A view from Germany

Date: 28 Oct 2011

Citywealth

As Germany swings into focus with Greece skimming default and talk of it leaving the Euro and the effects on the German export market, Citywealth thought it would be interesting to get an overview on Germany. Business consultant and strategist Count Albrecht Matushka, offered his unique insights into the complex and never ending Euro problem and beyond.

Matuschka started the first family office in Germany and the first Multi family Office. The son of a priest, he spent fifteen years in banking in London. “I was fifteen years with Siegmund Warburg,” Says Matuschka. Siegmund Warburg founded S G Warburg & Co in the UK (1946) which has since evolved into UBS.

Germanys economy

“Germany is the second biggest exporting country in the world. It has a strong industrial base and did a good job in restructuring itself before the crunch so we weren’t affected by it. Germany has spent the last ten years with good government and during this time many companies consolidated. Domestically the government did a good job. The manufacturing product range has also helped us. We’ve now become the machine house for the world and strong exports mean we are doing well. We have profited from being a strong industrial country within Europe, but keeping this in context, we haven’t had export growth like China.”

Banking and currency in Germany

“Germany only has one financial institution which can accompany business worldwide which is Deutsche Bank and so we are like a minnow in the financial pond. We don’t have sufficient tools to accompany the medium sized companies so that they can make timely, critical mass decisions internationally. Germany is part of the EU but I think the introduction of the Euro has been a big mistake. If you don’t have a central Government then, some countries go faster and some go slower. Currencies can adapt but it’s difficult for Governments to keep up.”

Greece becomes a widespread EMEA problem

“Financiers say a Greek default will cause a domino effect with the Euro that would cause a drop in export demand for Germany but I think we really have a much wider problem on our hands. If food prices double across the Mediterranean and unemployment is a problem in Egypt then you have riots which causes instability to financial and political systems which are all connected and ultimately have a dramatic effect on us all. That’s why our politicians are short sighted. It is a much bigger issue.”

“What the governments are doing is simply a stop gap in my view with the Greece policy and they need to be careful. In German history, we had Heinrich Br√ºning as Finance Minister in the thirties, who had a Conservative policy. We ended up in a mess with Nazism and Communism. To tell Greece what to do is not a positive way for Germany to go about things. If you look at the issues arising, then people are talking about the solidity of the banking systems. If across Europe they suffer enormous write downs then how is it going to look then? In Germany we use a term ‘Monnet over money’. It essentially means we need a bigger approach and to look back at how Europe was founded when Jean Monnet and Alcide de Gasperi, who were the founding fathers of the European Union , organised coal for energy and steel for rebuilding across frontiers. We must stop just considering making money. We need a collaborative and structured approach. It was the same as North Sea Gas – everyone pulled together. Greece is a topic that no-one can solve alone and bail outs simply patch up a gaping hole.”

Greek debt covers up deeper, impending food, water and health crisis across the world
“If you look around the Mediterranean through the eyes of the world agriculturists instead of financiers, then we have come to the point, which Sovereign wealth funds have realised, that food is the real problem not Greek debt. Agricultural policy in Europe has preserved high prices and their exports to third world countries have ultimately killed local markets but food prices have risen sharply.”

China start to do major agricultural deals

“China has realised it can’t feed it’s people and is working hard to get their ducks in a row. ChemChina, China’s second largest chemical enterprise, just bought into a crop protection company in Israel in a deal valued at $3.4bn. They now have a sixty percent controlling stake in Tel Aviv, Israel based Makhteshim Agan Industries, the world’s largest manufacturer which help protect crops against pests and give crops a “good start”. The transaction is one of the largest in the agrochemicals sector, the largest cross border acquisition of an Israeli company and one of the largest cross border acquisitions by a Chinese SOE (State Owned Enterprise) in the past five years. ChemChina will now become the global leader in the generic agrochemicals industry.”

