Boom-boom Brits could do with a stitch in time

COMMENT: 'Ken Clarke insists this is a wonder-boom that will not be followed by bust later - he has found a miracle cure for the ups and downs of the economic cycle that has somehow escaped the notice of Mr Greenspan'

Economy A is growing faster than its sustainable trend, unemployment is at its lowest for years and pay inflation is creeping up. The financial markets have been prepared to expect a small increase in interest rates that will allow the recovery to continue without being blown off course by rising inflation. The authorities are steering a delicate course between boom and bust, so far very successfully.

Economy B is also growing at a pace above trend, has rapidly falling unemployment and rising wage inflation. However, a rise in interest rates would be greeted with utter astonishment. For economy A is, of course, the US, nicely the right side of the presidential elections, and economy B is the UK in the heat of the longest election campaign this century. In the US the Fed Chairman Alan Greenspan has signalled the likelihood of a rise in Federal Funds rates after today's Open Market Committee meeting.

On this side of the Atlantic, the Government has given up all pretence of modest economic recovery. "Britain is Booming," announces the latest mailshot from Conservative Central Office. Ken Clarke insists this is a wonder-boom that will not be followed by bust later - he has found a miracle cure for the ups and downs of the economic cycle that has somehow escaped the notice of Mr Greenspan.

The British economy almost certainly is in better shape than for a long time. Yesterday's balance of payments figures were much improved compared with the same stage of the last economic cycle, in the late 1980s. The pay-off for these genuine improvements is that interest rates should not need to rise as much as they would have in the past. But the fact that it ought to be easier to keep the economy on a steady course does not mean the Chancellor can get away without touching the brakes at all. Today's expected interest rate move by the Fed, a classic "stitch-in-time" policy of the sort the Bank of England would love to follow, will highlight the risks the Government is taking with the British economy.

Wallace digs in for long haul at CWC

In his former life Graham Wallace, the new chief exec at Cable & Wireless Communications (CWC), used to run Granada's motorway service stations. He therefore knows a thing or two about squeezing the last drop out of a captive market. Now that Granada is facing competition again, having been forced to sell off Welcome Break, it is giving away Burger King Whopper Meals for 1p but that's life in the fast-food lane.

The challenge facing Mr Wallace at CWC, the great white hope of the cable telephony industry, is altogether different. It does not possess a monopoly or anything like it. When its cable network is built out it will still only pass a quarter of the homes in the country, having spent a cool pounds 6.3bn. Even when it corners a market the cable industry does not have much idea of how to exploit it. The cable companies that have joined forces with Mercury in CWC have spent billions digging up the streets and yet have only 580,000 customers out of the 3 million passed to show for it.

So far the rationale for the merger looks to lie largely in the financial engineering. The accumulated losses of the cable firms will knock about pounds 100m off the parent company's tax bill, CWC gets much better borrowing rates on the pounds 2.3bn it still needs to build out the network and condensing four head offices and workforces into one should shave another pounds 100m or so off its cost base.

But to justify the pounds 4bn-pounds 7bn price tag being put on the business by analysts will require something far more. On its own Mercury was too big to be nimble but too small to compete on an equal footing with BT. The cable companies were good at digging holes but ran out of ideas when it came to signing up customers. If Mr Wallace can engineer even a tenth of the cultural change needed at CWC he will be worth every penny of his pounds 100,000 signing-on fee.

He has made a start by linking remuneration to levels of customer service and bringing on board a marketing director who learnt her craft at Richard Branson's elbow. But the so-called synergies to be had from meshing the cable companies' customer base together with Mercury's technological wizardry are almost certainly overblown while rebranding the business under the Cable & Wireless logo is a step in the dark. It may have more consumer appeal than Nynex CableComms but it is a brand which remains largely unknown at home. On their own the constituent parts of CWC may have been facing a losing battle against BT but Mr Wallace has his work cut out to make the whole demonstrably bigger.

Krupp comes a spectacular cropper

Having parked its tanks on Thyssen's lawn with the engines running, Krupp last night embarked on the corporate equivalent of the retreat from Moscow. The withdrawal of Krupp's hostile bid for its fellow steelmaker must go down as one of the shortest and most disastrous campaigns in annals of Germany's corporate history.

If the intention of the Krupp chairman, Gerhard Cromme, was to bomb Thyssen to the negotiating table, then the tactics have misfired spectacularly. The outcome of the continuing talks between the two sides could well be Thyssen's takeover of Krupp.

Apart from the injury to Mr Cromme's reputation as Germany's takeover king (largely built on the fact that he is its only exponent), the collateral damage will be unpleasant. First, there is the standing of Krupp. By tabling the bid it exposed the weakness of its own financial position. It quickly became apparent that the mountain of debt necessary to fund the deal would have stretched Krupp's balance sheet to breaking point without a large share issue which would in turn have diluted the family trusts that control 80 per cent of the company.

Second, the position of Krupp's advisers, Deutsche Bank, Dresdner Bank and Goldman Sachs, looks tricky. By backing the bid in the first place they took a huge amount of flak, not just from protesting steelworkers but from the German body corporate to whom such tactics are anathema. By dropping the bid so quickly, they have been made to look inept and they will probably be made to pay for that ineptness through the loss of future mandates.

The third loser is the German steel industry. Whatever consensus deal Krupp and Thyssen now come up with to rationalise their respective steel interests it will almost certainly not be enough to put the industry on an equal footing with its competitors elsewhere in Europe. With production costs a third higher than those of British Steel, Krupp and Thyssen have a long way to go to catch up.

The final casualty is the German economy itself. The consensual approach to industrial restructuring has been tried and found wanting. But who else will want to give the Anglo-Saxon approach a spin now that Krupp has come such a cropper?

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