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Sarkozy’s Fund of Bad Advice
October 22, 2008
By common consent, Nicolas Sarkozy has had, for the most part, a good financial crisis. But he slipped up this week when he suggested European Union member-states should create their own sovereign wealth funds to invest in European companies and stop foreigners from buying up “strategic assets” on the cheap.
This proposal was flawed on so many counts that it is hard to know where to begin. But here we go. First, there is no evidence that non-European sovereign wealth funds are trying to seize control of strategic or even non-strategic European assets, least of all by means of hostile takeovers. Dark hints to the contrary do nothing but harm the EU’s relations with the countries where the funds are based. In fact, they risk deterring the funds from making benign investments in Europe.
Second, the EU is, or aspires to be, an open economy that prospers by investing abroad and accepting inward investment. For sure, the field on which the EU and its commercial partners play must be as level as possible. But if Europe tries to tip the balance in its favour, as Sarkozy is suggesting, it will soon find that others can play at that game, too. Everyone will lose.
Third, the degree of state intervention implied by Sarkozy’s idea goes far beyond anything needed to extricate the EU from financial crisis and economic recession. Fourth, EU governments do not have the spare cash to do what Sarkozy has in mind. Fifth, even if they did, many would not want to. His proposal is inappropriately divisive for a country holding the EU’s rotating presidency and, in particular, has exposed yet another area of disagreement between France and Germany.
Sixth, it would be rank hypocrisy for the EU to complain about the supposed political motives behind the investment strategies of non-European sovereign wealth funds, while European nations set up their own funds for reasons that were transparently political.
Seventh and finally, why does Sarkozy need sovereign wealth funds, anyway? France already has its very own Caisse des Dépôts, the state-controlled financial institution which owns stakes in most big French companies and which describes itself, entirely accurately, as the most important long-term investor in the French stock market.
Believe me, as long as the Caisse des Dépôts exists, no one in Paris need fear that the Saudis, Chinese or Russians are going to get their hands on French car producers, arms manufacturers or makers of delicious yoghurt.
nice piece.
Posted by: fxtrader | October 22nd, 2008 at 6:13 pm | Report this commentIMO, this stunt is purely designed at domestic politics - occupying the left’s natural space, just as they’re about to elect a new leader and trying to regroup…
The real instant victim in this “unregulated derivatives and greed debacle” is the SMALL BUSINESS, now without financing ,and this is a real disaster not only for Europa and the USA but for the whole world.
The Middle East Oil/Gas producers have huge surpluses in their SWF’s, they have invested in car manufacturers stocks to keep them from switching to ethanol-electric-fuelcells power sources, they have invested in banks to control the investements above, they just invested in one of the 2 key CPU manufacturers,AMD, and maybe they will ( does anybody care in the USA or EU ? ) take over all their assests and patents in the near future…they are investing in tool makers, machinery and defense companies, and they already control patents on advanced batteries and motors through commercial banks and investment banks stocks ( that’s why we still don’t drive hybrid- electric plug-ins )
and they are pushing for mayority stock blocks in food and power companies, so they are not stupid, after all, their advisers are our best Investment Bankers and Hedge-Fund managers in Europa and the USA!
China , with more than one trillion dollars in savings and ready cash is waiting on the sidelines for the waters to calm down and then make a real big move, and of course our “politicals” in Washington D.C. and Brussels will be the last ones to see it coming, as usual ! and guess who is their top advisers ? the Bankers and Hedge-Funds above !
Europa and the USA must defend its manufacturing base at any cost and become Energy Independent and with Full Broadband ,fixed and mobile, in every corner of our society, everywhere with video-conference and 3d avatars-graphics for work and play in real time and mobile, but of course the Hedge-Fund Managers and Bankers above have different interests,their bosses and investors from the Big Telcos and Cable TV, the Monopolies , don’t want the “populus” to have Broadband and Energy Independence, because to control social groups its better to have them down ,addicted and disconnected, so what will EU and USA do ?
3 key technologies: a) Wi-Fi ABGN with multiple antennas and mesh networks,b) Powerline Internet and IPTV , c) White Spaces , are vital for growth and JOBS worldwide, and they are under massive attack from the Monopolies,and the new political leaders next year i dont think they have the …wisdom….to make the real changes the economy needs to get us out of this absurd incompetent disaster.
The USA just launched a SWF with the 700 billion dollars bail-out plus the 540 billion dollars of Money Market/Mutual Funds purchases this week, and all these assets if properly administered and without corruption (!!!) can be a real smart move.
In these difficult times and with taxpayers putting all their wealth on the line , what’s wrong with Europa making sure key companies don’t get taken over by foreigners with a very different agenda ? what’s wrong with keeping assets at home and safe creating local jobs ?
