Is the rise of new sovereign wealth funds, and their penchant for acquiring politically strategic businesses abroad, fueling a new era of protectionism? This appears to be the case in Germany, which is working on redrafting a new law would allow Berlin to intervene in bids over foreign companies holding key stakes in national businesses. This may make sense in theory, but is extremely difficult to effective manage in practice, and the lack of clarity is particularly problematic.

From the Wall Street Journal:

Germany Tinkers With Foreign-Takeovers Plan

By MARCUS WALKER
January 14, 2008; Page A2

BERLIN — Germany is redrafting a proposed law that would enable it to block takeovers by state-owned foreign companies and sovereign-wealth funds.

Berlin’s troubles with the new law show how hard it is for Western countries to single out and block foreign state investors with capital from energy-rich countries or emerging giants such as China.

The redraft would exempt bids from other European Union countries. The EU’s executive arm, the European Commission, objected to the blanket threat to scrutinize any cross-border bids in an earlier draft.

The German economics ministry confirmed that the draft would allow Berlin to intervene in bids to take over foreign businesses that own stakes in German companies. That causes concern among German business groups and economists, who fear it could deter foreign investment in Germany.

“This will multiply legal uncertainty,” said Gunter Schall, trade adviser at the Federation of German Industries, which wants Germany to be open to foreign capital in general.

Chancellor Angela Merkel wants a law that Germany could invoke in cases where it believes foreign-state investors are trying to buy German companies for what it considers mischievous reasons, such as to gain political influence. German law now allows the government to veto foreign investors only in the defense and cryptography sectors. Berlin wants to expand takeover defenses to cover any foreign investment that could threaten “public order or security,” criteria that German officials contend are strict but critics call nebulous.

Ms. Merkel has cited the U.S. Committee on Foreign Investment, which can review foreign acquisitions of U.S. companies on national-security grounds, as a model.

Ms. Merkel says she is aiming only at exceptional cases. Critics worry she is drafting a law so broad that it could block any investment by foreign sovereign-wealth funds or state-owned companies. The draft law doesn’t limit intervention to only specific sectors. It also covers EU-based companies in which foreign governments control significant stakes. A spokesman for Ms. Merkel said only that the proposal is a work in progress.

“If politicians can use the law, then they will use it for reasons of popularity,” says Thorsten Polleit, an economist at Barclays Capital in Frankfurt.

The size of sovereign-wealth funds is one reason for Western angst. Private-sector economists estimate these funds control about $2.5 trillion of assets globally and are growing fast. German politicians worry that foreign states could effectively renationalize sectors Germany has privatized, such as energy utilities.

Ms. Merkel’s government is also particularly wary of the sometimes unpredictable behavior of the EU’s large eastern neighbor, Russia, and its giant energy firms such as OAO Gazprom. In recent years, Russia has several times stopped its oil and gas supplies to other countries during commercial and political disputes.

Berlin’s concerns about Moscow were heightened in late 2006, when Russian state-controlled bank OAO Vneshtorgbank revealed it had acquired a 5% stake in Franco-German aerospace group European Aeronautic Defence & Space Co., main parent of plane maker Airbus. EADS made it clear the Russian bank wasn’t welcome as a strategic investor.

Around that time, Airbus suffered a prolonged delay in deliveries of titanium from Kremlin-controlled company VSMPO-Avisma Corp. A person who was close to the situation at Airbus says he doubts the delay was political and that Russian deliveries were often less than punctual. But some in the German government suspected a tit-for-tat move, according to people familiar with the matter. VSMPO couldn’t be reached for comment.