Why is the German government scampering to get a new law on the statute-books to defend corporate Germany from Sovereign Wealth Funds? There has hardly been any bad news on SWFs so far, and much good news. Think of Kuwait’s engagement in Daimler or Iran’s in ThyssenKrupp since the 70s, or the equity support to stricken banking majors (Morgan Stanley, Merrill Lynch, UBS and Citigroup) with public money from China, Singapore and the Gulf states.
For oil states in particular it is very sensible to invest part of their riches for future generations, and in public funds rather than in the private coffers of those in power. If these riches are then linked to the wellbeing of the western world through long-term investments, it not only creates jobs over here. It also makes a “clash of civilizations” less likely.
The main concern of the German government is the runaway growth of foreign SWFs, whose total volume is currently around 2 trillion euro and is set to increase manifold in the coming years. There is no sign of lower oil prices and China is continuing its weak renminbi policy, hoarding foreign currency. But are SWFs suddenly becoming deadly dangerous merely because they are growing so fast?
On the contrary, we would expect that, precisely because of their growth prospects, even Chinese and Russian SWFs will remain tame for the time being. The more they wish to
invest abroad in future, the more they have a stake in behaving themselves so that they will still be welcome tomorrow.
But what must SWFs do in order to avoid making themselves unpopular? It seems that the German government is not quite sure itself what it is seeking to prevent. The planned amendment to the foreign economy bill is vague. In future any foreign investment exceeding a 25% stake may be prevented or be voided retrospectively if ‘public security and order’ are under threat.
Although the provisions are politically grounded in concerns about SWFs, they are to apply to all foreign investors, public or private, from outside or inside the EU. Even if German civil servants, legal system and the European Court of Justice managed to implement such an imprecise and at the same time all-encompassing law reasonably sensibly, and to focus its application on SWFs and state-owned enterprises, three risks would still lurk.
First, the law could be misused to create a protective wall around national champions. But internationalisation of business has proceeded so fast that economic policy initiatives based on national champions, as France has often illustrated, are showing severe limitations.
Second, the planned German law may end up diverting SWF capital elsewhere, away from Germany to other prosperous countries. In order to head this off, a European approach would be more sensible than a national one. It would be even worse if SWF resources were to be diverted from Germany to poorer countries, for whom SWFs are more likely to constitute a real danger. China is already pursuing an aggressive Africa policy. Do we wish to drive Africa even more into the arms of China?
Third, the planned law is likely to make it more difficult for emerging economies to open up to German investment. In countries with less developed legal systems a law to protect ‘public order and security’ can easily be bent to accommodate protectionist intent. One should not provide this pretext for protectionism. In principle, capital should mainly be flowing from ageing Germany to poorer countries and not vice versa.
These arguments go against the present legislative plans of the German government. Instead, Germany should calmly develop a more precise defence strategy against undesirable behaviour on the part of SWFs.
The first step towards better regulation should be transparency rules, on the model of German Finance Minister Peer Steinbrück’s remarkable transparency initiative for hedge funds. Similarly, an approach which is coordinated at international and European level makes sense for SWFs in order to avoid countries being played off one against another.
The IMF is due shortly to table initial recommendations on transparency and governance of SWFs. In parallel, the OECD is working on a code of conduct for dealing with foreign public investors. At European level a first report from the Commission is expected for the 2008 EU spring summit. In parallel, Germany could prepare a bill specifically addressing opaque foreign state funds and companies, in case European efforts here do not bear fruit.
In addition, any sector-specific risks posed by SWFs should be systematically sounded out. In many areas it may emerge that adequate legal provision already exists. But in particular sectors it may be advisable to make the rules tougher. In this connection reference is frequently made, and quite rightly so, to the media sector. If it really comes to the crunch, we need the media to defend the interests of our democracies, rather than the interests of foreign funds.
Jakob von Weizsäcker is a Research Fellow at Bruegel , a Brussels-based think tank focusing on economic policy in Europe. Previously he worked for the World Bank in Washington (2002-2005), the Federal Economic Ministry in Berlin (2001-2002), and held research positions at the center for economic studies in Munich and CIRED in Paris.
Nicolas Véron is a research fellow and Chief Development Officer at Bruegel. An expert on accounting, financial regulation and markets, Véron previously worked as chief financial officer of MultiMania / Lycos France, and was corporate advisor to France’s Labour Minister between 1997 and 2000.
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