Who is going to look after the small business ? the local farmer ? the store owner? the small parts manufacturer? the industrial designer? who ?
You are right that France has a system in place, but this has been a Huge Warning Sign,it’s time to secure the bases, the seeds, to water the plants and to make sure they grow into amazing trees,it’s time to re-inforce the whole continental structure from the basement up.
Solar,wind and water turbines,geothermal,hydrogen and methanol fuel-cells,synthetic jet fuels from jatropha and seaweeds,bio-fuels, coal-to-liquid capturing CO2,electric-hybrid plug-in cars and trucks,composites,water desalination and greenhouse farming , deep-water platforms for the Arctic-Atlantic,etc., must be a ” right now !” issue and investment , and with the goal to expand to Africa,Latin America and Asia, now more than ever it’s about Trade,Commerce and Friendship with all Nations.
Posted by: financialtools1@gmail.com | October 22nd, 2008 at 11:08 pm | Report this commentSovereign Funds are common both in petro-states and in export-led countries like China and Singapore.
A European Sovereign Fund should have been created a decade ago so now it would be a source of capital for Eurozone companies complementary to other Sovereign Funds from the rest of the World.
But now there is no capital to build it: Sovereign Funds receive their capital in times of economic expansion.
Posted by: Enrique | October 23rd, 2008 at 5:03 am | Report this commentThis topic is also being hotly debated on Gideon Rachman’s blog but it is as old as the EU itself viz. French ‘dirigisme’ versus German ‘corporatism’. What they have in common outweighs what divides them. Was it not Steinbruck who referred to hedge funds as “locusts”?
While the UK and the columnists of the FT continue to defend the role of the free market, a German utility is running a large part of the UK’s electricity grid, a French one is going to provide the next generation of nuclear reactors. Meanwhile, EDF remains a domestic French monopoly and Volkswagen retains the golden share guranteeing state control.
The devotion of the UK to the hidden hand is admirable but the question is: has it worked? And the idea that SWF’s are guided solely by market considerations invites a view of the world which is hard to reconcile with reality.
Posted by: J.L. | October 23rd, 2008 at 2:25 pm | Report this commentHas anybody noticed the Irish Pension fund as a form of “sovereign wealth fund”
Posted by: Donal | October 23rd, 2008 at 6:17 pm | Report this commentI think there is a misunderstanding here, deliberate or otherwise. Sarkozy uses the rhetoric of SWFs, but what he is suggesting is not a SWF at all.
The rationale for a SWF is to invest surplus foreign exchange in foreign assets that yield more than USTs or Agencies, partly to simply chase higher yield, partly to diversify the home country’s investment portfolio so to speak. Hence SWFs generally hail from countries which run large trade surpluses, either of the conventional (eastern Asia) or oil-driven (Norway, Russia, Gulf) variety.
Sarkozy’s plan is to set up a fund to invest in domestic companies. If he believes that this is what SWFs do, he is once again showing that he is a total economic ignoramus. An alternative explanation is that journalists can’t see past his rhetoric.
Posted by: Carlomagno | October 23rd, 2008 at 11:38 pm | Report this commentBefore anybody jumps on this… yes, I know the Norwegian SWF (Government Pension Fund) also has a domestic division, but IIRC over 90% of the fund is invested in foreign assets through its international division. If Norway invested its oil revenue purely or even mainly in domestic assets (or used it for public spending via the government budget), inflation would go through the roof.
Interestingly, investments in foreign assets by CIC (the Chinese SWF) in order to reduce domestic asset bubbles and inflation is explicitly acknowledged as a policy objective in China. See http://www.chinadaily.com.cn/bizchina/2008-01/05/content_6379035.htm.
Not that France have too much to worry on that front, since it runs a trade deficit and any French investment fund would just recycle domestic money.
Posted by: Carlomagno | October 24th, 2008 at 12:00 am | Report this commentCarlomagno,
As intra-European Trade receives the same treatment as National Trade in the Eurozone we should be talking about the extra-European trade deficit or surplus of the whole Eurozone, not a single nation.
Germany (the largest exporter of the World) or The Netherlands have impressive Trade surpluses a SWF ONLY can be created on a Eurozone base given the fact as we are in a common market, customs union and currency area as the USA.
But right now the Trade deficit or surplus of the Eurozone with the rest of the World is negligible so a SWF is just a possibility for the future if the Eurozone economy becomes competitive enough to held a huge surplus with the rest of the World.
Posted by: Enrique | October 24th, 2008 at 3:23 am | Report this commentBut it looks what Sarkozy project needs for France is just a Budget Surplus.
