What Germany should learn from Sweden

Germany sees a growing number of millionaires as a problem. Sweden sees it as a sign that more people should be investing.

Dear Reader,

When the Boston Consulting Group released its annual Global Wealth Report last week, it set off a familiar debate in Germany about taxing the rich.

Across the political spectrum, newspapers focused on a single figure: there are now more than 5,000 “super rich” people living in Germany, defined as those with financial assets worth more than $100 million, up from 4,000 a year ago.

The German left seized upon the report as proof of the avarice of the upper classes. For Die Linke, which wants to abolish billionaires, it showed that the wealthy elite are “a danger to democracy”. Left-wing daily taz grumbled that the super rich were “siphoning off wealth from society” and deserved “our deep contempt”.

There may be good reasons for levying a wealth tax. But these displays of resentment and cheap moralising did not provide any.

Curious whether a similar discussion was taking place elsewhere, I looked to Sweden. If Swedes are currently in a fury about the social inequalities created by capitalism, it has been remarkably well hidden from Google News.

The reason may be that Sweden has spent decades studying how the rich get where they are — and ensures that ordinary citizens benefit from that process.

An obvious fact is missing from Germany’s debate about its motor-yacht class. An extra one thousand Germans did not make it onto the list of the super rich by pilfering the pockets of the less fortunate. They had the good fortune of benefiting from an excellent year for the stock market.

And here is the difference to Sweden. While German lefties moan that only the wealthy are able to benefit from stock market returns, sensible leftists in Sweden have made sure that everyone reaps the rewards.

When stock markets rise, Swedes get richer. That is because virtually all working Swedes have exposure to the stock market through their pension system, thanks to reforms introduced by the Social Democrats in the 1990s. Instead of directing all pension contributions straight to current retirees, the Swedish state invests 2.5 per cent of workers’ salaries in financial markets.

Sweden also had the foresight to build up large reserve funds during the decades when the baby boom generation was still in work. These funds invested pension surpluses in global capital markets and now help finance the costs of an ageing society.

Today, Sweden’s public pension funds manage assets worth roughly half a trillion euros.

Put simply, Sweden is a financially literate country that understands that wealth is created through investment and innovation. Its pension system ensures that ordinary citizens participate in that process rather than merely observing it from the sidelines.

That’s not the only benefit. Stockholm’s faith in capital markets creates a virtuous circle. High levels of equity ownership make it easier for Swedish companies to raise money. Between 2016 and 2023, 508 Swedish firms were floated on the stock market — compared to just 73 in Germany. Digital giants such as Spotify and Klarna testify to the success of an economy that bucks the trend of stagnation and decline that characterises life on the southern shores of the Baltic.

There is no material reason preventing Germany from copying Sweden’s success. Like its northern neighbour, Germany is a high-savings society. The difference lies in mindset.

Rather than investing, Germans prefer to park their cash in bank deposits. Roughly 40 per cent of German household savings are held in cash and deposits, compared with around 20 per cent in Sweden.

Germans believe this is a low-risk way of holding their money. That could not be further from the truth. Germany’s Council of Economic Experts has calculated that, over a forty-year period, money invested in diversified stock portfolios would typically grow to around five times the value of money held in bank deposits.

In other words, Germans are missing out on a fortune!

Not only that, just as Swedish investments create a virtuous circle for the local economy, safety-first Germans are stifling innovation. As the OECD has observed, Germans’ propensity to park their cash “deprives capital markets of a large funding base”. Companies instead have to rely on bank loans — or go abroad.

Which brings us to the trillion-euro question: why are Germans so suspicious of people who make money on the stock market?

Some observers trace the distrust back to the Wall Street Crash of 1929, which unleashed the Great Depression and helped create the conditions for the rise of the Nazis.

But according to Berkeley economist Ulrike Malmendier, the roots are much more recent. She argues that many Germans remain psychologically scarred by the rise and fall of Deutsche Telekom’s famous T-Aktie.

In the 1990s, the public was encouraged to buy shares in the newly privatised telecommunications company on the promise that they would provide a guaranteed supplement to retirement savings. More than two million Germans bought in.

Initially, the strategy appeared to work. The share price rose from €14 to more than €100 during the technology boom.

Then came the crash.

By 2001, Deutsche Telekom shares had fallen back to around €10, leaving many small investors nursing heavy losses. It was a crash course in the importance of diversifying your investments. The experience left lasting scars, Malmendier argued in a recent statement to the Bundestag.

At the height of the enthusiasm surrounding the T-Aktie, around 12 million Germans owned shares. When the bubble burst, millions retreated into the perceived safety of savings accounts.

The financial crisis of 2008 appeared to confirm the casino-like nature of the stock market. Ironically, however, the era of ultra-low interest rates that followed fuelled one of the longest bull markets in modern history while leaving savers earning almost nothing on their deposits.

Photo by Mohamed Masaau on Unsplash

Now, though, attitudes are beginning to change. Young Germans are realising that savings accounts are a sure path to a post-retirement life of Altersarmut.

This year, thanks to surging interest from the young, the number of Germans owning shares surpassed 14 million for the first time. Over the past decade, the number of shareholders under 40 has risen from fewer than two million to roughly five million.

Unlike the Telekom generation, younger investors have embraced the diversified investment strategies offered by ETFs. Rather than betting on individual companies, they invest in broad indices, spreading risk across hundreds or even thousands of firms. Meanwhile, low-cost online brokers and monthly savings plans have made investing cheaper and less vulnerable to crashes.

Help is also on the way from the government.

You may have missed it amid the endless infighting within Friedrich Merz’s coalition. But his government has agreed upon a new pension scheme that bears more than a passing resemblance to the Swedish approach.

Starting next year, it will offer stock-based pension products and provide state support worth up to €540 a year for eligible savers. The new system has been praised for limiting annual fees to around one per cent of portfolio value, a stark improvement on the costly and unpopular Riester-Rente that it will replace.

Its biggest weakness, however, is that participation remains voluntary. If the reform is to succeed, Germans from across society — particularly those most vulnerable to old-age poverty — will need to embrace it.

And that brings us back to the debate about the super rich.

Germany’s primary concern should not be cutting the shareholdings of the rich. It should be increasing those of everyone else — particularly the poor.

Politicians who feed the suspicion that there is something unethical about making money on the stock market are ensuring one thing: that the poor remain poor.

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