Heading for a Low-Calorie Version of Communist East Germany?

Published on 2013/03/04
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Just a few newsletter issues back, I titled a commentary “Europe to Those who Love Big Government,” and started it with the line: “The regulation mania in Europe knows no bounds.”

Sad to say, the hypothesis is being confirmed week after week. The latest brainchild of the European Union is a new guideline that limits the success premium of bankers to a maximum of twice a year’s basic pay. One Social Democrat representative rejoiced by likening the move to a “revolution on the financial market” (as cited by the FRANKFURTER ALLGEMEINE ZEITUNG on 01 March).

The banker bonus cap is generally rather popular because bankers, as everybody knows, are the scapegoats of the financial crisis. I am well aware that even some of the readers of the GERMAN REAL ESTATE NEWS may have a bone to pick with bankers. Yet I should like to contend: Once you start regulating the pay checks of senior executives, you set a precedent that will not remain limited to banks, but spread to other sectors and segments of the economy.

This, however, will turn into a competitive disadvantage for any country that introduced such rules, because rules like these will never be universally accepted. By the way, it is not yet clear whether the rule will become effective even across Europe, because the British are opposed to it, and justifiably so. They are concerned that top bankers and traders will relocate from London to New York and Singapore.

Success-based salary components are simply a great way to create some “breathing space” for the expense accounts of companies and banks. So what impact would the re-regulation of the bankers’ bonuses have? There is already a discussion going on about how far the basic salary of a top banker will have to be raised to attract the best international professionals and to keep them aboard. The predictable outcome will be that the fixed labour costs of banks will shoot up. Every entrepreneur knows perfectly well that an increased overhead will do nothing to stabilise the company financially. On the contrary, it is hardly sensible to make life more difficult for banks in an anyway tough situation.

As it is, the populist policy measures have forced banks to set up huge departments the sole purpose of which it is to implement the ever-changing regulatory requirements (more than 14,000 per year). It is a costly thing to do and it has sent the expenses of banks skyrocketing. If the new EU caps on banker bonuses force banks to raise their employees’ basic pay in order to remain competitive, it will drive up their expenses even further. I can vividly imagine the outcry over the increase in fixed salaries that a bank will have to pay even if it has had a bad year. The next step according to this regulatory logic would be to cap the basic salaries, too.

Meanwhile, the regulatory frenzy is going at full tilt in Germany as well. The parliamentary debate past Thursday has shown: the Social Democrats are quite serious about capping the rent rates on first-occupation letting contracts. As we all know, the Social Democrats have demanded that rents on new leases may not exceed the local reference rent by more than 10%. However, Social Democrat politicians have realised in the meantime that a strict enforcement of such a cap would cause housing construction to stall.

All of the proposals now discussed by the Social Democrats in an effort to “soften” the approach actually increase the probability that a regulation of rents on new leases will be signed into effect. Hamburg has already submitted a draft bill in Germany’s upper house under which the rent on new leases would be limited to a maximum of 20% above the local reference rent (rather than 10% as demanded by the Steinbrück whitepaper).

The exact wording of the draft bill from Hamburg is not available yet. But it is quite obvious that things are coming to a head. The Social Democrats are also debating whether to exempt new buildings from the new regulation to keep housing construction from stalling, so that the new regulation would “only” apply to existing housing. It would, of course, be a hoax, because buildings that are new today will be used buildings tomorrow. What good is it that the cap does not apply to the first-occupation lease, if you have to lower rents during your next round of lettings a few years down the road? Any property valuer will take the re-letting rent as the “sustainable” one. Indeed, there is no alternative.

Finding out what exactly the Social Democrats have in mind will be the purpose of the upcoming BERLINER IMMOBILIENRUNDE panel, for which we recruited the President of the DMB German Tenant Union and the Social Democrats’ housing policy spokesman as speakers. It is not incidental that I scheduled the event for 23 April, weeks and weeks away, because by then the Social Democrats will have a clearer idea of how to realise their plan (for a copy of the event program, write to: info@immobilienrunde.de).

From my point of view, the likelihood of the Social Democrats being part of the next coalition government is nine to one, whether it be together with the Greens or with the Christian Democrats. Therefore, it is essential for the real estate economy to understand what exactly the Social Democrats want and to seek to engage them in a dialogue in order to keep the worst from happening. It would be naive for anyone in the industry to assume – true to the logic that things that are not supposed to happen will not happen – the Social Democrats will simply abandon their plans to regulate re-letting rents.

This is not a good time for market economy in Europe. Just last week, word had it that a cross-EU directive is in preparation that will limit the unemployment of young people to four months. Youth unemployment over longer periods of time will be prohibited. It is bound to be quite a popular measure, given the outrageous youth unemployment rate in countries like Spain and Italy. But will such a directive benefit young people in any way? Of course not. Let us remember that Communist East Germany banned unemployment altogether. Everyone had their workplace in state-run businesses, no matter how meaningless the actual job may have been. Could it be that we are heading for a low-calorie version of the same?

About the Author

Dr. Rainer Zitelmann is one of the leading experts for the strategic positioning and communications of companies.

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