Threat to German action on foreign investors

Germany’s attempt to erect a protective barrier against unwanted foreign investors has become hostage to the mounting political tensions in Chancellor Angela Merkel’s fractious “grand coalition”.

The chancellor and Michael Glos, economics minister and political ally of Ms Merkel, are growing concerned that efforts by the Social Democratic-led labour ministry to become involved in the project could fall foul of EU legislation.

Publication of the bill, a reform of the existing Foreign Business Act that would create a German equivalent to the Committee on Foreign Investments (Cfius) in the US, has been delayed by two months because of the dispute over how best to shield corporate Germany from state-controlled sovereign wealth funds.

The initial bill, drafted by the economics ministry, envisaged a lighter version of Cfius, whereby the ministry would review, and possibly veto, acquisitions deemed to pose a threat to national security or public order.

Yet Olaf Scholz, the Social Democratic labour minister with a reputation as a tough leftwinger, insists his ministry should be included in the vetting process and be allowed to block deals that look likely to result in hefty job cuts.

The demand has alarmed the economics ministry, whose experts fear the inclusion of job cuts as a reason to block transactions could conflict with the European Union’s single market rules and lead the European Court of Justice to strike down the law.

Attempts by the ministries to find a legally watertight compromise have so far failed and several officials told the FT Ms Merkel and Kurt Beck, chairman of the Social Democratic party, may have to take the matter in their own hands.

The chancellery, however, is keen for a deal to be struck at ministerial level since a politicisation of the dispute could cause the project to unravel as tension between Ms Merkel and Mr Beck is running high.

Such tensions, exacerbated by a renewed slide in the SPD’s already dismal opinion ratings and a looming general election next year, have made it increasingly difficult for the coalition’s parties, Germany’s two largest and historical rivals, to work together.

Now politically on the defensive, the SPD is becoming less willing to strike deals on policies that could be interpreted as concessions to Ms Merkel’s Christian Democratic Union.

Mr Beck’s failure to reverse the rise of the Left party, a radical grouping on the left of the SPD, is also putting pressure on the chairman to strike a tougher line on protecting jobs and insulating Germany from globalisation.

Ironically, the deadlock comes as concern about sovereign wealth funds from China and the Middle East is easing in the country. Such funds have proven singularly uninterested in German assets and have so far focused on investing in US casualties of the subprime crisis.

Both the EU and the International Monetary Fund have launched initiatives to sign up the largest sovereign wealth funds to a code of conduct that would bring more transparency to their investment strategies and objectives.

Instead, German politicians are more concerned about the recent decision by Eon, the energy group, to sell its power distribution network, which many fear could fall into Russian hands.

The chancellery’s experts do not consider power grids as strategic assets, whose sale to a foreign investor could be blocked under a reformed Foreign Business Act.

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