What does that mean?
It means that the private component designed to supplement state pensions will not have the effect it was once assumed to have. Substantial adjustments will have to be made again.
What sort of adjustments?
The easiest option is always to extend total working time.
So are we going to see a retirement age of 70?
At the moment, I wouldn't say 70, but everyone is aware of the issue. Today, we have a "golden" generation of pensioners who are doing much, much better on the whole than we are sometimes given reason to believe. The generation that is set to retire in the near future still enjoys a fairly good level of protection. For everyone else, the current phase of low interest rates poses a real problem.
Bearing this in mind, what do you think of the proposals for a supplementary pension made by the German Minister for Family Affairs, Ursula von der Leyen?
Calls for tax-financed solutions are being made again and again. This is based on the expectation that we will manage to tackle all of the structural issues like our ageing society through productivity increases. But in order to achieve this, we will either have to work more or increase automation levels. Neither option is very appealing. Work even more? That brings us back to the debate on burn-out. And as far as automation is concerned, policymakers fear that this would result in jobs being axed. I would warn against believing that we can solve our problems by boosting productivity. But the question as to how we are going to deal with our ageing society remains a very central one. This issue is so important to us that we will be organizing the second "Berlin Demography Forum" in early 2013 in cooperation with the German government.
In the past, the government has bought the things we could not achieve through productivity growth. Since the 1980s, when our growth started to decline.
Yes, this is the reflex I'm talking about. Whenever something has to be financed, we say, let's finance it through tax. This is based on the fantasy that growth is infinite. But we have achieved a lot of growth using leverage. We want to move away from this approach. Everyone wants to take the risks associated with leverage out of the system. This means that we will not be able to achieve the large-scale growth spurts seen in the past. So we also have to reduce the demands that are placed on the state. This means nothing other than reducing the large expanse of government.
There are limits to growth?
There are limits to growth. In February, I attended a panel discussion with the head of Greenpeace on the use of resources. He used a very powerful image: if we keep on going as we are at present, then one day, we'll be using the resources of four planets at the same time. So there are clear limits here, too. The growth story isn't as credible as it used to be.
As you mentioned, the problems are reflected in retirement provision. Have you ever calculated how much of an impact the low interest rates are having on the retirement provision gap?
We have performed a calculation. On average, savers would have to set aside around one third more every month. The exact figure, however, depends on a whole number of factors. But one decisive question is: what investment opportunities are actually available to help us fill this gap? If you are brave, you can certainly invest in securities offering high returns. But this always comes hand-in-hand with a certain element of risk.
After all, the environment is extremely volatile.
The financial markets also have to worry about how to get rid of the debt. What will happen if we don't manage to nail the combination of bearable inflation levels and growth. As long as no credible plans are in place explaining how we can achieve this, there will always be the latent risk that we will meet with a fate similar to that of Greece.
Is there a solution?
The most straightforward solution in theory would be: everyone agrees on 50 percent debt cancellation.
For everyone?
Essentially, many countries are facing similar problems to Greece. As long as there is no answer to the question as to how to get rid of the debt, a Damocles sword will continue to hang over the markets in psychological terms.
But this sort of debt cancellation would turn the entire financial system – be it insurance companies or banks – upside down…
Yes, which is why it's not really very realistic. This also explains why it would only be an easy way out in theory for the governments. The experience of countries that have opted to follow this route is dire. Argentina has still not recovered from a similar move. Another debt cancellation is the ultimate horror scenario. I don't believe that countries like Italy would sign up to this sort of solution. But then, the country also has to take the right steps, for example when it comes to its labor market structures.
Economists increasingly have the name of another problem child on their lips: France. Do you share the skepticism regarding developments in our neighboring country?
The government has made a commitment to limiting its budget deficit to three percent of the country's annual economic output. Apparently, two thirds of the sum of money required to achieve this is to come from tax hikes, with one third set to come from spending cuts. These calculations are, however, based on a scenario that assumes moderate growth next year.
So you don't believe that these plans can be put into practice?
The main question facing France is how to make the industrial sector competitive again. This is, first and foremost, a question of labor market policy, and it is crucial that France can reach a consensus in this respect. I am not yet entirely sure how this sort of consensus can be achieved.
The French election campaign focused on exactly the opposite. More state support, more comfort and the rich should cough up.
