European Economy. Economic Papers. Germany's growth performance in the 1990's

3.3.3 Capital markets
An efficient allocation of capital is an important condition for attaining a high growth potential
in an economy. While the capital market in Germany is efficient compared to most other EU
countries, it appears to be lagging behind that of Anglo-Saxon economies. Improvement could
be made in two areas.
•
Capital market regulation: For international investors, Germany’s capital markets still
appears to be relatively closed and lacking in transparency. While the situation has
improved in recent years in step with the very dynamic evolution in equity financing in
particular in the second half of the 1990s, capital market reform remains still behind that of

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other countries. Some momentum might however come from the 4th Financial Market
Promotion Act, which should improve security for investors by stronger controls on price
manipulation and insider trading and give exchanges and capital investment companies
more flexibility to run their business. A recent law enhancing transparency of public
security offers and take-over procedures together with the company tax reform is also likely
to improve market efficiency by giving incentives to reduce the widespread cross-ownership
of German companies.
•
Pension funds: The recent pension reform is likely to bring a boost to previously practically
non-existent pension funds. However, the new funds will remain legally extremely
constrained in the type of investments they are allowed to undertake. In addition, their
volume is likely to remain very small in comparison with the UK, US or the Netherlands.
Consequently, there remains substantial room for deepening the capital markets. In
particular, large pension funds could exert substantial pressure to increase share-holder
value and hence the efficiency of stock traded companies and provide a source of financing
for companies other than bank credits.