essays State, money and rules: An EU policy for sovereign investments By Katinka Barysch, Simon Tilford and Philip Whyte ★ Lower oil prices and the unwinding of global imbalances will slow the growth of sovereign wealth funds (SWFs). Nevertheless, these state-controlled vehicles will remain major players, with trillions of dollars to invest in companies and markets in Europe and elsewhere. ★ European businesses and banks have generally welcomed the prospect of long-term investment from SWFs. But politicians and the media have expressed concerns about their close links to governments that do not necessarily believe in liberal democracy and open markets. ★ The European Union has been right not to rush into new legislation to control SWF investments. Instead it has supported multilateral efforts under the auspices of the IMF and the OECD. These initiatives will set standards of accountability and transparency for SWFs and aim to make the investment environment in rich countries more predictable. ★ The risk that individual EU countries will erect new barriers against outside investment remains, however. The EU should resist any new moves towards protectionism. These undermine the functioning of the single market, deprive European companies of fresh capital and damage the credibility of the EU in the international arena.
Introduction: A muddled debate In October 2008, Nicolas Sarkozy, president of France and holder of the EU rotating chairmanship, suggested that European countries should set up their own ‘sovereign wealth funds’ (SWFs) to secure stakes in strategic local companies and prevent them from falling into foreign hands. Most of his EU colleagues were not enthusiastic about the idea. But his proposal refocused European minds on an issue that had dropped off the agenda during the worst days of the financial crisis. Between early 2007 (when the term SWF first caught on) and the summer of 2008 (when the global financial crisis worsened dramatically), Europe had a lively debate about how to react to these state-owned investment vehicles mainly found in oil producing countries and fast-growing Asian economies. Although pre-crisis predictions of SWF growth have probably been exaggerated, these funds still hold trillions of dollars. Many of them are looking to diversify their investments away from their traditional focus on the US. Will Europe welcome them as saviours in an environment where capital is scarce? Or will it seek to fend them off through existing rules or new and inherently protectionist measures? European countries are bound by EU rules to allow free movement of capital. Although these rules (and many national laws) allow governments to restrict this freedom, most European politicians have pledged to keep their economies open to all investors, sovereign or otherwise. Efforts to construct some kind of international framework for SWF investments have been remarkably swift. Although EU countries see the SWF ‘threat’ very differently, they quickly managed to agree on a number of principles to guide their policy reaction. Crucially, they decided against new rules at the EU level. Instead, they pledged to support the
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