EU Debates Response To Power Of Sovereign Funds

European policy makers are beginning to wrestle with how to guard against unwanted attempts by foreign state-run investors to buy stakes in European companies without inviting accusations of protectionism.

Sovereign wealth funds have been active buyers of stakes in European companies for many years, but on a relatively small scale. But with their coffers boosted by oil revenues and large trade surpluses, these funds are now estimated to control between $2 trillion and $2.5 trillion, and their behavior is coming under closer scrutiny. So far, European governments have yet to agree on how to respond. They have identified three options: do nothing and leave it to the market; make case-by-case decisions on a national basis using "golden shares" in strategically important companies; or establish a central, European Union body that would review such takeovers based on an agreed set of guidelines. Each government is likely to voice its own preferences during the next several regular meetings of E.U. economic and finance minister in Brussels. The U.K. government has long been an advocate of relatively free flows of investment across national boundaries and avoided interfering in takeovers. Institutions owned by foreign governments have this month taken or attempted to take large stakes in one of the U.K.'s largest banks - Barclays Bank - and one of its largest retailers - Sainsburys. U.K. Chancellor of the Exchequer Alistair Darling Wednesday reaffirmed that position in his first speech since starting the job late last month. "I think it would be wrong for any government to say in respect of any investment proposal ..... 'you can't do this'," he said. "What I do say is that for countries across the world who want to take advantage of our open markets, they have to realize in the long-term this is not sustainable unless this is a two-way process," Darling said. Darling indicated his government won't support efforts to negotiate common rules that would govern investment flows in the same way that the World Trade Organization regulates trade. "I think if you did that you'd get very quickly to where we've gotten to with the world trade talks which are stalled at the moment," he said.

'Golden Shares' To Protect Against Unwanted Takeovers

Speaking Tuesday, Italian Minister for European Affairs Emma Bonino showed little enthusiasm for new measures to regulate foreign investment, saying that the idea that governments should hold 'golden shares' in strategic companies that would allow them to veto takeovers was "not useful - and also very difficult to implement." She added that she was indifferent to the national origin of a buyer for troubled state-owned airline Alitalia, saying anyone is "welcome to buy it if they manage to make it work." The idea of using "golden shares" to protect against unwanted takeovers of companies deemed strategically important was proposed Sunday by European Commissioner for Trade Peter Mandelson. Among other proponents for action, German Chancellor Angela Merkel has proposed that the E.U. establish an equivalent to the U.S.'s interagency Committee on Foreign Investment, which reviews the national-security aspects of overseas deals. And French President Nicolas Sarkozy has made it clear that the protection of a broadly defined national interest, rather than a commitment to free competition, will drive his government's attitudes to a range of international economic policy issues, including takeovers. Central bankers, who are not involved in domestic politics, have become increasingly concerned about feeding opposition to globalization. "The switch of reserve rich countries from lenders to owners of financial or real assets is also likely to lead to political tensions and pressures for protectionism," Bank of England Deputy Governor John Gieve said Tuesday. European Central Bank President Jean-Claude Trichet said in an interview published Wednesday in Germany's Die Zeit, said sovereign wealth funds "have to be studied and carefully observed." Both the International Monetary Fund and the Organization for Economic Cooperation and Development have been asked by their member states to review the operations of sovereign wealth funds. The IMF report may come as early as October.