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German Takeover of New York Stock Exchange Is Bad News for the U.S. Economy

Prof. Peter Morici - 2/11/2011

The acquisition by merger of the New York Stock Exchange by Deutsche Borse is bad news for the U.S. economy. However, short of antitrust, the U.S. government is in no position to stop it, and antitrust concerns can be resolved without blocking the merger.

Efficiencies that derive from electronic trading technologies and 24/7 global trading in equities and derivatives make mergers and consolidation of leading stock exchanges across the globe inevitable. Over past three decades, the United States has gone to great lengths to encourage other countries adopt more open investment policies, Germany is generally open to foreign investment, and the United States would champion the deal if the NYSE were acquiring DB.

The merger is 60 – 40 in favor of DB, which means that it will be the dominant party, even if seats on the board of directors are evenly split between NYSE and DB. Over time, this could have profound negative consequences.

First, is the obvious prestige impact. NYSE is the symbol of American capitalism, and essentially, it will be foreign owned. This will further confirm in the minds of world political and financial leaders that gapping U.S. budget and trade deficits, and all the foreign borrowing and high unemployment that results, are significant attributes of an economic super power in decline.

The United Kingdom had a similar experience with trade deficits and borrowing in the 1950s and 1960s, and it went from the first tier of economic powers to the second, ultimately replaced by Germany and Japan. The United States will face growing difficulties in trying to influence global financial rules and institutions—simply the Germans and Chinese will take the Americans less seriously.

Second, the takeover will erode New York’s (hence the U.S.) primal position in global equities trading. Initially, electronic trading in New Jersey and backroom activities in New York and New Jersey may stay in place, but with technology evolving as it has, those activities can be moved anywhere. Pressure will mount to move to Europe or cheaper locations in Asia.

Overtime the distinction between NYSE and other exchanges will blur, as trading floors become ever less relevant and direct trading through combined electronic exchanges dominants. Whoever owns the underlying infrastructure—the computers and systems—will be the "location" of equities trading. In relative terms, more and more U.S. equities will be traded in Europe and other locations, and fewer foreign equities will be traded in the United States.

Americans have no one to blame but themselves. Living beyond their means, they have borrowed and continue to borrow excessively from foreigners to finance a government that spends too much and badly, and personal consumption that leaves too little margin for saving out of income.

Now all those dollars that went abroad as debt securities are coming back to buy real assets. It’s like selling the dinning room furniture, chair by chair, to eat caviar every night. It works for a while but then you have to sell the house brick by brick and you end up a tenant in you own home or dispossessed.