2007 period' (Bruff and Horn 2012, 162). Prior to the crisis, the
German banking system was widely considered anachronistic. In 2003, The Economist
echoed the then common call to consolidate and 'overhaul […] Germany's rigid three-pillar
banking system.' The same outlet now predicts that in the future the German 'model of a
localised and diverse banking system is likelier to win adherents' (The Economist 2012).
Many post-crisis policies strive to shift banking practices toward the traditional savings banks
model (Bülbül et al. 2013, 1) and prominent policymakers like David Cameron have
identified capitalist diversity in the form of the German Mittelstand as a model worth
emulating (The Guardian 2015).
It appears as if the German model's comparative advantage derives from the very
diversity explained in this paper. Genetic diversity is said to produce the strongest
offspring—as the disparately liberalized German financial system serves the dissimilar needs
of large international corporations and the Mittelstand, a comparative financial advantage
might have emerged (Posen 2015, 8). One may be tempted to interpret Germany's relative
economic success in the wake of the global financial crisis to fulfil VoC's wildest predictions:
'firms can sustain a decline in returns because the financial system of a coordinated market
economy provides firms with access to capital independent of current profitability' (Hall and
Soskice 2001, 16). But instead, 'new institutional "complementarities" have emerged within
Germany’s "coordinated" variety of capitalism [...] [P]atient and less patient forms of capital
are not engaged in a zero-sum game but rather may be complementary' (Lehrer and Celo
2016, 731-32). In an interesting twist, these strengths may turn into risks under the low
interest rate regime brought about by post-crisis monetary policy, which is punitive of
'boring' banking business models (IMF 2016, 22).
1 Among the 34 OECD countries, Germany ranked 20th in terms of stock market
capitalization in 2010 (OECD World Databank).
2 Companies are divided into four categories: small and medium sized public and private
firms with an annual turnover of under 50 million and large public and private firms.
3 Hardie et al. (2013) examine the degree to which banks’ balance sheets rely on market
mechanisms along four aspects: 'marked to market' valuation, securitization, outsourcing to
shadow banks and market finance.
4 Hall distinguishes three orders of parametric and paradigmatic change. First order
magnitude changes are reactions toward altered circumstances, whilst second order means
that different instruments are used to attain the same goal. For a third order change the
overall policy goal needs to change.
5 Ideationally attuned analyses of financial liberalization are largely missing. Notable
exceptions are works by Höpner and Jackson (2006) who implicitly include notions of social
learning in the diffusion of finance capitalism and Jackson (2005) who emphasizes ambiguity
in actors' perceptions of corporate governance regimes. The most serious attempt to
conceptualize ideation as an explanatory factor of financial system change is Culpepper's
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signalling and beliefs among actors as explanatory factors, this binary concept is steeped in
rationalist institutionalism, evidenced by essentially omitting marginal change and
underplaying the messy, evolutionary nature of change (Schmidt 2010, 9).
6 For an overview, see MacKenzie (2008) and Bernstein (2007).
7 This notion of incommensurability is reflective of a long-standing debate in the history and
philosophy of science following Kuhn's (1967) seminal work.
8 For the distinction between regulative and redistributive policy areas, see Leifeld (2013,
9 Programs are concrete cognitive policy prescriptions that outline a course of action for
decision makers. In the background policy paradigms (Hall 1993) or belief systems
(Lehmbruch 2001) function as often-unarticulated assumptions that circumscribe the range of
potential programs actors consider and find articulation as the dominant discourse. Public
sentiments are normative background ideas in the form of national identities and public
opinion as the perimeters of the legitimate. Frames serve decision makers to promote and
legitimize programs.
10 For a discussion of (the tension between) both logics in Hall's model of change, see Blyth
11 For a juxtaposition of the paradigm argument and discursive approaches, see Taylor-
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12 I draw on Korpi's (2006) distinction into protagonists, who initiate policies as agenda
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persistent antagonists.
13 For analytical purposes it is auspicious to distinguish between the political and the
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not mean that implementing actors do not also participate in public discourse and shape
political outcomes.
14 Comprising of the 'big three' commercial banks— Dresdner Bank, Commerzbank and
Deutsche Bank— the state of Hessia, the association of foreign banks and the Bundesbank
(Lütz 2002).
15 Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (Corporate Sector
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16 In the case of Landesbanken, the expiring privilege to issue publicly guaranteed debt in
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17 See Blyth (2013) for a general analysis of this absence of a finance paradigm shift. In an
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... By now it should be clear that Germany's model of banking differed substantially from the increasingly market-led banking practised in Britain during the eighties. However, the German political economy underwent several changes over the last decades (Streeck and Thelen 2005;Hardie et al. 2013;Röper 2018). I will emphasise how a mix of domestic and international pressures has led to an increasingly marketled model, resulting in a staggered convergence on bank branch restructuring. ...
