To understand French politics, it helps to forget most of what you know about American politics and everything you know about economics. In the United States, a “conservative” candidate described as supporting “free-market economics” might be expected to oppose regulations on hedge funds and private equity firms. Indeed, even the spendthrift Republican administration of George Bush and the pro-regulatory Democrats on Capitol Hill are careful to note the economic benefits of hedge funds and leveraged buyouts. But in France, where leftists are expected to riot as a result of the decisive victory Nicolas Sarkozy in the run-off for the French presidency, even the “right-wing” candidate hates hedge funds and leveraged buyouts.

"We can't tolerate hedge funds buying a company with debt, firing a quarter of the staff and then enriching themselves by selling it in pieces. We didn't create the euro to have capitalism without ethics or morals," Sarkozy said recently, according to the Telegraph. The American magazine quoted Sarkozy blasting “these aggressive [hedge] funds ... that buy up a company, sell it off in pieces, sack 25 percent of the staff in the meantime, collect 25 percent profit and create zero wealth.”

Some have tried to write this off as merely a rhetorical necessity, a bit of play-acting in a European political theater that has become increasingly hostile to hedge funds and private equity. But Sarkozy is promising to go beyond rhetoric and has proposed a tax on “predators” making “speculative” investments.

“Hedge funds should remember that strong verbal denunciations by European politicians are usually followed by significant government intervention. Foretold is forewarned,” Jurgen Reinhoudt recently wrote in the American.

France is home to 92 hedge funds, according to the Telegraph. Many funds fled the country in the 1990s, despite the election of pro-market reformer Jacques Chirac and his appointment of Alain Madelin, who was possibly the most free-market oriented politician in France at the time. Stringent restrictions on their activities drove fund managers abroad, largely to London.

But the European Union is far stronger now than it was, and European politicians may find that closing off the option of exiting for other European countries has carved out room for even more regulation of the financial industry. And if Sarkozy represents the most far-flung reaches of free-market thinking in European political circles, it probably won’t be long before those now spectral regulations take substantial form.

Sarkozy turns on 'predator' hedge funds [Telegraph]
The European Assault on Hedge Funds [The American]