Posted by: Enrique | October 24th, 2008 at 4:12 am | Report this commentEnrique, Sarkozy is talking about a French “SWF” not a European SWF. And regarding the latter posibility, do you really think that the Germans are just going to hand over their FX earnings to the rest of Europe? As to a French budget surplus, dream on…
This idea from Sarkozy is just a rehash of past failed policies, right out of the 1970s and 1980s.
BTW, I heard a figure of $100bn mentioned on the radio this morning. If that is what Sarkozy has in mind, where on Earth is he going to find the money. I’ll tell you the answer: higher taxes, higher public borrowing or both.
Posted by: Carlomagno | October 24th, 2008 at 8:05 am | Report this commentglad to read most comments, much more interesting, and substantiated, than the initial post.
Posted by: from far away | October 24th, 2008 at 12:37 pm | Report this commentJust a translation issue, perhaps? Am not sure.
This is from “Le Figaro” concerning the so-called SWF:
Création d’un fonds d’investissement stratégique géré par la Caisse des dépôts pour apporter des fonds propres supplémentaires aux PME, développer de petites entreprises très innovantes, ou pour stabiliser le capital d’entreprises qui seraient la proie de prédateurs.
Translation: creation of a strategic investment fund to be managed by the Caisse des dépots to provide additional support for small- and medium-size business, to develop innovative small companies, or to stabilize the balance sheets of companies subject to predatory takeovers.
In other words, this so-called “SWF” will do what several other countries are doing: stimulate the economy, support troubled industries (think US auto firms), plus defend against unwanted takeovers (nothing new there).
So, much ado about nothing, methinks. Perhaps Sarkozy used the SWF designation in error or perhaps this was intended as a coup de théâtre.
After all, Sarkozy does have to watch his left flank.
Posted by: Norbert | October 24th, 2008 at 9:26 pm | Report this commentNorbert,
Here’s an extract from the verbatim transcript of Sarkozy’s speech of 21 October before the European Parliament (available on the EP’s website):
Eh bien, moi je demande que, chacun d’entre nous, nous réfléchissions à l’opportunité qu’il pourrait y avoir de créer, nous aussi, des fonds souverains dans chacun de nos pays, et peut être que ces fonds souverains nationaux pourraient de temps à autre se coordonner pour apporter une réponse industrielle à la crise! (emphasis added)
He follows-up in the same paragraph with a reference to the need for Europe to respond to the US govt’s loans to the “Detroit 3″, referring more generally to the need for a sectoral industrial policy.
It is well known that Sarkozy’s grasp of economic issues leaves something to be desired. I think the guy just doesn’t understand what he is talking about and mixes everything up.
Posted by: Carlomagno | October 26th, 2008 at 5:22 pm | Report this commentCarlomagno, to say that Sarkosy has a weak grasp of economics is a free joke.
The best thing all the EU politicans have been doing is booking up lots of 200+ comvention centres to talk about the credit crisis.
In fact I don’t blame them, they should strive to look busy but as far as possible keep their hands out of the markets.
Whatever happens Sarkosy knows that no French manager/politician will ever go to prison for their mistakes. See Trichet when he was head of the BdF, see the SocGen managment…etc etc…being a French politician makes you fundamentally immune to reproach or responsability…
However would the EU have been a diffrent place if Roosvelt had convinced Churchill to take out De Gaulle? Don’t think so…I’m sure De Gasperi and Adenauer would have found another willing ally…
Posted by: AJGS | October 29th, 2008 at 11:15 am | Report this commentThe article seems quite dry. It’s like the boss told him to knock the idea down a bit and Tony’s just like “I’m against it because … it’s a bad thing and it’s bad becuase … you ought to know.” The article’s argument/phrase&buzzword ratio is pretty low, the points repeat themselves, are extremely universalistic, with very few specifics of the particular plan, and miss the undesired economic effect description the author seems to promise to cover.
Posted by: Zagiel | October 31st, 2008 at 7:29 pm | Report this commentTony,
I too scoffed when Jacques Chirac blocked the takeover of Danone for ‘national security reasons’ but that was before the Chinese toxic milk crisis.
I also laughed long and hard when Jacques Chirac said that the Common Agricultural Policy was the future of the EU but that was before the biofuels debate had even begun.
Whether Sarkozy’s latest proposal is a good one remains to be seen. It will at least ensure a debate.
In the meantime we can eat delicious French yoghurt and much else with confidence thanks in part to the Caisse des Dépôts.
Posted by: Central Scrutiniser | November 3rd, 2008 at 10:52 am | Report this comment