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The perils of a stakeholder economy taken too far

By Joe Zammit-Lucia


“The last place we expected something like this to happen was Germany,” said Peter Altmaier, the German economy minister in the wake of the Wirecard fiasco. But is it really?


Many are now fully familiar with the Wirecard debacle. For those who are not, here is a potted history.


Since 2008, analysts and journalists have been raising questions about Wirecard – a German digital payments company. In 2015, the Financial Times began publishing a series called 'House of Wirecard' raising questions about the company's financial affairs.


In 2016, the Zatarra report, co-authored by two professional investors and short sellers, Matt Earl and Fraser Perring, and published anonymously, raised serious questions about deficiencies in money laundering controls and oversight at Wirecard. The company's stock price fell by a fifth.

Rather than investigating the claims thoroughly, BaFin, Germany's financial regulator, embarked on an investigation of the journalists and authors involved. In 2018, Munich prosecutors issued a penalty order seeking to fine Fraser Perring for suspected market manipulation. None of the German press sought to investigate Wirecard any further. Instead, the German press printed unsourced allegations leaked by regulators naming one of the journalists under investigation and making unsubstantiated claims that British reporters had been offered bribes to publish negative reports about Wirecard.

Also in 2018, an internal whistleblower alleged fraudulent activities and Wirecard's legal team in its Singapore headquarters mounted a legal investigation. In October that year, that internal investigation was quashed. A Financial Times article about the investigation was published in January 2019. Wirecard immediately declared it as 'false' and BaFin initiated an investigation of the FT for possible market manipulation.

In June 2020 Wirecard collapsed. A whopping €1.9 billion of cash on its balance sheet could not be traced and likely never existed. EY, the auditors, had failed to look at original bank records to verify the existence of that cash. On June 22nd, Wirecard admitted the potential scale of a multi-year accounting fraud – for the first time.


How could all this happen – and why in Germany? Why, in spite of multiple warnings and many investigations by the FT, investors and foreign governments, did the German establishment close ranks – and close its eyes – to a multi-year fraud?


Wirecard was supposed to be the one 'modern economy' success story in Germany - a country that has been slow to move from traditional, 20th century manufacturing prowess to a 21st century information-driven economy. Wirecard moved rapidly into the DAX 30 index making it an essential investment for institutional investors. It was hailed as Europe's greatest fintech. As a result, it was seen as a national champion seemingly to be defended at all costs.


Germany has rightly been proud of its multi-stakeholder focused economy and collaborative atmosphere between business, government, trade-unions and workers. It has, with some justification, been suspicious of the more rough-and-tumble, confrontational Anglo-Saxon approach with its focus on maximizing profits and shareholder returns at almost any social cost.

Viewed through this lens, Wirecard became a symbol of national pride. Criticism was interpreted as the undermining of a German icon by foreign journalists and Anglo-Saxon financial speculators only intent on making a fast buck through short selling. That such a framing became the prevalent groupthink is not surprising. That it went on for so long in the face of mounting revelations is.


What this (and also the recent VW diesel emissions scandal) shows is that stakeholder capitalism, which is to be encouraged, can all too easily slip into corporatism – a relationship between all parties that becomes rather too cosy and blind to obvious deceit. Where the essential checks and balances disappear because 'we're all in it together.'


Drawing the line is never easy. The rot percolates into the system over a period of decades. As they attend the same conferences and the same dinner parties as top businesspeople; as they engage in a revolving door of private-public job appointments, politicians and their appointed regulators risk sliding unconsciously into a situation where they stop doing their job. Where a healthy culture of collaboration slides unnoticed into a shady culture of collusion. It all points to how delicate, and difficult, is the endless dance between business and politics.


For Germany, the Wirecard scandal and the obvious failure of the German financial oversight system places a big question mark over the viability of Frankfurt taking over from London as the EU's main financial centre after the Brexit transition period. Even more doubtful is Frankfurt's ability to evolve, eventually, into a Tier 1 financial centre. Such a journey is not simply a matter of grand political assertions, but of the practicality of building a large, well-functioning ecosystem with the necessary mix of skills and capabilities with reliable and effective regulatory oversight of a financial services industry that is masterful at running much faster than any regulator. In London, these capabilities have been built up over multiple decades. While they are still, and will likely remain, imperfect, they are probably among the best in class.


As the Brexit transition period comes to an end, and the EU drags its feet at providing equivalence certification for UK financial services, the Wirecard fiasco should encourage some careful thinking. It would be a shame if the EU were to fall prey to the same closed and self-focused thinking and cut itself off from the ecosystem of capabilities and expertise of the only Tier 1 financial centre in Europe and the largest incubator of the emerging FinTech industry. If that were to happen, expect many more EU-based Wirecards to emerge over the coming years until one or other city painstakingly builds the large set of competencies, and the scale, needed to create a flourishing and well-regulated financial hub.

Versions of this article have appeared in CityAM and the Times of Malta

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