We need to help China get what it wants to help the Euro zone crisis

“We have lived with the old guard and companies like Tiny Rowland’s with Lonrho wielding their power in areas like Africa for their sole profit. Today we need to collaborate more. Seventy five percent of the water consumption is through agriculture. It’s like wine. If you bought a vineyard fifty years ago in Italy or South Africa, you would be rich because it became part of a huge wine culture. The Chinese know that they have to do something like that so they are telling the state government to invest in food. But it is up to us, in Europe, to help them because we can help them build businesses and partnerships like the Israeli deal in an integrated approach which supports everyone throughout Europe.”

Using government tax break investment in neighbouring countries

“As an example if you look at energy, we Germans are proud to have got rid of our atomic plants and now we have tremendous subsidies in place for green energies to the tune of a thousand billion Euros. We could put this solely into the German economy but it might be better to put some of it into other countries, like Egypt, to bring jobs and wealth to their population. These types of ideas would help to stabilise their economy and to have a positive knock on effect for the rest of us in terms of political stability and cross border alliances.”
Making billions in a new way

“I think England can play a big role in future strategies of this nature. They have qualified engineers, financial and systems experience. Each country has it’s own expertise to bring to the party. For instance, in Germany we are good at engineering. In my view we need a bottom up strategy in the pyramid. For instance someone who owned a few mobile phone companies in the past, would now be a multi billionaire because of the explosion in the use of mobile phones. Today we can recreate this wealth in a different way for instance with medical prescriptions available on phones. Giving the man on the street, in any country, easy access to medicine could make someone ¬£500bn globally. We just need to focus and work on these problems together with all our human capital and financial expertise.”

It is not us against the Chinese. It is a world marketplace for anyone

“We should be very practical in Europe and I include Britain, which even though it has its own currency, is still part of Europe. America has no money and can’t do the deals they did. They borrow ¬£4bn every day, so you can forget them as a future player in financing global deals. Although the Chinese are fast learners and potentially we are at risk of them taking intellectual property expertise, we are just as much at risk from Mr Google and Mr Apple. Anyone who is fast and clever can scale up these days. It’s a world market for anyone not us against the Chinese.”

Stop using a begging bowl with China

“At present the Chinese have not yet organised their structure to work together with Europe or EMEA. They have bought into government paper from Portugal and Spain because they need a stable Euro. If they don’t have it they will have to do everything in dollars and the rod of power sways to America. The interest from the Chinese is a stable Middle East and a stable Africa. Everyone, including the Chinese have realised that the American way of using brute force, is not going to work anymore. You can’t do it with brute force now. We can’t use arms to get or take what we want.”

“The Chinese have an interest in stabilising the whole area. At present we have been begging them for funds as we go and as each disaster has hit but we need a better approach. Previously the USA and the UK dominated in the Middle East but this is changing and now we need a peace offensive. In the Mediterranean area, the Chinese don’t have knowledge of what to do, this is where they need our expertise. The Chinese learn very fast, but if we talk about new, collaborative, stabile markets then we all profit from it.”

Having companies backed by the Chinese doesn’t mean they aren’t British or German

“Rather than look at Chinese investment as a bad thing you have to look at some of the companies in Germany. They may be only twenty percent owned by Germans with the rest as international shareholding but they are still considered to be very successful German companies. What we need is a proper match. The Chinese have the money and very serious domestic needs. They know that they can’t just grab our assets because the world will move legally against this. They need to build a company like Danone or Nestle. They need to build a culture, and they need to do it bottom up, in a combination of the food and water industry. I would be hesitant about the dangers of the Chinese because their domestic problems are so big and food prices are going up.”

“If we look at the Chinese as a bank, what is more efficient for them to do? Put up ¬£3000bn in treasury bills or invest the money in capital to grow their holdings in the agricultural industry? Clearly the latter. My argument is that, if we got our act together and combined our ideals with the Chinese need for food, then we could create something dynamic. I am not pro Chinese particularly but the Chinese are the only people with the money and vigour to take a focused approach. In the past we would have done it with the Americans, like the early founding partners of Europe.”

