Laissez faire is passé. That's the emphatic message from France, where Nicolas Sarkozy, once seen as a pro-market president, has emerged as Europe's interventionist cheerleader-in-chief.
Since October, the French president has heralded "the return of politics" to economics, proclaimed the birth of a "moral revolution" that will steer a new financial order and, memorably, declared the death of the "dictatorship of the market."
Sarkozy's newfound distrust of the free market culminated in late November with the launch of a €20 billion ($25 billion) French sovereign wealth fund that he claimed would become a "powerful arm in [France's] industrial policy." The fund, which political appointees are to oversee and state-controlled fund manager Caisse des Dépôts et Consignations, or CDC, is to manage, has been met both in France and abroad with a mixture of intrigue, concern and amusement, generally in that order.
All three reactions are warranted. The fund has the kernel of a good idea, despite its embodiment of Sarkozy's apparent belief that for any problem the state is the answer. But whatever its ideology, the fund is almost sure to
What merit there is to the fund lies in the idea that the state has a role in helping companies access capital while credit markets are broken and investors have gone to ground. That notion is hardly unique to France, as the multibillion-dollar bank bailouts in Europe and the U.S. make clear.
Sarkozy has promised that his fund will target small and medium-sized industry. If that proves the case, he might also deserve some credit for accurately targeting a problem area. In a long credit drought, small and medium-sized companies will suffer more acutely than many of their bigger brethren because they tend to be reliant on bank lending, even more so since the bottom fell out of the high-yield debt market.
Even the most ardent advocates of the free market have been able to find some reason to praise the new fund. "The state has no useful role to play in a market that is functioning well, but you can't reasonably say that about the current market," says Colette Neuville, head of France's largest shareholder advocacy group, Association de défense des actionnaires minoritaires, or Adam.
Sarkozy's fund will begin with €6 billion ($8 billion) of cash raised on the debt markets, leveraging an expected AA or A+ rating to access money at significantly cheaper levels than its investment targets could. The remaining €14 billion consists of equity assets contributed by the state and CDC.
The president might have preferred to support French industry by selling government bonds and then lending the money directly, but European Union regulation makes that taboo. In establishing an ostensibly independent fund to buy equity, Sarkozy clearly hopes to bypass those regulations. "At the least, it creates some uncertainty that may allow for a compromise with regulators if France chooses to ignore their protests," says a Paris-based lawyer.
Finally, by establishing a leveraged fund to buy equity, Sarkozy has provided his pet project with the opportunity to profit from its investments. This is the same model at which the British government arrived to save its struggling banks and that other nations have subsequently adopted.
Sarkozy insists the fund will buy only minority stakes and will sell when it can do so at a profit. His appointment of Patricia Barbizet to head the fund's investments suggests he has designs on running a proper investment vehicle. Barbizet made her name as chief executive of Artémis, one of the investment vehicles of François-Henri Pinault, one of France's richest men.
If the French president had been able to limit his rhetoric to talking about broken capital markets, he might have won grudging respect from other European Union members for an innovative (should that be sneaky?), partial solution to the wider market problems.
Unfortunately, Sarkozy has taken the opportunity presented by the fund's launch to return to that favorite French theme of protectionism, loudly hailing the new fund as a bulwark against foreign raiders.
"I do not want European citizens to wake up a few months from now and discover that European companies belong to non-European capital which has bought at the lowest point of the stock exchange," he told the European Parliament in October as he urged other nations to follow France's lead in launching their own funds.
No matter that there is scant evidence of foreigners lining up to grab French industry; protectionism plays very well with the worried French electorate.
Yet France has the most to lose from Sarkozy's economic grandstanding. Providing capital to French companies might be laudable; seeking to ensure that others don't do the same because they happen to be foreign is little short of destructive.
Thankfully, Sarkozy's call for other European nations to launch similar funds appears to have fallen on deaf ears in Germany and the U.K. Worryingly, European Commission President José Manuel Barroso called the idea "extremely interesting."
The French president offered foreign investors the most withered of olive branches in late November, when he invited "respectable foreign funds" to invest in the new French fund. Such investors are unlikely to find the idea of being a junior partner in a politicized investment vehicle very attractive. They are also unlikely to be inspired by the fund's initial investments: a 33% stake in failing French shipbuilder, STX France Cruise SA, and a smaller stake in Cie. Daher SA, a family-owned maker of transport and nuclear power station technology.
The final problem for Sarkozy and his fund is that his rhetoric doesn't reflect reality. It is this disconnect that has given cause for some mirth in French investment circles.
Before he provided details of the fund, Sarkozy had spoken about emulating the world's biggest sovereign wealth funds. "What the oil producers do, what the Chinese are doing, what the Russians are doing, there's no reason why France shouldn't do it in order to have an industrial policy worthy of the name," he said in late October.
In the days before details were released, French papers abounded with rumors that the fund could be as large as €100 billion. The reality was inevitably going to be a letdown. France's roughly $40 billion of foreign reserves and long-standing current account deficit were never going to be sufficient to allow it to play at the top table of sovereign wealth funds. China, by comparison, has almost $2 trillion of foreign reserves and a current account surplus of about 7%.
At €20 billion, the state-backed fund is worth less than 2.5% of the combined value of France's largest 40 companies. Put simply, it is not capable of "intervening massively," as Sarkozy imagines that it might.
That €20 billion figure also assumes the French fund will be able to bring the full weight of its capital to bare -- presumably by selling much of the €14 billion of equity holdings contributed by CDC and the state. Yet many of them, including stakes in French carmakers and Air France-KLM SA, come with political strings likely to tie them to the fund permanently.
A fund too small to make any real difference and yet important enough to do real damage is hardly a combination to inspire confidence and certainly nothing for France to celebrate. But as he rails against the dictatorship of the market, Sarkozy is a happy man.