Thursday, November 20, 2008

Why the European Sovereign Wealth Fund Is a Bad Idea (or Maybe Not)

Kavaljit Singh dismantles Sarkozy's idea of a European sovereign wealth fund. Unlike the developing countries that have established SWFs, Europe does not have a large trade or budget surplus. Other SWFs invest primarily outside the territory of the states that run them. Their purpose is not to protect against foreign takeovers but to diversify investment portfolios, recycle trade surpluses, and perhaps--a point not mentioned by Singh--to obtain access to foreign technologies. Indeed, Singh may be rather too sanguine in concluding that SWFs have not been used for political or strategic purposes to date or that, even where this is the case, they cannot or will not be used for such purposes in the future. Nevertheless, he is quite correct to point out that the French have released no details about what their SWF will look like, how it is funded, what its investment strategy will be, or how it differs from the existing Caisse des Dépôts.*

Singh sees a certain European "paranoia" about SWFs. This is probably a bit harsh. As with other forms of "economic patriotism," the European SWF idea is simply the expression, or exploitation, of generalized fears about decline and failure. Sarkozy's gift as a politician is an ability to repackage fear as optimism. He takes a fashionable buzz word--"sovereign wealth funds" were all the rage in the financial press earlier this year--and puts it to a new and characteristically voluntarist purpose: Europe will not stand idly by as foreign money pours in, it will emulate with its own money (the source of which is left mysteriously shrouded) what the frightening foreigner is doing with his. De l'audace, encore de l'audace, toujours de l'audace. Well, why not? It worked for Danton -- for a while.

* Whoops: spoke too soon. Here are the first details.

ADDENDUM: Dani Rodrik offers a possible defense of the French SWF and economic patriotism as a reasonable response to a stock-market overshoot on the down side, the opposite of irrational exuberance: irrational cafardisme, perhaps?

No comments: