Germany strives to fend off flood of hungry dollars

Section:

Germany Defends Its 'Crown Jewels'

By Ambrose Evans-Pritchard
The Telegraph, London
Friday, July 6, 2007

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/06/cngerm...

Germany is drawing up detailed plans to stop strategic assets falling into the hands of "giant locust funds" controlled by Russia, China, and Middle East governments.

Finance minister Peer Steinbrück said "telecoms, banks, post, logistics, and energy" were among the sectors that would be shielded from sovereign wealth funds, the new state trusts that are fast swamping global asset markets.

It is the first time Berlin has begun to spell out which industries would be covered by the new code.

In an added twist, he said "private finance houses" would also be restricted from taking over Germany's crown jewels, an apparent reference to Anglo-Saxon hedge funds and private equity groups.

Mr Steinbruck said it was time for Germany to learn a few tricks from France, Italy, and Spain, which all pursue industrial policies without apology. "We must have an active industrial policy," he said.

Germany's lurch towards 1970s-style protectionism is the clearest evidence to date that the EU's fragile free-market consensus is breaking down under the strain of globalisation. Until now Berlin had been viewed as a member of the EU's "free-market" camp, albeit in a schizophrenic way. It often voted with Britain, Holland, and Scandinavia on key issues in Brussels.

Germany's radical shift follows the success of French president Nicolas Sarkozy in striking the words "free and undistorted competition" from the list of the EU's treaty objectives last month, a move that emasculated the chief enforcement arm of the EU's single market.

Mr Steinbruck insisted that the massive state funds and petrodollar war chests are the real target of the investment ban. "It's clear that we are dealing with a new kind of foreign capitalist," he told the Handelsblatt newspaper.

The biggest funds are Abu Dhabi's ADIA ($875 billion), Singapore's GIC ($330 billion), Norway's Petroleum Fund $300 billion), Russia's Stablisation Fund ($100 billion, but growing fast). China is raising $200 billion for a new fund as a way to slow the accumulation of vast foreign reserves, surpassing $1.2 trillion, although part of this will be channelled through private equity firms such as Blackstone to avoid putting a "Chinese flag" on investments.

Berlin fears that foreign powers are buying stakes in strategic industries to gain technology secrets. Last year it stopped Russia's Mischkonzerns Sistema from gaining a share of Deutsche Telekom. There have been mounting suspicions over the true motives of the Kremlin-controlled bank VTB in acquiring 6pc of EADS, the mother company of Airbus and a clutch of defence industries.

Sovereign wealth funds have burst on to the global scene over the past five years, buying $2,280 billion of bonds, stocks, property, and commodities.

Morgan Stanley believes the figure will hit $12 trillion by 2015 as the funds raise their share of the global asset pie from 2.5 percent to 9 percent.

"They're not going to take over the world but they're already bigger than hedge funds with $1.6 trillion," said Stephen Jen, the bank's currency strategist.

Mr Jen said fear of these funds is setting off a wave of financial protectionism around world, often for understandable reasons.

"Oil investors like race tracks and Russians like football clubs. But I can assure you that Asians will not be buying football clubs. They want banks, resources, and high tech," he said.

Brussels ruled the German legislation a "clear breach of EU law" and has launched legal action at the European Court.

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