It is important to bear in mind that France has better long-term prospects than we do. The demographic situation in Germany is much trickier. After all, the French population is around five years younger on average. But there is no advantage to having a younger population if these people are not as well integrated into working life. The main source of population growth is the fact that 20 percent of the French population are immigrants - but these immigrants are not nearly as well integrated as Germany's immigrants are. Here in Germany, foreigners are better integrated, and the level of education of first and second-generation immigrants is much higher. The French will have to make much more of an effort when it comes to integration. The country has huge potential in this respect, but it needs social consensus. And even then, this only solves the problem in the medium term and fails to answer the key question as to where growth will come from over the next few years.
Will there ultimately still be 17 euro countries?
I believe that there will actually be more than 17 euro countries at the end of the day.
And does this include today's 17?
Yes.
But Allianz could handle a Greek bankruptcy?
We have been very disciplined in our efforts to reduce our commitments here. We now have less than 100 million euros invested in Greek sovereign bonds.
The 30 billion euros that you have invested in Italian government bonds are another matter entirely.
30 billion is another matter entirely, but our starting position is also a different one. Incidentally: in the worst-case scenario, which I don't believe will materialize, Italy would leave the euro and bring back the lira. We would be able to cope with this because we would see the same effect on both the assets and liabilities side. The only horror scenario would be if everyone were to remain in the euro and opt for substantial debt cancellation. This would reduce the assets side by, perhaps, 50 percent, but the liabilities would remain the same.
Given the situation you have described, do you think that European sovereign bonds will actually be an interesting investment opportunity over the next few years?
If you go by what the government says, then these bonds are a preferred form of investment because they are risk-free. Our internal models tell a different story, especially after the debt cancellation in Greece. This is why everyone is pulling out of European government bonds and heading to the emerging markets, or moving into corporate bonds, infrastructure or real estate. We are trying to avoid government bonds in our new investments. I cannot actually invest in German governments bonds at all, because the returns they offer are lower than the rate of inflation. And if I look at other countries, I have the question of risk.
Isn't the situation in Greece an extremely rare one?
The haircut means fundamental changes to the way in which risks are assessed. There were a few voices in the past that warned: the price you pay for the uncertainty that there are no risk-free investments left will be very very high.
But you can find enough alternatives to government bonds when it comes to investing your billions?
It is certainly very difficult to make the change. But it serves as a warning to governments. When the Greek haircut was implemented, governments failed to grasp what it really means when major investors start gradually moving into other asset classes.
So how is the ECB supposed to ever fully retreat again if major investors withdraw from this market completely?
At Allianz, we explained the route that has to be taken last year. We proposed an insurance solution for government bonds provided by the ESM. The mechanism provides protection for the first chunk of any loss. If our policymakers want to avoid a haircut in the future, it can give private investors the security they need and say: we'll look after the first 30 percent. This would provide a considerable incentive. At some point, this is the path we'll have to take. At some point, the central banks will have bitten off more than they can chew.
So why has the proposal failed to convince policymakers?
This has to do with the necessary requirements, which leave a dent in the pride of the individual countries. But insurance components have, in fact, been included in the ESFS and the ESM.
Getting back to Allianz: where exactly are you investing your money these days? In corporate bonds?
This is an asset class that we have always invested in. But if everyone runs off in the one direction, we'll soon find ourselves with a bubble on our hands. We are not speculators. We have to cover our insurance liabilities in a way that makes them completely watertight. This is why our investments are extremely diverse. We are investing in the emerging markets, the US is looking attractive again and we're also making infrastructure investments.
In electricity grids, for example…
The German Federal Network Agency regulates the prices in this sector, which makes it a secure model. These investments are not as attractive for producers, because the returns are lower than their capital charges. But they are very attractive for us when it comes to investing our funds.
If you keep granting more loans, don't you risk looking increasingly like a shadow bank?
We have always granted loans, but we're not going to start replacing banks when it comes to lending. We work with customers that we know very, very well. The challenge facing us is to be the first to recognize the opportunity offered by a particular investment. We certainly have the skills required to do so, as we've shown with the purchase of Pimco. The situation is more of a problem for players that don't enjoy the same positioning on the investment side of things. When it comes to investments, they are only left with whatever the professional investors didn't want.
Will this be a matter of survival for some players?
It will certainly be more difficult.
So smaller insurers will be pushed off the market?
We are certainly talking to competitors about whether we could perform asset management activities on their behalf. IT is another area in which many companies can no longer afford the investments that are necessary. Regulation is also creating costs for small companies. It is become more difficult for smaller providers that are not specialized to keep up with the competition in the current environment.
