SPIEGEL Interview with EU Commissioner Günter Verheugen 'I Am No Friend of Hedge Funds'

Günter Verheugen, European Commissioner for Enterprise and Industry, spoke to SPIEGEL about foreign state-owned investment funds, the risks associated with hedge funds and his controversial private life.

SPIEGEL: Mr. Verheugen, Russian energy giant Gazprom is said to have its sights set on Germany's largest energy provider, E.on. Chinese state-owned investment funds have already indirectly acquired shares in Germany's largest telecommunications company, Deutsche Telekom. Is it all completely normal global capitalism -- or does the trend worry you?

Günter Verheugen: Not at all. I see nothing threatening in this. These kinds of investments are made in order to earn money, not in order to influence the political or economic structures of other countries. That has been our experience with this type of direct investment, regardless of whether they are made by traditional industrialized countries or by the new economic powers. I therefore see no reason to now abandon the principle of the free movement of capital, which is so valuable for Europe, because of some vague fears.

SPIEGEL: Germany's federal government takes an entirely different view. Politicians from the governing coalition, including those from your own Social Democratic Party (SPD), are currently outdoing each other with proposals for preventing the purchase of German companies by so-called state-owned "locusts," or hedge funds

Verheugen: I believe this kind of excitement is unfounded. There is no reason for taking drastic action. I really cannot see any indication that such company takeovers could be bad for us. Let us take a concrete case: Investors from China, Russia or elsewhere come to us with pockets full of money…

SPIEGEL: … and they don't invest in Germany to make a profit, but to win political influence.

Verheugen: How would they do that? By purchasing a pipeline and then turning off the supply? Or do they stop producing electricity after purchasing E.on? That would be tantamount to a declaration of war. Besides I find it strange that we want to keep out investment from China and Russia while simultaneously demanding unlimited investment opportunities for our own companies in those countries.

SPIEGEL: Chancellor Angela Merkel says one should "not be naïve" on this issue. Europe must be able to protect itself from the influence of foreign state-owned capital if that should become necessary, she said.

Verheugen: If at some point a situation should arise -- I do not believe it will -- in which the strategic interests of Europe or a member country were threatened by such an investment, then there are already tools available today for taking action and protecting sensitive economic sectors.

SPIEGEL: Which industries fall within that category, in your view?

Verheugen: The arms industry, the aerospace industry, all of infrastructure, electronics and communication…

SPIEGEL: … Deutsche Telekom as well then, for example?

Verheugen: Clearly. All strategically important industrial sectors.

SPIEGEL: The media as well? Some government members are haunted by the nightmare of Gazprom purchasing German media giant Springer.

Verheugen: That is an unlikely scenario, and in any case I wouldn't wish for it to happen, politically. But to sum up: I see no need to take action at the European level. Everyone has the tools to defend themselves should the need arise.

SPIEGEL: What tools?

Verheugen: States can prevent this type of share purchase. The rules of the global trading system make that provision for strategically important firms. The United States regularly makes use of this option. But I would plead in favor of a private-enterprise solution rather than prohibitions.

SPIEGEL: What private-enterprise solution exactly?

Verheugen: As the government, I would try to put together a suitable private consortium, which would then take over the company as a "white knight." Because we must not forget that there is an intention to sell on the part of the owners. In such a situation, prohibiting the sale of the company seems to me to represent too large an infringement of property rights.

SPIEGEL: When it comes to the equally controversial company takeovers by hedge funds, are you as relaxed as you are with regard to the state-owned investment funds' shopping tours?

Verheugen: In fact hedge funds worry me much more. Let me be very clear: I am no friend of hedge funds.

SPIEGEL: Why not? What distinguishes them from the state-owned investment funds?

Verheugen: Takeovers by hedge funds regularly lead to the break up of companies, ending with the sale or closure of company divisions, all in the name of an even higher return. Later it turns out once competitive companies were ruined and jobs wantonly destroyed. Nothing of the kind has been heard about state-owned investment funds until now.

SPIEGEL: Let's talk specifics: Imagine an Anglo-American hedge fund was preparing to take over Deutsche Telekom. It announces that it will asset-strip the company in order to make the individual company divisions more efficient.

Verheugen: To me, that would definitely be the point at which the country's strategic interests force the federal government to intervene.

SPIEGEL: But there is not much it could do. It lacks the tools.

Verheugen: But it can create them at any time, by a minor change to the Foreign Trade and Payments Law, for example. The law presently only protects the arms industry and industries close to it. But the specifications could be expanded to include other economic areas without any problem. Strategically important sectors comprise far more than just the arms sector.

'We Will Be Relentless in Defending Fair and Equal Competition'

SPIEGEL: Are you not concerned that such protectionist measures threaten the internal European market, regardless of whether they are directed against state-owned investment funds or hedge funds?

Verheugen: No, not at all. Why should they?

SPIEGEL: Because there are more and more cases of member state governments wanting to prevent cross-border company mergers within the European Union (EU). For example, energy provider E.on failed in its attempt to take over Spanish energy provider Endesa.

Verheugen: I would not generalize from that case. There are only a handful of these types of problem cases. They come up wherever markets have not yet been fully liberalized, as in the electricity industry. But on the other hand we have a record number of cross-border acquisitions and mergers within the EU this year. And they are happening without any intervention at all from politicians. And if complications arise that violate EU legislation, then we -- the European Commission -- will intervene, you can be sure of it. We will be relentless when it comes to defending the principle of fair and equal competition in Europe.

SPIEGEL: Mr Verheugen, at the moment it is mainly yourself who you need to defend relentlessly. Your private life is in the media spotlight again. And serious accusations are being leveled against you: You are alleged not to have told the truth about your relationship with your colleague Petra Erler.

Verheugen: Those accusations are false. One question is politically relevant: Was there a relationship between myself and Petra Erler that went beyond friendship when she was promoted and became my cabinet leader, and is there such a relationship today? The answer is no. That is the truth, which I have always stated in this way.

SPIEGEL: Now there are photographs that create the impression your relationship with your colleague was already more than friendly prior to her promotion.

Verheugen: You are mistaken on that point. One photograph is at issue, which has just been published by a German magazine and which allegedly shows me and Ms. Erler leaving her house together on the morning of Aug. 2, 2007. I have taken legal action against this, because the situation allegedly shown …

SPIEGEL: … which you do not want to explain in greater detail …

Verheugen: … did not take place. That can be proven. It can also be proven -- and the public has not been so aware of this until now -- that I was the object of surveillance measures that continued for weeks, perhaps even months, and which involved spying in my neighborhood and on my shopping habits. Once I was even pursued all across Germany.

SPIEGEL: In a current publication, a female friend of your wife comments extensively on your marital life.

Verheugen: My wife and I will not utter one word in public about our marriage. Some media have now sunk to a level of reporting that doesn't even merit comment.

SPIEGEL: There are rumors in Brussels that the President of the European Commission, José Manuel Barroso, has asked you to assign Ms. Erler to a different office. Would that not be a good idea?

Verheugen: He has not done that, if only for the reason that I am unable to do so. Ms. Erler is not a Commission official. Her employment contract is linked with my term as European Commissioner.

SPIEGEL: Do you even get around to working any more?

Verheugen: I actually work a great deal and the results, I believe, are presentable.

Interview conducted by Hans-Jürgen Schlamp and Christian Reiermann