"With those sovereign funds we have new and completely unknown elements in circulation," Merkel said. "One cannot simply react as if these are completely normal funds of privately assembled capital."

The immediate concern was Germany's energy industry, its distributors and power generation companies. Being publicly traded, their shares could be bought up by the highest bidder in the traditional free market way. But what if the highest bidder were another country, acing as a straightforward capitalist investment fund but in fact pursuing political goals?

While most commentators have been thinking of the new 21st century capitalism in terms of hedge funds and private equity and the massive leverage they can generate in order to buy companies worth tens of billions of dollars, the more unusual development has been the emergence of the state as capitalist.

The preferred investment vehicle is the sovereign fund. The Abu Dhabi Investment Fund is estimated to worth some $875 billion. Singapore's Temasek is worth more than $300 billion. Impressed by Temasek's success, China is now proposing to put some $200 billion to $300 billion of its vast $1.2 trillion foreign exchange reserves into its own sovereign fund. This year's Russian budget claims that the country's "stabilization fund" is already worth more than $160 billion, and should reach $200 billion next year.

The principle of state investment has been around for some time. Norway, for example, has $300 billion in its petroleum fund, the investment of its earning from the North Sea energy bonanza, intended to ensure the country's income even after the oil and has run out. Alaska has a similar fund. But Norway is known for its transparency, and for its self-imposed limit on the proportion of a company's shares it will buy.

Altogether, the total value of these funds is reckoned to be some $2.5 trillion, according to a survey by Morgan-Stanley. On the usual Wall Street rule of thumb, that should be enough to raise and leverage 10 times as much capital -- $25 trillion, which is close to the combined annual output of the U.S. and European Union economies. Morgan-Stanley also predicts that by 2015, the total money in the sovereign funds will be $12 trillion.

These new sovereign investment funds are "black boxes" of secrecy, warns Simon Johnson, chief economist of the International Monetary Fund, one of the leading thinkers behind the view that all this represents an important change in the capitalist system.

"There are an increasing amount of financial flows going through black boxes. Hedge funds are black boxes. Sovereign wealth funds are black boxes. We don't know what happens and we should worry about that," Johnson claims. "Black boxes should make us uneasy. People are beginning to feel uncomfortable about this."

Germany is getting very uncomfortable indeed. Last year, the government moved to stop Russia's Mischkonzerns Sistema from buying into Deutsche Telekom. And while Russia's state-controlled VTB bank was not stopped from buying 5 percent of EADS, the corporate parent of Airbus and several defense companies, the German government has made it clear no more will be allowed. When Daimler-Chrysler later put more EADS shares on sale, a hasty consortium of German banks was assembled to buy them and keep the shares of the open market where the Russians were expected to swoop.

The problem is that Germany does not have a clear structure of legal defenses against this, and the European Union's competition policies make it difficult to draft one that does not look protectionist. The French tend to ignore or sidestep such EU concerns and Britain, while usually the most open economy in the EU, has a tradition of informal controls that were sufficient to block Russia's Gazprom buying into Britain's gas distribution industry.

"The most important thing is how to do this without creating a new kind of protectionism," notes Elmar Brok, a German Christian Democrat who is a veteran member of the EU parliament.

But the EU is coming to the rescue. Ireland's Charlie McCreevey, the EU commissioner for the Internal Market, last week told staff to examine the issues and consult with the German and French teams of ministers and top aides who are examining their own legal options. But the French have taken their economic nationalism to ludicrous extremes, even claiming the Danone yogurt and dairy giant was a strategic national asset that had to be defended against foreign takeover.

The Germans are planning to amend a law that allows the government to block foreign purchasers from buying more than 25 percent of defense companies, and extend that principle to companies defined as essential to national security.

"This is about protecting important industrial sectors from the political influence of other states," argues Volker Kauder, parliamentary leader for Merkel's Christian Democratic Union.

It is also about coming to grips with the globalization of capital, the emergence of new financial powerhouses in oil-rich countries like Russia and the Persian Gulf, and a heady flood of takeovers fueled by the new capital systems of hedge funds and private equity.

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