What is the biggest challenge you face as CEO at present?
Investments and security. If a large number of investments are shifted from Europe to the US, for example, a market risk is replaced by an exchange rate risk.
After all the sovereign risk of the US also needs evaluating.
This is something we are absolutely clear on: when it comes to making changes, the US is capable of displaying an astonishing momentum. The issue of shale gas alone has brought them an enormous competitive advantage and this is providing a completely new form of stimulus.
Which types of investment do you favor in the US?
We are actively involved in the corporate bond market, but also in interesting infrastructure projects. If you put your credit card into a parking meter in Chicago, we are part of the process.
Would you purchase larger stakes in companies? For instance if Lower Saxony were to sell its stake in VW?
No. After all we've been there before. But at that time, accountancy rules were entirely different. If a long-term investor is called upon to report the market price every quarter, this creates a high degree of volatility. In the past we used to report the purchase price and everything else counted as hidden reserves, which was much more suited to our business model.
In your view, debt cancellation is unlikely and growth expectations are excessive. So what is the best solution? A higher rate of inflation?
That's not a scenario I envisage. I'm of the view that there is enormous potential. The move to alternative energy sources in Germany, for instance, is likely to become a major export success. We'd also do well to really look into the issue of recycling. And, in the long term, we mustn't forget to invest in education either. We do have the means to sort ourselves out in Europe, provided we tackle our structural problems and do not waste too much time arguing about phoney issues. If we talked about our long-term competitive edge with the same intensity as about the quota for women, we'd have a lot more capacity to solve this problem.
But a higher proportion of women in business is also something that can stimulate the economy. There's genuine potential that needs to be realized.
Don't get me wrong. I'm certainly not opposed to diversity issues. But we've grasped the issue and we're already well ahead of what's being debated in detail now. I don't know anyone in Germany who has a real problem with this issue. But this constant debate and the countless proposals are taking up unnecessary energy and we need to deploy too many resources to explain why statutory regulation is ill advised in this instance. I feel that a voluntary commitment would have a much greater impact than strict statutory regulation. At Allianz, we've certainly already come a long way.
Is there any one thing that the government and all citizens really need to do? To put it in Ludwig Erhard's terms, do we all need to tighten our belts?
This is definitely something we need to do as well. However, from a political point of view, this is currently the wrong approach. In the short term, we still need people to consume. We need to stimulate the domestic market in order to compensate for potential export losses. We need to find a balance. The private households in Germany are doing exactly the right thing. Their savings rate has always been high.
But all those who'd currently like to put by some money for their old age get such a small return because they have to pay the price for states being able to finance themselves at advantageous rates.
True, but lower interest rates are also good for the economy. You mustn't just look at this from only one perspective. And panicking is certainly no use. The way in which we've been dealing with the euro crisis - tackling everything piecemeal - hasn't really been all that bad. Taking small steps, one at a time, was politically the right thing to do, but long-term issues also need to be dealt with.
However, there are also those who urge caution, like the head of the Bundesbank, Jens Weidmann, his predecessor Axel Weber and the former chief economist of the ECB Jürgen Stark. Voices of doom and gloom that caution against the large volumes of liquidity and against purchasing government bonds.
Having cautious voices is a good thing. Otherwise we'd all quickly become euphoric. However, they are not saying what else could be done. Even those who think it might be better to allow banks to collapse just the once and to allow countries to go to the wall, in my view none of them have a proper solution.
So you don't think it's necessary for a few banks to withdraw from the competition just to recalibrate the system?
Indeed, I certainly do think that. It is unsatisfactory that those whose operations are sound are unable to enjoy the fruits of their efforts, because the competition receives government support. But I can understand why this is not a risk people are prepared to take in a fragile situation such as this. The Lehman trauma has not been forgotten. Destabilizing the financial system at a time of crisis would be irresponsible.
Stark would now say that the system is being stabilized by what you are doing. And yet that this will not regenerate trust. Trust could be regained if there were a corrective recession. The financial crisis could be managed if certain institutions were to make an exit, for instance like WestLB did in Germany.
But just remember how painful this process was and how many years it took. At any rate, WestLB wasn't all that close to the hearts of retail customers; it focused on a different business. I understand the reluctance in unsettling retail customers of banks and insurance companies at this point in time. However, this mustn't become a long-term solution. After all, politicians are keen to create situations where no one can be blackmailed and where competition is not distorted.
