Christopher Walker: Labour needs pen pals in the City

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Somerset Maugham's play The Letter is due a revival. This tale of a tempestuous affair, full of suspicion and jealousy, culminating in a poisonous epistle, well describes last week's events. No better analogy could be found for the tiff between New Labour and the City over Railtrack.

When Stephen Byers announced the closet re-nationalisation of Railtrack without compensation, wounded feelings in the City soon turned to anger. His gamble was that, for the sake of a few cheap points earned with Old Labour back-benchers, he could ride out any legal threats from shareholders and continue to secure the financial community's co-operation in the crucial public/private finance initiatives.

This gamble failed disastrously. The number of legal actions sparked by the re-nationalisation spiralled dangerously out of control, while the City gave every indication that in future it would not play ball. Government plans for the privatisation of its defence research laboratories, QinetiQ, were scrapped, with one government figure admitting openly that, post Railtrack, privatisations were no longer possible. The final coup de grâce was the now-famous letter signed by 22 fund managers that raised the straightforward issue of trust.

The Railtrack affair may prove to be this Government's biggest disaster. The rail network faces a far more uncertain future than it did before the announcement; huge amounts of public money are, and will be, poured in; and all future business HM Government wishes to conduct will attract a considerably higher risk premium. In making its U-turn, the Government has not only lost the points gained with left-wingers but further alienated them. One MP criticised the "cosy relationship with the City". Cosy? How wrong he is.

The relationship between New Labour and the City has resembled nothing so much as the courtship of scorpions. It started in the dying days of the Major government, with the "prawn cocktail" offensive in which Alistair Darling was despatched as if an ambassador to a foreign realm.

When the new government assumed power, the urgent cry went out for someone (anyone?) in the financial community who was prepared to counsel on the City's arcane workings. Answering the call, I quickly felt like one of those Americans kidnapped by aliens for scientific experiments. From my cufflinks to my City shoes, I was not what the apparatchiks were used to.

It is this lack of any firm hinterland in the financial community that exposes the Government to so much danger. Early disasters such as the proposed taxation of foreign dividends (which threatened to wipe out large chunks of the FTSE) demonstrated the lack of financial antennae. On the back-benches there seems to be an underlying suspicion that capitalism is an evil, only at best necessary. In their eyes there is little to distinguish the honest broker from the rogue trader.

It is these factors taken together that offer the only explanation for New Labour's bizarre relationships with a variety of dubious "businessmen", a desperate and confused search for financially aware friends.

Over Railtrack, New Labour has been forced into one of its most embarrassing climb-downs. Nevertheless it was right to do so, just as it was wrong in the first place. The issue now facing the Government is how to rebuild its reputation with the City. Left-wingers who say this doesn't matter should consider the overwhelming dependency of the UK on the financial industry. Post the meltdown of UK manufacturing in the Eighties and Nineties, we have come to resemble not so much a country with a finance industry, but more a finance industry with a country. We cannot buck the markets.