Germany draws up new rules for foreign state funds

20th August 2008, Comments 0 comments

Merkel's coalition government is particularly concerned over the threat posed to key German industries, such as telecommunications, banking and the energy sectors.

Berlin -- German Chancellor Angela Merkel's ruling coalition unveiled new and far-reaching rules on Wednesday aimed at heading off powerful foreign-owned state-controlled funds going on a shopping spree for companies in Europe's biggest economy.

Of particular concern to Merkel's conservative Christian Democratic-led coalition is the threat posed to key German industries, such as telecoms, banks and energy sectors, by cash-rich state funds from Russia, the Middle East and China.

The proposals agreed to by Merkel's Cabinet means that attempts by non-European Union controlled investment groups or companies to buy a 25 percent or more stake in strategic parts of German industry can be blocked in the future.

"The majority of foreign investments won't be affected by the draft law," said Economics Minister Michael Glos setting out details of the proposals. "Germany is and remains open to foreign investment."

Setting off alarm bells

Based on an American model, German plans could lead to further attempts across the 27-member EU to block foreign investment incursions into sensitive industries.

Under German proposals, "public order and security" is the principal criteria for triggering a review of foreign groups' investment plans.

But Berlin's drive to enhance government regulation over investment funds operated by foreign governments pushing into corporate Germany has set off alarm bells in German business.

"Foreign investment brings many advantages such as economic growth, employment and as a result, rising living standards," said the general secretary of Germany's International Chamber of Commerce (ICC), Angelika Pohlenz.

She said that the plan to regulate foreign investors could lead to lower foreign investment in Germany and trigger limits on German investment in other parts of the world.

Echoing concerns

The ICC's concerns were echoed across German business with the chief of the nation's influential Federation of German Industry (BDI), Werner Schnappauf, saying Berlin's new laws sent "the wrong signal for Germany as a place to invest."

"As the world's leading export nation and a key source of foreign investment, Germany is heavily dependent on open markets," said Schnappauf, adding that foreign investment underpinned more than 2 million jobs in Europe's biggest economy.

A report prepared by the investment house Morgan Stanley estimated that the state funds could already control up to $2.5 trillion worldwide, building to $12 trillion by 2015.

Last year, the Chinese government acquired a 10-percent stake in the US private equity house Blackstone, which has a key holding in German-based Deutsche Telekom AG, Europe's biggest phone company.

This followed moves by Russian state bank VTB to carve out an interest in Europe's sensitive aeronautic and defense sector by seeking a stake in the European Aeronautic Defense and Space group (EADS), the parent company of the European aircraft maker Airbus.

At the same time, Berlin has spearheaded a push to ensure greater transparency of the international hedge-fund industry, despite the reluctance of both Britain and the US to take action to monitor the $1.4-trillion business.

Under the Merkel government's plans, investors would have to get approval when purchasing more than 25 percent of a major German company.

But analysts said that the risk is that foreign state funds could use groups based in other parts of the EU to move in on key German corporations.


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