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The EU’s Next Bad Idea? A So-Called Sovereign Wealth Fund

Ferdinando Giugliano

(Bloomberg Opinion) -- If you are searching for the EU’s next bad idea, look no further than the “European Future Fund.” The 100 billion euro ($110 billion) pot, first reported in Politico, would be a way to boost strategic sectors which are seen as lagging behind China and the U.S.

It’s not a formal policy plan, and the details are still scanty. But Ursula von der Leyen, the incoming president of the European Commission, would be wise to ignore the proposal. Europe needs to pool resources in other areas, starting, for example, with a fund to help euro-zone member states stabilize their economies when they face shocks. It’s best to leave most of industrial policy to national governments, making sure they do so fairly.

The “European Future Fund” has been dubbed a sovereign wealth fund – except that it isn’t. The EU is not a sovereign state and will not become one for the foreseeable future. The EU would not be tapping any existing “wealth” or natural resources.  A sovereign wealth fund like Norway’s – which uses income generated by its oil and gas reserves – is a way to ensure that such riches are not wasted on current spending, but invested to guarantee future prosperity.  The EU would simply be using existing budget resources to create such a fund in the hope of attracting money from the private sector.

Any help for Europe’s so-called strategic sectors should be handled with care. There is merit in launching joint R&D initiatives, such as the partnership France and Germany have set up to develop electric car batteries. But it is less clear why the EU should intervene to stop takeovers of individual firms by foreign companies, which seems to be at least one of the reasons to set up this fund. Does the Commission have the ability to manage a stake in a fast-growing tech firm? With what objectives? At what price will the acquisition take place? The risk is that fewer European start-ups will grow if they fear they can’t be sold to a deep-pocketed foreign rival. Take no offense, but Google can be a much more attractive buyer than any “European Future Fund.”

The Commission is going at the problem the wrong way. Several member states – France and Germany in particular – have decided that the reason why Europe is not fertile ground for innovation is that companies are not allowed to develop to an adequate size to compete with rivals from China and Silicon Valley. They argue that competition policy needs updating, which is really a polite way to say it needs to be watered down. This argument is misplaced in several ways. Economic studies have found no direct relationship between how large and how innovative a business is. Moreover, the Commission rarely blocks mergers between companies that operate in similar industries. If a state wants to step in and buy a company at its market price and manage it in a competitive manner, there is no reason why it can’t.

Margrethe Vestager, the EU’s departing competition commissioner, has offered some meaningful resistance to this Franco-German push, for example blocking the rail merger between Alstom SA and Siemens AG. But it’s unclear that any new commissioner, assuming she moves on to another role, will be as combative. The EU needs a strong enforcer of competition more than any lofty new fund.

To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net

To contact the editor responsible for this story: Stephanie Baker at stebaker@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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