Germans agree on sovereign fund law

Germans agree on sovereign fund law

By Hugh Williamson in Berlin

Published: April 9 2008 18:47 | Last updated: April 9 2008 18:47

Germany’s ruling coalition has cleared the way for measures to block unwanted investments by foreign sovereign wealth funds after political differences in Berlin on the controversial move were resolved.

A spokesman for Chancellor Angela Merkel told the Financial Times that the “remaining issues” holding up the draft law had been dealt with, adding that the cabinet would adopt the legislation “probably in the next few weeks”.

Berlin plans to create a German equivalent of the Committee on Foreign Investments in the US (Cfius), by establishing an interministerial commission with the right to review, and possibly veto, acquisitions by state-backed investment funds deemed to pose a threat to national security or public order.

The agreement on the final form of the commission, struck between ministers on the margins of a cabinet meeting on Tuesday, is a compromise between tougher and more minimalist versions of original proposals tabled last year.

The labour ministry had favoured tougher rules, including a right to block deals if they threatened big job cuts. Under the agreement, the more liberal economics ministry will co-ordinate the commission, but the labour ministry “will be involved in the consultations”, the labour ministry said. Representatives from the foreign, interior and finance ministries will have seats on the commission.

Acquisitions involving a stake in a German company of more than 25 per cent will potentially come under scrutiny, the economics ministry said, adding that the law would not identify any specific sectors to be prioritised.

Under the plans, foreign state-controlled investors from other European Union member states are excluded. The commission will have the power to cancel an investment up to three months after it occurs.

The potential threat posed by sovereign wealth funds has been a vibrant political issue in Germany since the chancellor gave warning last year that such investment vehicles were often driven by “political and other motivations”, including security issues, rather than purely economic priorities.

Ms Merkel also pointed out that large German companies could fall into the hands of such funds, estimated to control between $1,500bn and $3,500bn (€946bn- €2,200bn, £758bn-£1,770bn) in assets. Her spokesman stressed on Wednesday that the law “was absolutely not a protectionist move”, adding that the legislation would be “relatively liberal” compared with that in the US and elsewhere in Europe. Leading German business groups oppose the legislation as unnecessarily protectionist.

In February, the European Commission proposed a voluntary code of conduct for sovereign wealth funds. Commission officials argue that while it is legitimate for member states to take national steps to review acquisitions, these should not undermine joint investment standards in the EU common market. Last year, Ms Merkel also called off co-ordinated EU-wide action on sovereign wealth funds.

Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development, said on a visit to Berlin on Wednesday that Germany’s proposed law was a “positive signal”. The OECD opposes protectionism towards sovereign wealth funds, but he said Berlin’s move struck the “right balance” between reviewing investments in strategic sectors and “keeping investment markets open”.