European debt worries have muted investment bankers' prospects for big capital markets and merger deals so far this year, but will ultimately provide a basis for consolidation in Europe and around the world, said Martin Reitz, head of investment banking for Germany at private bank Rothschild.

"We saw a very positive development this year in investment banking before the situation in Greece worsened. The crisis had a dampening effect," said Reitz, who is still confident about Rothschild's own prospects for the business. "The current crisis is also a chance because the sense of urgency is there."

Reitz believes slow growth prospects for Europe will result in mergers and acquisitions activity in future years as companies are forced to become more efficient. Banks, service providers and industrial companies are all sectors ripe for consolidation in Germany, he said.

Cross-border M&A deals will also pick up in coming years as developing economies gain a more important role in the global economy.

"Pressure on European companies to become active in developing countries will continue to increase. At the same time, we can expect an impressive uptick in the number of companies from developing countries who take stakes in European firms with strong technological or market positions," he said.

Reitz was tapped from UBS by Rothschild last year as family-owned Rothschild sought to strengthen its investment banking ranks in Germany with several key hires. Reitz made his mark at UBS AG (UBS) as co-head of investment banking in Germany.

In recent years in Germany, Rothschild has won high profile mandates for blue-chip deals like Volkswagen AG's (VOW.XE) merger with Porsche Automobile Holding SE (PAH3.XE) and CVC Capital Partner's stake buy in Evonik Industries AG. Rothschild consistently ranks among the top investment banks competing for German M&A advisory deals alongside the likes of Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DB) and JP Morgan (JPM), according to the industry rankings.

In Germany's sprawling banking market, there is particular room for consolidation and restructuring in the state-controlled Landesbank sector, Reitz said.

The Landesbanken "have to get their business models back on track. It will take some time before they achieve satisfying returns on equity."

Germany's Landesbanken were particularly hit in Germany by the financial crisis due to their dependence on exotic securities and other high-risk investments as earnings sources. Critics have for years urged them to consolidate.

"There are definitely long-term options for the Landesbanken that can be profitable," although they are unlikely to earn as much as private banks as long as regulation restricts the kinds of business they can do, Reitz said.

Eyeing the broader economic environment, Reitz called for a balance between savings and growth.

"The high indebtedness of many European countries can only be resolved by putting massive savings measures into place. The savings must occur in an intelligent way to preserve the countries' futures," he said.

-By William Launder and Madeleine Nissen; Dow Jones Newswires; +49 69 29 725 515; william.launder@dowjones.com
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