... As a consequence, the 1990s witnessed a domestic policy shift to strengthen Germany's position as a financial centre. This, almost inevitably, implied moving towards the Anglo-Saxon paradigm (Deeg 2005;Röper 2018). Throughout the decade several initiatives were taken to accomplish this project of Finanzplatz Deutschland (Dore 2000). ...
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... When financial challengers started to push for financialized pension funds for both private and occupational pensions in 1995, the political environment was highly favourable and challengers were all but certain to be victorious in substantially financializing the German private pension regime (Röper 2018). However, the pension funds that were eventually established as part of the PRA2001 had little to do with the financialized 'Anglo-American pension funds' that challengers were advocating. ...
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Despite renewed interest in the role of business in shaping the welfare state, we still know little about how factions of capital adapt their strategies and translate these into political infighting and coalition building. Based on a detailed process tracing analysis of the political battle over German pension funds, this paper shows that cleavages within business do not necessarily run along the lines of finance vs. non-finance. While 'financial challengers' (banks and investment companies) advocated financialized pension funds, 'financial incumbents' (insurers) defended a conservative understanding of old age provision. Tremendous political momentum toward financialization notwithstanding, challengers remained largely unsuccessful. Incumbents elicited support from the wider business community by adjusting their strategic goals and engaging in discursive reformulations to effectively fight pension financialization from within capital. To accommodate such competition politics and coalition building, the paper argues for a more dynamic understanding of business strategizing and highlights the importance of discursive political strategies. It shows that some capitalists may act as antagonists of elements of financialization and problematizes the actual mechanisms of coalition building through which business plurality affects political outcomes.
... This included adopting American style corporate governance and pro-shareholder reforms (e.g. Santos et al. 2018) even in places once thought less susceptible to these changes like Germany (Röper 2018) and Japan (Vogel 2019). Cioffi and Höpner (2006), for example, argue that left-of-centre parties promoted these to appeal to middle-class and business constituencies while addressing economic problems like slow growth, low innovation and high unemployment. ...
The ‘financialisation’ of the economy is considered a key phenomenon of our time, but we lack large-scale empirical evidence of it. Has financialisation in the non-financial corporate sector really taken off in recent decades? To answer this question, I marshal data on all available publicly traded corporations in the largest 37 countries from 1991 to 2017. While there has been a decline in ‘real’ capital accumulation, I do not find firms are substituting tangible for financial investment. Financial income and financial asset shares have declined over time. Only by one measure – shareholder payouts – is there significant growth. To the extent we do see financialisation behaviour, it is overwhelmingly accounted for by very large and internationalised firms. In light of these findings, I argue that non-financial sector financialisation is connected to changes in the global production process which allows a small number of powerful firms to recycle surplus profits into financial capital.
... Hedgefonds, Staatsfonds, aktivistische Eigentümer und passive Indexfonds vertreten Interessen und zeitliche Horizonte, die zu der traditionell in Deutschland bzw. in Kontinentaleuropa herrschenden Eigentümerstruktur wenig passen (Goyer 2011;Gospel/Pendleton/Vitols 2014;Fichtner/Heemskerk 2019). Diesen neuen Akteursgruppen kommt eine wichtige Funktion beim partiellen Wandel des Corporate Governance in Deutschland zu (Schmidt 2001;Deeg 2011;Hall 2015;Röper 2018 Governance-Systeme angesehen werden. Dabei wird vor allem eine Konvergenz hin zum anglo-amerikanischen Corporate Governance erwartet bzw. ...
Technical Report
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Private Equity ist eine Investition auf Zeit, wobei der Ausstieg („Exit“) der Private-Equity-Gesellschaft eine wichtige Weichenstellung für das Portfolio-Unternehmen darstellt. Bislang ist umstritten, ob die Unternehmen damit in tragfähige Eigentümerstrukturen überführt werden. Der Beitrag untersucht die Eigentümerstrukturen für sämtliche Unternehmen, die in Deutschland in den Jahren 2012 bis 2015 von einer Private-Equity-Gesellschaft übernommen worden waren. Dabei konnte für 423 Unternehmen bis zum September 2020 ein Exit festgestellt werden. Es wird gezeigt, dass nur eine Minderheit der Unternehmen bei diesem Exit eine nachhaltige Eigentümerstruktur erhalten hat. Während mehr als zwei Fünftel der Unternehmen von einer weiteren Private-Equity-Gesellschaft übernommen worden ist, geriet ein Fünftel der Unternehmen in eine finanzielle Notsituation, die sich vor allem über Insolvenzanmeldungen abbildet. Zugleich ist mit dem Exit eine starke Internationalisierung der Eigentümerschaft verbunden, wobei die neuen Eigentümer aus anderen europäischen Ländern (29 %), Asien (20 %) sowie aus den USA oder Großbritannien (19 %) stammten.
