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Europe

Germany Critical of French Wealth Fund Proposal

Germany reacted coolly to a proposal by French President Sarkozy to create a sovereign wealth fund aimed at protecting French firms from unwanted takeovers and helping small companies squeezed by the credit crunch.

A man looks at a screen displaying market news in Paris

French markets have also been hammered by the financial crisis

Signaling a new era of economic patriotism, French President Nicolas Sarkozy on Thursday announced the creation of a French sovereign wealth fund on Thursday, promising it would "intervene massively" to protect any strategically important French firms threatened by the global credit crunch.

The fund, which is meant to be in place by the end of the year, will inject cash into struggling companies. In return, the French state would temporarily buy stakes in the firms.

"Large French companies can't be allowed to fall into foreign hands just because we don't react to the financial crisis," Sarkozy said.

French President Nicolas Sarkozy

Sarkozy says the financial crisis underlines the need for governments to intervene in the economy

Earlier this week, Sarkozy, whose country currently holds the EU's rotating presidency, stirred debate in the European Parliament with his plan to partially nationalize key industries with the help of state funds.

Sarkozy argued that the sovereign wealth fund would help to prevent countries such as China and other Gulf nations taking over large European companies by using current stock plunges to buy up shares in EU firms.

"I don't want European citizens to wake up in a few months and discover that European companies belong to non-European capitals," he said.

Germany resists plan

Germany, which last week passed a 500-million-euro rescue package for its troubled banks, reacted sharply to the French proposal on Thursday, saying saying any measures must be compatible with European Union rules.

"The German government believes that ... greater protection measures are not needed in Germany," government spokesman Ulrich Wilhelm said. "It is also convinced that measures to protect against foreign takeovers must be compatible with (EU) internal market rules."

German Chancellor Angela Merkel will discuss Sarkozy's idea with him on the sidelines of a two-day summit of European and Asian countries beginning in Beijing on Friday, Wilhelm said in a statement.

Earlier this week, German Economy Minister Michael Glos too dismissed the French plan.

"The French proposal that the state should take stakes in European industry so as to protect it from foreign state takeover goes against the successful principles of our economic policy," Glos said.

"Current state intervention in the banking and insurance sector are an indispensable exception so as to prevent a possible breakdown of financial flows and help protect jobs and growth," Glos said.

Sarkozy vows more state investment

In addition to the sovereign wealth fund, Sarkozy unveiled measures to stimulate the French economy.

His administration plans to scrap corporate tax on new investments until 2010 and inject 175 billion euros in infrastructure.

"In the past 20 years, France has lagged in infrastructure," Sarkozy said, adding that investments were needed in new energies, universities and public transportation.

"Governments have to become more active in the economy," he said. "The dictatorship of the markets is over."

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