| Should Europe Regulate Sovereign Wealth Funds ? WIESBADEN – State-controlled investments from overseas – so-called sovereign wealth funds ( SWFs ) – are now the subject of intense debate . The United States and France have made their fears known . In Germany , too , the debate centers on SWFs ’ political and economic significance for the country’s future . The problem has been exacerbated by the growing wealth of a number of countries , some of them formerly run by socialist or communist regimes . China , Russia , India , and the Gulf States have integrated their wealth into the global economy , to the immense benefit of world trade . The openness of Germany’s markets makes them especially attractive to global trade . This openness will not change , yet there are some who now call for new safety fences – in other words , for protection . For example , Russian investors are interested in taking a massive share in the German-French aerospace company EADS , which is already 5%-owned by a Russian bank . For many , this proposal has underscored a change in investors ’ behavior . But what , exactly , has changed ? SWFs have been around for years . Among the first countries to invest their considerable state-owned funds were Kuwait , the United Arab Emirates , Norway , and Singapore . They invested , and still invest , their budgetary surpluses worldwide in government bonds and state-owned enterprises . Industrialized countries like the US and Japan also have so-called “ reserve funds . ” Some of these funds are huge . In the UAE , the Abu Dhabi Investment Authority has estimated capital assets of $875 billion , making it probably the world’s largest state-owned investment company . In July 2007 , another rich UAE fund , Dubai International Capital , bought 3 % of EADS , after taking a stake of almost 2 % in the automotive manufacturer Daimler in January 2006. The Kuwait Investment Authority , also a state-owned fund , holds 7 % of Daimler . Singapore possesses two SWFs – Temasek-Holdings , with capital assets of roughly $100 billion , and the Government of Singapore Investment Corporation , with approximately $330 billion . Both funds are invested worldwide , including with the port operator PSA . Some funds are subject to considerable restrictions . Japan limits its state investments overseas to bonds , mostly those issued by the US . Until recently , China , which holds foreign currency reserves of more than $1.2 trillion ( the world’s largest ) , followed this policy , too . But a $3 billion investment by the Chinese SWF in the US investment firm Blackstone suggests a more worryingly strategic investment policy , one that appears aimed at advancing its own industrial interests in certain markets . Russia , where the line between state-controlled and privately controlled companies is often blurry , has demonstrated this strategy in Europe . Indeed , Russian investments in aerospace , telecommunications , and , most of all , in the energy sector , are the main source of concern for Germany . Are state-controlled investors now aiming primarily for strategic rather than purely financial returns ? Because SWFs ’ resources are so substantial , it is advisable to take precautions to avoid becoming a target of politically motivated market manipulation , or becoming economically and psychologically dependent on foreign governments ’ decisions . Most Western countries already have instruments to deter foreigners from making unwanted investments , not only in defense industries , but also in other sectors . But , while Germany’s Foreign Trade and Payments Act protects against takeovers in the defense industry ( though the law needs strengthening ) elsewhere Germany has no system for examining investments by SWFs that may be strategically motivated . The International Monetary Fund now encourages more transparency by foreign investors , and has plans for a code of conduct . The EU Commission also favors voluntary agreements aimed at strengthening transparency . Some SWFs now seem willing to engage in constructive dialogue . But assessing potential threats is not easy . Most investments are seen to benefit a country’s economy , if not its security . We in Germany need to distinguish one from the other . Bills have been drafted that amount to amendments to the Foreign Trade and Payments Act and related regulations . While strengthening the act , they seek to avoid affecting the openness of the German economy . Under proposed new legislation , if a foreign investment in a German company amounts to more than 25 % , an assessment can be made of whether public order or safety might be threatened . In my view , this would address the concerns about SWFs , while not generally impeding investment because it would apply only in a very few cases . Germany has also drawn up a plan to protect its industries that is modeled on US regulation . Since 1988 , the US president can prohibit foreign direct investment if it is seen as a threat to national security . An additional control was introduced last year , so now all direct investments in which a foreign government is involved are scrutinized by the Committee on Foreign Direct Investment . The principle of reciprocity should clearly apply to transnational investments . Germany is open to foreign investors , but in return we Germans demand the same market access abroad . Much remains to be done in this area even in Europe , as Germany’s own experiences with France and Spain demonstrate . In China and almost all Middle Eastern countries , foreigners are restricted to minority shareholdings and must contend with high import duties and numerous non-tariff barriers . Protective measures must remain the exception rather than the rule . We Europeans must accept the challenges of global competition , and transnational investments are the basis of thriving economic development at home and abroad . Nevertheless , we must not allow ourselves to become the passive economic playthings of other nations , or of big state-owned enterprises . We must play an active part in shaping globalization , and that means crafting appropriate rules . |