Sovereign wealth funds: so what should the European Union do?

Julien Chaisse, World Trade Institute, Bern

Abstract

Sovereign wealth funds have become major players in the global finance system and more recently have been attracting increasing public attention. The International Monetary Fund (IMF) and some governements are calling for increased controls and regulation. This recent move is aimed to prevent countries like China and Russia using investments in US or EU to obtain political influence in strategic sectors, such as energy and defence. Sovereign wealth funds have existed since the 1950s, constituting an important source of liquidity in financial markets. The rapid growth of sovereign wealth funds risks provoking a protectionist response by industrialised countries, notably within the EU. A voluntary code of conduct could help avert the problem. The European Commission’s approach calls for a code of conduct ensuring transparency and that the basic motives for the investment of these sovereign wealth funds become clear and that the funds themselves apply good corporate governance. The proposals discussed by European leaders would feed into international efforts, both at Organisaton of Economic Co-operation and Development (OECD) and IMF levels, to draft a code of conduct by the end of 2008.