But if you look at Spain and the situation of the banks there, you get the impression that nothing much has changed. They are all being rescued.
Well, we've achieved an enormous amount. One mustn't underestimate the capital that banks have accumulated, the complexities that have been eliminated, all the regulatory efforts that have been made. However, we have not yet had a major breakthrough. The idea was to decrease the size of institutions altogether. If you look at the development in the US, then institutions have instead become larger and have therefore gained in systemic relevance. By now everyone and anyone would like to be on the list of systemically relevant institutions, because this amounts to a kind of government guarantee. And this means that we have achieved the opposite of what we set out to do.
Hence the debate about the separation of commercial and investment banking. Your colleague Nikolaus von Bomhard, the CEO of MunichRe, has come out in favor.
We do have some experience with the separation of banking components, because we've tried all that already with Dresdner Bank.
Then you must be quite glad that you were able to achieve this separation in good time, mustn't you? Feel free to be quite frank.
Under the umbrella of Commerzbank it is much easier to solve this issue.
What a diplomatic answer.
It is certainly extremely difficult to effect such a separation. An investment bank is dependent on its rating, which is linked to capital and refinancing. If you need to separate out the investment part, then this gets really rather expensive, because capital requirements rise disproportionately.
But isn't it also a good thing if certain transactions are simply no longer worthwhile because they cannot be cushioned by customer deposits?
It's not as simple as all that. You incur ongoing costs for very long-term transactions.
So you are not keen on separating commercial and investment banking because you would argue that this would finish off investment banks?
Yes, and it would also destabilize the rest of the bank. In the retail customer business hardly any money is being made in the current environment. So it would be extremely difficult to accumulate the necessary capital without returns from investment banking. If I were to design things from scratch today, I would do it differently. But since we are not starting from scratch, the situation is something else entirely.
So you think von Bomhard is wrong?
In theory he is right. But if this solution were possible in practice, we'd already have seen it at the one or the other bank.
So you wouldn't advise the SPD to make this part of its election campaign?
I am somewhat alarmed about the fact that politicians keep using the anger of the population at large for their own gain.
So what should politicians do instead?
They need to think about what kind of institutions we need to finance necessary growth. I can well remember offering our services as a local bank to major industrial companies. Time and again the response was: "Many thanks, but we are using a provider from the U.S. You lack their capital market expertise." This entire discussion seems to me to reflect the spirit of the age, at least to some extent.
In what way?
In Germany we have but one bank that is relevant from a capital market perspective: Deutsche Bank. Instead of pouncing on this one bank, we'd do well to think hard about which function this bank has for its German customers and whether we can - and want to - rely on other banks taking over this function in the future.
So we need a strong German bank with an investment banking arm.
In my view it's a disaster that we only have the one.
Entrepreneurs such as Jürgen Heraeus or Wolfgang Reitzle, the head of Linde, would say: "We are doing things right, but the mistakes that our providers, the banks, have made are costing us billions."
I don't think that we are talking about a mistake on the part of the banks first and foremost. It's more the mistake of cheap money, triggered by the mortgage crisis in the US. I myself was working in the US when mortgages were practically given away. Of course there were excesses on the banking side, but in essence a lot of factors were coming together. There was the desire to prop up the economy with cheap money. And this is a phenomenon we are experiencing yet again, now that we are fighting the crisis with money that is kept artificially cheap.
Are you of the view that linking the depot guarantees of German banks to those of other countries will make European banks safer?
We would first need a joint supervisory body, then the economic conditions would need to be balanced, and only then will it be possible to talk about joint security systems in a meaningful way. Ultimately, however, we are liable even now; we are already part of a fiscal union. We have given guarantees, and it is in our own interest that these guarantees will not be drawn on. We are already part of a community based on mutual solidarity.
But this doesn't mean that there are no alternatives. If Germans no longer want it, there will be no united Europe.
Only in theory, in practice we are already right in the middle of it. It's like driving through a tunnel. There are no emergency exits. Now, one might argue that this was a design fault, but this is the way it is.
Last but not least we also have to ask you how long you would like to remain at the helm of Allianz. After all, this is an issue that surfaces repeatedly.
My contract is in effect until the end of 2014. As usual, the Supervisory Board will deal with this issue half a year in advance. I cannot say any more at this stage.
