Clarke sees no danger but the old enemy is back
Thursday 20 March 1997
Yesterday's unmistakable evidence that the old enemy of wage inflation is on the march could scarcely have come at a more awkward moment for the Chancellor. While it may have been possible to persuade the City to overlook rapid monetary growth and ignore booming service industries and construction in favour of limping manufacturing, wage inflation is one thing financial markets do take seriously as an indicator of wider inflationary pressures in the economy.
There is, of course, absolutely no chance of Mr Clarke doing the honourable thing after the April monetary meeting and, as he should have done six weeks ago, raising interest rates. This explains the big sell-off in gilts and short sterling yesterday. UK interest rates are now hostage to the election and will not rise until May. That will be six months during which the Chancellor has ignored the Bank of England's advice that interest rates must rise for there to be a chance of hitting the inflation target. And let us not forget, the Bank is more optimistic about inflation than others.
In the US short-term interest rates will almost certainly be rising again shortly to choke off any possible inflationary danger. Meanwhile, better economic news on the Continent is likely to confirm expectations that interest rates in Europe will fall no further. Britain, as ever, will be taking inflationary risks on its own.
The consequences for gilts and the pound are predictable. The Government has not hit its inflation target at any point since the end of 1994. Already we have one of the highest inflation rates among the major industrial countries, and one of the highest long-term interest-rate spreads over German bonds too. The gap can only widen now the brief flirtation with being tough on inflation is over.
This could be the calm before the steel storm
The rapid outbreak of peace in the Krupp-Thyssen takeover battle had the German political establishment breathing a mighty sigh of collective relief. But there is a long way to go before the Ruhr steel industry, and Chancellor Kohl for that matter, are out of the woods.
The Kohl queue, as Germany's unemployed have become known, is still at its longest since the war and there is every chance that Krupp and Thyssen will be adding to it shortly, irrespective of whether their "commonly- held steel business" is forged through agreement or aggression.
The fact is that the German steel industry is much less efficient and much less profitable than those of either Britain or France. Nor has the inherent advantage it enjoys of producing steel in the same currency as it is traded throughout Europe been exploited to the full.
At Thyssen it costs about pounds 60 to produce a tonne of liquid steel. On Teesside or any of British Steel's three other integrated plants, the figure is nearer pounds 45. The Germans also labour under the disadvantage of having two big steel producers. In France and Britain there is only one.
A lesson which the German coal mining industry learnt the hard way is now been passed on to its steel producers. Job security is a thing of the past in an age when the Japanese, the Koreans and even the Brits can do it better and more cheaply. To be fair, Thyssen is acutely aware of this. But it has taken the Krupp chairman, Gerhard Cromme, to do something about it by short-circuiting Germany's consensus culture with his cheeky bid.
Thyssen may have bought itself time by returning to the negotiating table, while the political will for a deal that does not cause mass job losses must remain a powerful influence. But Mr Cromme's surprise takeover of Hoesch in 1991 shows he has the ability to pull off hostile bids in the face of political unease and management opposition.
In that case, he had secretly amassed a sizeable stake in Hoesch while the board was vowing to retain its independence. With Thyssen shares off their earlier highs there is a similar buying opportunity in the grey market for fans of Mr Cromme. The next eight days could prove to be the lull before the storm.
Co-op is going to put up a fight
There must be life in the Co-operative Wholesale Society after all. Its appointment of Brian Keelan of SBC Warburg, one of the City's most aggressive investment bankers, to help repel boarders is as clear a sign as they come that the ship is manned after all and is taking very seriously the threat being posed to its tradition and values by the youthful Andrew Regan.
What it also tells us is that there probably is a way for Mr Regan to mount some kind of hostile boarding party, notwithstanding the Co-op's complacent insistence that its rules and constitution make it entirely immune to this sort of grubby capitalist enterprise.
The Co-op is now pulling out all the stops. Through an early day motion in Parliament yesterday, it accused Mr Regan of being a nasty little offshore asset stripper. But just in case the politicians and the courts decide to abandon the movement to its fate, Mr Keelan is being parachuted in to lend a hand. Technically his role will be to evaluate the Lanica "offer" if and when it arrives. What he might actually find himself doing, if Mr Regan's bid is as credible as his backers claim it will be, is attempting to beat Lanica at its own game - constructing a break-up which delivers even more value back to the Wholesale Society's regional members.
They've certainly hired the right man to do it. Mr Regan and his apparently high-powered array of City backers will certainly meet their match in Mr Keelan, who acted for Southern during its mooted breakup bid for National Power, and Trafalgar House when it attempted to back its losses into Northern Electric. In other words, he knows rather more than Mr Regan about the art of the possible in corporate finance.
If Mr Regan is to move at all, he will have to do so in the next two weeks. He's assembled the fire power and believes he's found a way through the Co-op's byzantine defences. But will he actually fire the cannon? If he backs off now, then the credibility of this young chancer may well be shattered for good.
Certainly his hyper-inflated share price will fall like a stone once the suspension is lifted. But if he lights the fuse, he can expect a fight that might prove equally fatal.
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