French Sovereign Mistake

“I will not be the French president who wakes up in six months time to see that French industrial groups have passed into other hands,” Sarkozy told a business forum as a justification for setting up an SWF. The fund is to be run and financed by the Caisse des Depots et Consignations (CDC). The CDC is a sort of state-owned investment fund come savings institution.

The fund would take stakes or make reimbursable loans to smaller companies deemed strategic because of their technologies or sector classification. It’s an unnecessary and expensive prop to national pride and will not help the economy’s productive capacity.

If anything it resembles yet another wheeze to get around ever stricter EU rules to combat protectionist behaviour.

The real problem in France is a lack of entrepreneurs. A much better approach would be to seriously tackle the stifling red tape which holds back smaller companies.

Sarkozy should do more to incentivise people to start new businesses. Maybe France could set up a fund to invest alongside venture capital groups to help start-ups create jobs, new products and services at a time when capital is scarce. Recessions can spawn new companies and industries as laid-off talent goes it alone with new ideas and concepts.

The main point of an SWF is to help a country, which generates huge foreign exchange reserves or is overly reliant on a single commodity – to diversify its income base or create revenue for future generations. Besides, France already has a diversified economy and therefore does not need a SWF.

And what are the prospects for swathes of industry falling into foreign hands during the downturn?

Probably, not as high as Sarkozy fears. Corporates are likely to be too busy shoring up their existing operations and cost cutting. Also, raising acquisition finance is now a lot harder than it was during the boom years. As for foreign SWFs, some may well come under pressure to invest more at home to compensate for falling export revenues and weakening foreign investment in their countries of origin. So their “predatory” presence abroad cannot be taken for granted either.

This post first appeared at Thomson Merger News