“This is also where the Sovereign funds can help. They aren’t finding pleasure or performance anywhere. Solving the needs of basic people, I think, could be much more profitable for them at this time. If a big Islamic fund could organise the purchase of the basic provision of health care on the mobile phone, it would be worth more than owning the five biggest American pharma’ companies today.”

“Top down doesn’t work anymore, governments can’t achieve anything but if people get together like a cooperative and people in Islamic countries buy their basic needs together, it is worth more. It all has to be done in partnership between companies and countries because only local people in countries like Egypt and India know their local situation. If we transfer liquidity into real assets then suddenly the Southern belt of Europe would look very different economically.”

“We can blame each other for different things and say it is Greece’s fault for over spending but in difficult times things come down to basic needs – water, food and education. If we look at those opportunities and consider putting 1000 billion Euros into energy efficiency instead of the capital markets, which will swallow it up, you could create jobs, opportunity and wealth.”

The mobile phone can help scale businesses up dramatically

“Today with the mobile, we can find and reach people easily and they can buy from us simply in a click. We can identify one woman and her six children and consolidate her purchasing power and give her a Tesco card. You can empower her; you can give her an airline card; you can give her medical prescriptions at a tenth of the price. We have the ability to scale up things domestically.”

Opportunity for the financial companies in the UK

“England and the City have a role to play to put these deals together. England would have a large opportunity to make money with financial structuring and putting together financing. If you take that same approach in the Mediterranean with food, water, health and basic needs then we are helping with wealth creating and business everywhere.”

There is a lot of capital doing nothing

“What went wrong in the Southern belt of Europe is that the mortgage rate went from twenty percent to four percent and so we saw a tremendous building boom. Now we need a similar thing to happen in basic things like food and water. Interest rates are low and there is a lot of capital available. The Euro markets were organised by Sigmund Warburg in London. We can take our people and communities with ideas and with partnerships we could make their business ideas grow ten times more. So for instance in Germany we have a lot of business families who can add value with the Sovereign funds acting as banks.”

“The best example of a business that has already done this is the mobile market. In fifteen years it has got all over the world. In a split second you can be in touch with people no matter where you are. We are able to do these type of things now. Look at the Apple. They are worth billions. In a war economy things can change very fast and a difficult economic situation mirrors this. If you have sixty percent unemployment and a lack of food, then this pressure will create the change we need quickly. We need lots of holes in order to leverage these ideas.”

“We could pick winners for mass markets who have done these things already – the mobile phone companies, Tesco and Visa. If you look at Visa you can draw money in any country at any second of the day. So miracles can happen. At the moment anything green gets a subsidy. So if I invest a hundred dollars today to reduce Co2, I get tax breaks and help citizens. Now we need to work on that kind of motivation for basic needs. We aren’t doing an efficient allocation process across the all necessary frontiers yet.”

We have lost sight of reality with financial markets

“Everyone has become distracted in the financial markets and we have lost touch with underlying basic items. We are so used to making money trading that we don’t think about the items being traded. If you trade bananas back and forward in the markets until they go rotten, then you no longer have bananas to sell and the question might be: why do you eat bananas?”

Let’s stop blaming everyone else

I mention the commodities markets and the areas that have escaped policing for instance controlling delivery of goods to raise prices in certain countries. “Although we can look at the manipulation of markets and a misallocation of resources, I think it is better not to apportion blame but simply to show people how they can make more money doing things in different ways. Showing them the multiplier effect of capital use rather than speculation. What we do today is that we print money at
the European Central Bank at zero interest rates and banks invest it in bonds and people think less about creating value. It’s just moving money. We must in a sense look at the sense of leverage of basic needs to leverage capital to fix things.”

“Our focus is to match the Sovereign funds with big local business families and matching that with European potential. So if there are a thousand companies who know about water in Continental Europe and there are 4bn people without access to water, then the question is simply to bridge the gap. We want to gear up private balance sheets, entrepreneurial balance sheets and human capital.”

Count Albrecht Matuschka is Founder and Chairman of the Matuschka Group which offers business consultancy and strategy advice in Germany to families, family enterprises, non-profit organizations and financial institutions.

http://www.matuschka-advisors.de/