Whilst both the level and the make-up of public debt are high salience issues, the management of public debt seldom commands public attention. This study examines the quiet politics of public debt management in advanced capitalist societies, comparing debt management reforms and the everyday practice of debt management in Germany and the UK. We present evidence of two factors contributing to the political quietude around public debt management: a persistent absence of partisan contestation and conflict; and the dominance of ‘market discipline’ as an interpretative frame, which prevents changes in interest rates and debt servicing costs to be seen as the product of faulty debt management. We also find that this quietude creates a space for the coordination and cooperation between contemporary capitalist states and large dealer banks, whose capacities effectively to act within their respective domains depend on each other.
Public banks are banks located within the public sphere of a state. They are pervasive, with more than 900 institutions worldwide, and powerful, will tens of trillions in assets. Public banks are neither essentially good nor bad. Rather, they are dynamic institutions, made and remade by contentious social forces. As the first single-authored book on public banks, this timely intervention examines how these institutions can confront the crisis of climate finance and catalyse a green and just transition. The author explores six case studies across the globe, demonstrating that public banks have acquired the representative structures, financial capacity, institutional knowledge, collaborative networks, and geographical reach to tackle decarbonisation, definancialisation, and democratisation. These institutions are not without contradictions, torn as they are between contending public and private interests in class-divided society. Ultimately, social forces and struggles shape how and if public banks serve the public good.
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Deutsche Bank was once an acclaimed US-style investment bank but is now struggling. The rise of US finance is often explained as an outcome of financial liberalization that motivated other banks to abandon their traditional industrial support to chase profit opportunities within global securities markets. This story, however, underestimates how the transition to US-led financialization was deeply entangled with managerial struggles and the contradictions of adopting US financial innovations from a peripheral position. By contrast, I use the concept of extroverted financialization to portray Deutsche Bank’s transformation as an outcome of its attempts to integrate new funding practices connected to US money markets, called liability management. I argue that this process generated a difficult-to-manage business model and, ultimately, Deutsche’s decline. Because of these extroverted strategies, the bank is now caught between opposing logics of banking, within neither of which it can regain its previous powerful position.
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This paper reconceptualizes the impact of US finance on European banking as a process of ‘extroverted financialisation’. This impact is commonly associated with the rise of ‘market-based banking’ (MBB). While MBB exposes how commercial banking has been deeply transformed by disintermediation and borrowing from wholesale markets, the concept struggles to capture the distinct imperatives of this process, and its uneven nature. By contrast, the concept of extroverted financialization captures the problems European banks have faced while adapting to US-led financialization. More specifically, the concept portrays the financialization of European banking as an outcome of new funding practices, called liability management (LM), developed in US money markets from the 1960s onwards. I show how this put pressures on European lenders because it allowed US banks to leverage extensively. To catch up, European banks had to improve their access to liquid USD, which forced them to find a way into the Eurodollar markets and into the US money markets. To operate in these markets, they had to gradually implement the practices of LM. This process of extroversion made their own banking models highly fragile and dependent on US money market funding. Despite adopting LM, they could not reduce their structural disadvantages vis-à-vis US banks.
Technical Report
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Der Einfluss von Private Equity-Investoren auf deutsche Unternehmen hat seit der Finanzkrise laufend zugenommen. Aus Arbeitnehmerperspektive stehen insbesondere Fragen zur Beschäftigungsentwicklung und zur finanziellen Stabilität der betroffenen Unternehmen im Vordergrund. In der vorliegenden Studie wird empirisch untersucht, wie sich Wachstum, Beschäftigung und Finanzierung von Unternehmen entwickelt haben, die 2013 von Private Equity-Investoren übernommen wurden. Zur spezifischen Beurteilung des Faktors "Private Equity" wird eine Vergleichsgruppe von Unternehmen ohne Private Equity-Eigentümer herangezogen.
This book picks up where Karl Polanyi's study of economic and political change left off. Building upon Polanyi's conception of the double movement, Blyth analyzes the two periods of deep seated institutional change that characterized the twentieth century: the 1930s and the 1970s. Blyth views both sets of changes as part of the same dynamic. In the 1930s labor reacted against the exigencies of the market and demanded state action to mitigate the market's effects by 'embedding liberalism.' In the 1970s, those who benefited least from such 'embedding' institutions, namely business, reacted against these constraints and sought to overturn that institutional order. Blyth demonstrates the critical role economic ideas played in making institutional change possible. Great Transformations rethinks the relationship between uncertainty, ideas, and interests, achieving profound new insights on how, and under what conditions, institutional change takes place.
The advancement of social theory requires an analytical approach that systematically seeks to explicate the social mechanisms that generate and explain observed associations between events. These essays, written by prominent social scientists, advance criticisms of current trends in social theory and suggest alternative approaches. The mechanism approach calls attention to an intermediary level of analysis in between pure description and story-telling, on the one hand, and grand theorizing and universal social laws, on the other. For social theory to be of use for the working social scientist, it must attain a high level of precision and provide a toolbox from which middle range theories can be constructed.