German politicians have a complex relationship with modern capitalist forces, especially private equity and hedge funds.
As Peer Steinbrück, the Social Democratic finance minister, says, understanding of the financial sector in Germany is “under-developed”. The rise of hedge funds and private equity has met with “ambivalence”, he argues, with plus and minus points.
In 2005, Franz Müntefering, now vice-chancellor, denounced hedge funds as “locusts”. Mr Steinbrück strikes a more pragmatic tone. No doubt, it helps that Germany is enjoying what he sees as a “long-lasting” recovery, driven largely by the private sector.
“There is not just one single explanation [for the recovery]. But German companies have improved their competitiveness considerably in the past three or four years,” he says.
Structural reforms have helped. For instance, 2006 was an “exceptionally successful year”, he says, with shrinking unemployment (down 800,000), healthy growth (2.7 per cent) and a lower budget deficit (1.7 per cent compared with 3.2 per cent in 2005). “This is not all the government’s work but we did contribute with important decisions.”
The rise of foreign private equity investors attracted by Germany's well-established, globally active industrial companies has been one of the changes that have taken place in Germany financial markets, he says.
“We don't want to act as if everything is positive in this connection. But it is certainly relevant that financial markets have changed considerably over the past 10 or 15 years.”
Germans needed to realise the financial sector was now one of the leading industries. “The share of people working in the finance industry in Germany is probably bigger than that working in the chemical industry and plant engineering industries. That needs to become clearer to ordinary Germans.”
As Germany has adapted to the new breed of investor, Mr Steinbrück says the debate in the Social Democratic party has become more realistic. Mr Müntefering's locusts analogy was the result of a closely fought election campaign, he says.
Germany should push on with economic reform, he says, listing public finances, the sclerotic system of federal government, and corporate tax reforms, due to be completed next month.
But he is anxious the “German model” should retain its traditional features. That means the prescriptions of outsiders, for instance on privatisation, might not always be appropriate. “It is about not simply following an Anglo-American model. It is about finding the right answers for Germany,” he says.
For business leaders, for instance, did not mean bowing to short-term pressures: "The mid-term orientation of my market position – that is what we should keep from the German tradition of the 1950s, 1960s and 1970s.”
The need to invest in research and development or training is not consistent with the aspirations of hedge funds pushing for special dividend payouts, he argues.
Germany’s fears, shared by European central bankers, about the threat of hedge funds to global financial stability, lie behind Mr Steinbrück’s attempts to win international agreement on stronger policing of the sector.
Germany holds the presidency of the group of G8 industrial nations and hopes to endorse proposals for a voluntary code of conduct at the G8 summit in June.
The code was “not about state regulation but about voluntary regulation by the hedge funds themselves” to boost transparency, he insists. He is confident that despite opposition from the UK, the European Union will back the drafting of such a code next month.
"If we are able to persuade the top 10-20 per cent of [hedge] funds to agree, then we’d have up to 80 per cent of finance volumes. This would be a major breakthrough”. He says his contacts with hedge funds suggest they are open to more transparency, if only to deal with “black sheep in the industry that can cast the whole industry in a bad light”.
A big unknown is how the legal and tax framework affecting private equity will evolve in Germany itself. Berlin has promised legislation this year to “improve” conditions, especially for companies offering seed capital for smaller companies, but has given no details. Mr Steinbrück sheds little light.
“I can't say because we are at the start of the work on this. It is not just about improving the conditions for private equity from overseas. It is about improving private equity in Germany." His somewhat anguished tone suggests Mr Steinbrück is in no rush to make dramatic changes.