It was bound to happen. And it should surprise no one that the French were the ones to initiate it.
French President Nicolas Sarkozy last month proposed that European countries establish sovereign wealth funds to purchase stakes in key companies in the region to foil overseas “predators” seeking control at knockdown prices.
“I wouldn’t want to see European citizens wake up in a few months and discover that a European company is owned by non-European investors who bought at a rock-bottom price,” Sarkozy told the European parliament on 21 October.
The good news is that Germany, Europe’s biggest economy, shot down the idea. Still, that didn’t deter the French head of state from going it alone.
“I will not be the French president who wakes up in six months’ time to see that French industrial groups have passed into other hands,” Sarkozy told French business leaders in Argonay in the French Alps two days later. Europe “mustn’t be naive, mustn’t leave its companies at the mercy of all predators, mustn’t be the only one not to defend its interests, not to protect its citizens”.
Protectionist: A 30 October photo of French President Nicolas Sarkozy. He has proposed that European countries set up wealth funds to purchase stakes in key firms in the region to foil overseas ‘predators’. Philippe Wojazer / Reuters
He didn’t say how big France’s “public intervention fund” will be. French television said it would total €100 billion (Rs6.08 trillion). That’s in addition to €10.5 billion already earmarked for boosting the capital of six biggest banks in France.
It’s a shame. Sarkozy’s proposals smack of protectionism at a time when the global economy can least afford it. Rather than using scare tactics to pursue narrow nationalistic agendas, the leader of a major nation and the acting head of the world’s biggest economic bloc should, instead, be preaching the evils of restricting the free movement of capital, limiting investment opportunities and imposing trade barriers.
Never mind that creating a sovereign fund implies breaching European Union rules governing the size of national budget deficits. Or that it may violate regulations prohibiting government aid to companies. Protectionism also invites retaliation, and Sarkozy’s proposal risks convincing true sovereign funds, a source of capital for ailing banks, that Europe is a region to avoid.
No matter how tempting it may be to protect so-called corporate national champions, increased state involvement in the economy—other than as an impartial referee or regulator—should be treated with care.
Bailouts are different
Bailing out banks is one thing, rescuing private companies from the clutches of foreign investors is another. Keeping a French company French or a Spanish company Spanish isn’t the same thing as bailing out banks. A dysfunctional banking system can drag down the global economy, whereas the world can live with fewer auto makers and airlines.
The bad news is that European Commission president Jose Manuel Barroso called Sarkozy’s suggestion “extremely interesting”.
Meanwhile, Italy is reportedly considering imposing limits on sovereign wealth funds, after Prime Minister Silvio Berlusconi accused foreign investors of taking advantage of low equity prices to make hostile bids for Italian companies.
It is also unsettling that Germans may be closer to Sarkozy’s thinking than their own government’s.
A majority of Germans favour the state buying stakes in strategic industries—including utilities, railroads and banks—to prevent foreign acquisitions, according to a poll last week in Stern magazine.
No political bias
What’s more, Sarkozy turns the notion of a sovereign fund on its head. These funds represent the excess reserves of countries with large current account surpluses and/or major oil exporters.
They are overwhelmingly invested outside their domestic markets and so far have been managed passively, without political bias, to achieve enhanced returns.
“What the oil producers do, what the Chinese do, what the Russians do, there is no reason why France should not do,” Sarkozy said in Argonay. Alluding to Alstom SA, an engineering firm France rescued in 2004 when he was finance minister, Sarkozy also held out the possibility of capital gains when the stakes acquired in French companies are later sold to private investors. France paid €720 million for 21% of Alstom—which makes trains and power plants—and sold it in 2006, booking a €1.26 billion gain.
Three problems: One, France has only $43 billion (Rs2.06 trillion) of foreign exchange reserves, compared with China’s $1.9 trillion and Russia’s $569 billion.
Two, France also has a current account deficit equal to 1.6% of gross domestic product (GDP) and hasn’t posted an annual surplus since 2003. By contrast, China sports a surplus of 7.2% of GDP, Russia 10.9%.
Three, while trumpeting the Alstom success story, Sarkozy neglects to mention the mid-1990s bailout of Credit Lyonnais SA, a fiasco that cost French taxpayers €14.7 billion.
All this makes you wonder how a country with France’s penchant for state capitalism ever came up with the term “laissez faire”.
Respond to this column at email@example.com