06 March 2008

MEP Wolf Klinz: Risks and opportunities - examining sovereign wealth funds

“The rise of sovereign wealth funds should not be met by protectionism but should be seen as proof of the good functioning of the free movement of capital across borders”, Wolf Klinz, member of the European Parliament said. “However, existing concerns cannot be ignored”.

If there is any limit to foreign investment, this should be restricted to only key strategic sectors, i.e., the defence (and possibly energy) industries. The recent call from the European Commission for a code of conduct, complementary to the IMF and OECD initiatives, to enhance transparency and corporate governance is a sensible solution.

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The public debate during recent months on the possible risks of sovereign wealth funds to European companies has been heated. National governments are discussing ways to protect their enterprises, particularly in sensible sectors, against influence from countries such as China and Russia, with political rather than economic interest.

State-owned investment funds are on the rise and already manage assets of more than $3 trillion, twice as much as the global hedge fund industry. The main concern of Europeans is that sovereign wealth funds, which for one single fund can amount to up to $875 billion (as in the case of the United Arab Emirates), may buy themselves into key strategic sectors and act not in the long-term economic interest of the company but rather follow a political agenda or seek to gain access to key technologies. Some sovereign wealth funds are managed in a very transparent manner, such as in Norway, and are therefore not controversial. However, recent developments are a cause of growing concern to Western governments. The depreciation of banks due to the ongoing write-off process caused by the US sub-prime crisis has created new opportunities for sovereign wealth funds to invest in Western companies. The sovereign wealth funds of newly industrialised countries, such as Singapore, Kuwait, the United Arab Emirates and China, which have been mostly spared from the global credit crunch, are now seizing the opportunity to stock up on their investments in major Western banks. In fact, they have been quite welcome, since they injected badly needed equity.

The rise of sovereign wealth funds should not be met by protectionism but should be seen as proof of the good functioning of the free movement of capital across borders. Global financial stability and an open investment climate benefit recipient countries. However, sovereign wealth funds should invest according to economic principles, not a political agenda. The state-owned funds should respect regulatory and disclosure rules in the host country; in turn, the recipient country should strive for a fair, transparent and open investment policy.

However, existing concerns cannot be ignored. If there is any limit to foreign investment, this should be restricted to only key strategic sectors, i.e., the defence (and possibly energy) industries. The recent call from the European Commission for a code of conduct, complementary to the IMF and OECD initiatives, to enhance transparency and corporate governance is a sensible solution. It makes sense, rather than having 27 differing national regulations, for EU Member States to aim at a single framework which does not have the general effect of building up barriers for foreign capital investments but welcoming investments.

Any measures should ensure that the stability of the financial system in the future is increased, without having a negative impact on the openness and progress that has been achieved over the past years. Free cross-border movement of capital has contributed to European and worldwide economic growth as a whole and we need to be careful not to suffocate these vital gains by overregulation and protectionism.

By Wolf Klinz, Member of the European Parliament with the Free Democratic Party of Germany

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