Strong support from the financial sectors for the activities of sovereign wealth funds (SWFs) has to be taken into consideration, but it should not be the only assessment criterion. It's quite normal that those responsible for these funds defend them; their responsibility is to successfully manage billions of dollars conferred to them (see this column yesterday). The positive welcome from western banks is also just as understandable. One European leader pointed out that “wherever the banking industry has run out of liquidity, the SWFs have come around to oil the cogs”. The European Commission affirmed that support from the SWFs should not be underestimated. According to Joaquin Almunia: “These funds have been the best investors around and most of the practices are clear and transparent” (while admitting that there has been a lack of transparency in some cases). Charlie McCreevy declared that a lot of firms would have been in a real fix without action by the SWFs. Another official, who wanted to remain anonymous, said that they should not deny the EU any unexpected godsend that can help growth.
This is all very well and good. The financial world has the right to speak out, it should be taken on board. Political and economic strategy, however, is not its role and the authorities also have to consider other factors.
1. Don't ignore the industrial and economic repercussions of the arrival of new owners and very powerful shareholders (access to patents and knowledge, influence on companies' strategic orientations etc). In a recent debate (EUROPE 9635) the idea of the golden share was even revived. I am quite aware that this idea is incompatible with the purity of economic liberalism and that the European Commission is continuing to attack it. Even last week, Charlie McCreevy warned Germany against Lower Saxony seeking to keep the “Volkswagen law” (EUROPE 9640). I would not have dared mention the words golden share if a Luxembourg banker hadn't beaten me to it. The weight of the SWFs, however, from this point of view, cannot be ignored.
2. Don't ignore what's being done elsewhere. The US has introduced public control or reinforced it on foreign investment in sectors it considers strategic (these go way beyond the military domain). The US market certainly remains a largely open one but there are instruments for intervening. In Russia, the list of areas where foreign investment is subject to restrictions and authorisation is quite impressive: 42 sectors, far and above the defence industry and natural resources (oil, gas, etc), including the mass media, telecommunication etc. Special authorisation, granted by a committee chaired by the prime minister (Vladimir Putin from now on) is required by any private foreign company seeking to acquire more than 50% of a Russian company. If the potential purchaser is a publicly owned company, the threshold becomes 25% or even 10 or 5% for oil and gas extraction or other basic products.
Peter Mandelson's doctrine for trade calls for a maximum opening up of the EU borders, followed by vigorous action to open up the markets of others. It is not a reasonable doctrine for investment where the principle of reciprocity has to apply from the outset.
3. SWF transparency is far from being agreed. Negotiations on a “code of conduct” have not even begun and the current situation is far from being homogenous. From the total clarity of the Norwegian funds we go to a total lack of transparency in the funds of Abu Dhabi, whose fund contributors are secret. The director of the Kuwait Investment Authority sharply attacked the European Commission's code of conduct (which is, notwithstanding, very cautious) declaring: “Let's spell things out as they stand. The countries receiving the capital that they need want to handcuff the sovereign wealth funds through regulation known as code of conduct, when what is needed is further deregulation”.
The “voluntary discipline” called for by the Commission isn't on tomorrow's menu. In the meantime, the EU and its member states have to provide themselves with the same instruments of control possessed by other big countries. The authorities that put the European economy and industry at the total disposal of third countries, which are often undemocratic, and which have accumulated and continue to accumulate billions and billions of dollars, to come to the rescue of those who transformed banking activity into a colossal instrument of speculation, will assume a historic responsibility. They would do well to think about this carefully. (F.R.)