Brussels, 26/02/2008 (Agence Europe) - On Wednesday 27 February, the European Commission will unveil its proposal for a common approach on principles to govern the activities of Sovereign Wealth Funds (SWFs) in Europe (see EUROPE 9609). These proposals, part of the worldwide reflection process under the aegis of the IMF and OECD, will be put to the European Spring Council (13-14 March) for debate. EUROPE has obtained a copy of the Commission proposal, the main elements of which are as follows:
While SWFs have existed since the 1950s, they have seen rapid development since 2000 and have become a source of investment and market liquidity “of systemic importance”. Today, more than 30, for the most part emerging, countries, have SWFs, the largest being those of the United Arab Emirates, Norway, Russia, Saudi Arabia, Kuwait, China and Singapore. The aim is to bring a profit from budget surpluses from gas or oil revenues, trade surpluses or revenue from raw materials. The rise of these state investment funds, estimated today to be worth nearly $3,000 billion, and likely to rise to $12,000 billion by 2015, is the cause of great concern in developed countries, since, “as state owned investment vehicles, some can raise questions about the risk that those investments may interfere with the normal functioning of market economies,” the Commission says.
Over the last six months, SWFs have helped the world economy. They have, above all, helped stabilise the international financial system by providing the liquidity which was sorely needed by Western financial bodies as a result of the credit crunch. However, while they talk about general beneficial objectives (stabilisation, savings that will benefit future generations, development of socio-economic projects, retirement funds), the Commission says there is a certain “opacity” over their real intentions. SWFs may not only be “driven by normal commercial interests in expansion to new products and markets”; their investment could target control of strategic sectors (such as energy) in recipient countries, obtain technology and expertise useful to their own industries or to maximise rapid financial returns.
However, for the Commission, which wants above all to build defences against funds which, when there is nothing strategic at stake, help the European economy, it is possible to prevent these threats without recourse to the risky defence instruments spoken of in some European capitals, such as setting up a European mechanism to consider proposed SWF intervention or the use of golden shares. The Commission is convinced that the EU already has the tools to protect its legitimate interests if there was need, SWFs being “subject to the same rules and controls as any other form of investment, either domestic or foreign” under the principles of free movement of capital. In addition, “the free movement of capital is not absolute”, since the EU can, if necessary, adopt by qualified majority ad hoc measures and introduce, by a unanimous decision, measures that restrict direct investment. The Commission, then, would prefer a common European approach which would avoid any distortion of the internal market as a result of national reactions incompatible with the free movement of capital. “The right approach is to promote a cooperative effort between recipient countries and SWFs and their sponsor countries to establish a set of principles ensuring the transparency, predictability and accountability of SWFs investments,” it says.
The Common EU approach, which will be a contribution to the code of conduct drawn up by the IMF in cooperation with SWFs, and rules of good management practice within the OECD, will be based on the following principles: - commitment to an open environment, “any protectionist move … may inspire third countries to follow suit and trigger a negative spiral of protectionism”; at the same time the EU has to gain reciprocal opening of SWF owner countries for its investment; - support for multilateral work in the IMF and OECD, along with SWF owner countries; - use of existing instruments in the EU and member states; - respect of EC Treaty obligations and international commitments; - proportionality and transparency. The European contribution to a global code of conduct to govern SWF activity will be based on: 1) principles of good governance, including clear allocation and separation of responsibilities in the internal governance of the SWF, development of a clear SWF investment policy; public disclosure of the general principles governing an SWF's relationship with governmental authority and the issue of risk management policies; 2) principles of transparency including annual disclosure of investment position and asset allocation, exercise of ownership rights, disclosure of the use of leverage and of the currency composition; size and source of an entity's resources, disclosure of the home country regulation and oversight governing the SWF. The Commission believes that this common approach will help to bring an international agreement on a raft of guidelines to govern SWF transactions before the end of 2008. (E.H.)