Falling Irish inflation undermines anti-euro case

Irish inflation; US power cock-up; Orange flotation
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The Independent Online

Another piece of europhobic nonsense bites the dust. Ireland's ever rising inflation rate was the cause of almost as much celebration among eurosceptics as the ever declining euro. The latter trend began convincingly to reverse late last year and yesterday, the canard of Irish inflation was removed from the europhobic armoury as well. Between November and December, the Irish inflation rate as measured by the harmonised index of consumer prices (the standard European measure) fell from 6 per cent to 4.6 per cent.

Another piece of europhobic nonsense bites the dust. Ireland's ever rising inflation rate was the cause of almost as much celebration among eurosceptics as the ever declining euro. The latter trend began convincingly to reverse late last year and yesterday, the canard of Irish inflation was removed from the europhobic armoury as well. Between November and December, the Irish inflation rate as measured by the harmonised index of consumer prices (the standard European measure) fell from 6 per cent to 4.6 per cent.

Admittedly, this is still too high for comfort but further falls are expected during the remainder of this year as the lower oil price and a stronger euro begin to work their way into the figures. The improving outlook for inflation is all the more remarkable against the backdrop of criticism levelled at Ireland's last Budget, which pumped more money by way of tax cuts and welfare benefits into the country's already booming economy.

The economic case against the euro - and it is admittedly a persuasive one - has always been that a single interest rates cannot deal with all the differing and varied economic needs of Euroland's member states. In some areas it is bound to be inappropriately high, in other, more economically buoyant regions, too low. The one size fits all approach is flawed, euro detractors have argued. Ireland seemed to provide all the proof that was needed. No longer, it would seem. Ireland's economy is plainly not heading for the road crash so many eurosceptic "experts" were predicting.

According to research by the European Central Bank, regional differences in inflation within Euroland are no higher than they have been in the United States. Again the argument often used by eurosceptics that the US is different to Europe because it has political union and the safety valve of high labour mobility is exposed as a flawed analysis.

Far from being a disaster, the euro is starting to show every sign of success. Price transparency is homogenising inflation and leading to greater competitiveness across Europe, tax rates are being harmonised downward and even job creation is, for the first time since anyone can remember, running at a faster rate than the US. Tony Blair is reported as wanting to defuse Europe as an election issue by promising to delay any referendum on the single currency until well into the next Parliament. By pandering to public opinion, or at least his own perception of it, the Prime Minister is once again missing the main story.

US power cock-up  

The Californian power crisis looks like presenting George Bush's administration with its first real test. The world's richest economy has declared a state of emergency, its citizens are faced with the spectre of rolling power cuts - or brownouts as the Americans like to call them - and its two biggest electricity companies are on the verge of filing for Chapter 11 bankruptcy protection.

So serious is the situation, that the state authorities have had to step in and buy power supplies on behalf of California's consumers because the generators are no longer confident of being paid by PG&E and Southern Californian Edison. They have also had to bring in supplies from outside California, putting the electricity supply system in neighbouring states under increased strain. The task for President Bush is to prevent the contagion spreading, putting America's power market and even its financial system at risk.

Since the root cause of this unfolding disaster is the way in which the Californian power market was deregulated, it is reasonable to ask whether a similar fate could befall the UK, which has also liberalised its energy industry. The short answer is almost certainly not. Although there are some superficial similarities between the Californian and UK markets, there are also some important differences.

The Californian crisis stems from a lack of generating capacity, which has driven wholesale prices sky-high, and the inability of the electricity companies to pass those increased costs on to consumers. State planning laws, environmental restrictions on generation and the phenomenal growth of the Californian economy, powered by energy-hungry IT firms, have not helped. But the main culprit is the peculiarly botched deregulation of the market in California. This forced the utilities to sell off much of their generating capacity whilst preventing them from signing long-term contracts or raising domestic tariffs until 2002.

In the absence of long-term contracts, the generators had no incentive to build new capacity. And because their customers were reliant on volatile spot prices, they had every opportunity to profiteer. The biggest difference in the UK is that we have plenty of capacity. Plant margin - the amount by which installed capacity exceeds peak demand - is about 30 per cent, and more power stations are being built following the lifting of the moratorium on gas-fired plants.

Although the prices that UK electricity suppliers can charge certain customers in their own regions remain capped until next year, in all other respects, the supply market has been liberalised, allowing suppliers to sign up to long-term contracts that fix their generation costs.

In most respects, the UK still has a lot to learn from the way the US economy is run. On this occasion, the boot is very firmly on the other foot.

Orange flotation  

City institutions are playing a cute game in arguing down the valuation for the Orange flotation. Before the pre-marketing got under way, Orange and its advisers were confident of achieving a valuation in the 70-85bn euro range. But that's a premium to Vodafone, investors in Britain and Germany have told Orange in no uncertain terms. Orange may be a faster growing company, but Vodafone is the market leader and in these markets, that counts for a lot.

Unfortunately for Orange, investors know that their need to buy is a good deal less pressing than France Telecom's need to sell. With markets still down in the dumps and a lorry load of other mobile phone companies planning to float this year and next, no-one has to buy Orange. France Telecom, on the other hand, desperately needs to sell to help pay down some of its mountain of debt, which is even bigger than British Telecom's.

Of course, Orange might argue that the 60-65bn euro range advisers now seem to have settled on was always the one it had in mind. The 70-85bn target might have been put into the market to convince investors they were getting a bargain when eventually the real price emerged. Whatever the answer, it's all good news for retail investors. Orange is without a doubt the best of the mobile phone companies coming to market over the next year, and the lower valuation makes it more attractive still. France Telecom would not be selling in these market conditions unless it had to. The equivalent of the Versailles silver is up for sale and investors would be silly to miss out.

j.warner@independent.co.uk">j.warner@independent.co.uk

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