Commission plans sovereign fund rules

The European Commission plans to unveil a list of common principles to tackle the growing power of foreign state-controlled funds in March.

A Commission official said that a number of different directorates-general would be contributing to the paper, which aims to protect EU strategic interests in sectors such as energy and defence while respecting internal market principles.

The move to curtail the power of so-called sovereign wealth funds, announced last year in response to French and German concerns, is said to have been delayed as a result of internal divisions.

Peter Mandelson, the commissioner for trade, suggested last year that golden shares might be a viable way of protecting strategic sectors, while Charlie McCreevy, the commissioner for the internal market, warned that member states should resist the temptation to impose protectionist measures.

The rise of sovereign wealth funds, which control as much as €2 trillion in world assets, according to the International Monetary Fund (IMF), has also prompted different responses from member states.

Germany is drawing up a law aimed at fending off investments in strategic sectors by state-owned firms and investment funds. French President Nicolas Sarkozy this month pledged to defend strategic sectors "in the face of a rise in the power of extremely aggressive sovereign funds".

The UK is more open to the sovereign funds. During his trips to India and China this month, Prime Minister Gordon Brown welcomed investment by the funds operating on a commercial basis and playing by the rules.

Adrian van den Hoven, director for international relations at employers’ federation BusinessEurope, warned against contradictory legislation on sovereign wealth funds being adopted by EU member states. "We don’t want fragmentation of EU markets as a result of strategic legislation in different member states. On the other hand the Commission should not restrict member states’ ability to protect national security," he said.

"The Commission definitely has to assume its responsibilities and ensure that laws are in conformity with European laws. There is quite clear jurisprudence saying what the limits are. If member states go beyond that, the Commission has to launch infringement proceedings."

Bruegel, a Brussels-based economics think-tank, echoed calls for the Commission to increase its scrutiny of member states’ laws. "The German coalition has opened a Pandora’s box," said Nicolas Véron, a research fellow at Bruegel. "There is no doubt that there is enormous scope for legislation that is not only about national security, but also about national objectives that are incompatible with the single market."

The highly secretive funds came under pressure from the US Treasury at the World Economic Forum in Davos last week. G7 finance ministers have asked the IMF to produce a code of conduct seeking to increase transparency in consultation with major funds such as Singapore’s Temasek Holdings and the Abu Dhabi Investment Authority. The Organisation for Economic Co-operation and Development is working on policy advice for countries targeted by such funds.

The European Commission plans to unveil a list of common principles to tackle the growing power of foreign state-controlled funds in March.