The Spread of People's Capitalism

IN the postwar era, Germany emerged as the economic powerhouse of Europe. But the reputation owes more to the Bundesbank's steady monetary policies - which have kept inflation low and growth mostly on an upward course - than to the country's ability to lure capital with dynamic equity markets. Indeed, only about 6 percent of households own shares in publicly traded companies. That compares with more than 20 percent in the United States.

Germany's main financial center, Frankfurt on Main, stands head and shoulders below major world-market centers, namely New York, London, and Tokyo. The Frankfurt exchange is Germany's largest. But it competes for business with seven borses across the country. Compared with other industrialized nations, the number of German firms quoted on the exchanges is low, at only 670. Britain, for example, has 2,000.

The reluctance of Germans to invest in stocks, analysts say, is primarily due to their aversion to risk. A powerful incentive, namely no capital-gains tax, would favor stock ownership. Yet German investors tend to prefer government bonds and interest-bearing accounts, which offer steady, but less spectacular returns. This, despite the fact that some estimates show stocks have significantly outperformed both bonds and interest accounts in the last decade.

Many families who own businesses don't want to go public, as this would mean relinquishing a lot of control. Instead of turning to markets for capital, many businesses depend on banks. They, in turn, dominate equity markets. In fact, financial houses directly own up to 7.5 percent of all circulating shares, according to some estimates. And counting proxy rights granted by customers, banks may control more than 50 percent of German shares.

But several factors are forcing the equity system to become more individual investor-friendly. Foremost is growing global competition for capital. If Germany doesn't introduce more flexibility, Frankfurt's attractiveness to investors will slip, some analysts worry. Also, the European Union's decision to situate the European Monetary Institute - the forerunner of an EU central bank - in Frankfurt pressures the German stock market to raise its profile.

Demographics come into play as well. The aging German population threatens to shrink the tax base that supports the generous state-run pension system. That's prompting some financial managers to promote individual stock plans as a nonstate-dependent alternative.

Already, the market is responding to some pressures. Stock exchanges have taken steps to combine and coordinate operations. And the Frankfurt exchange acted late last year to bolster its domestic standing by slashing fees.

The government enacted legislation last Aug. 1 to promote equity ownership. The laws ban insider trading, make reporting of corporate earnings more transparent, and pave the way for introducing money-market funds, for example.