Jeremy Warner's Outlook: Growth pact reform fails to address main issue

Legal flotations; British Energy
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The Independent Online

In March 2000, European Union leaders agreed a programme of measures at a summit in Lisbon designed to turn Europe into the world's most competitive economic region within 10 years. Meeting in Brussels this week for a half-time appraisal, they can conclude only one thing: self evidently they are failing. Nor is it easy to see, given the political constraints under which each individual nation operates, how the tide might be turned.

In March 2000, European Union leaders agreed a programme of measures at a summit in Lisbon designed to turn Europe into the world's most competitive economic region within 10 years. Meeting in Brussels this week for a half-time appraisal, they can conclude only one thing: self evidently they are failing. Nor is it easy to see, given the political constraints under which each individual nation operates, how the tide might be turned.

The tinkering with the stability and growth pact agreed by finance ministers at the weekend, bringing in some respects into line with the British approach to governing the public finances, will make no significant difference at all, though it ought at least to prevent the absurdity of already stretched budgetry positions being made even worse by the imposition of swingeing fines.

Indeed, if reform of the pact leads to higher interest rates, as logically any loosening of the straitjacket of budgetry constraint ought to, then it might end up doing more harm than good. Already, Yves Mersch, a member of the European Central Bank governing council, has warned that any easing of fiscal rules might have monetary consequences.

In any case, the reforms agreed at the weekend are not anywhere near deep enough to allow the tax cuts that are perhaps necessary to provide a decent stimulus to demand in the depressed nations of Germany, France and Italy, and thereby get these economies moving again.

Europe isn't entirely a busted flush. Some eurozone countries run budget surpluses while unemployment is low in a number of the peripheral nations. Productivity per man-hour is high and many European companies are among the most competitive in the world. Yet in the economic heartland of the eurozone ­ Germany and France ­ unemployment remains stubbornly above 10 per cent and growth is barely perceptible.

It's been said countless times before, not least at the Lisbon summit five years ago; what Europe needs is structural reform, particularly of its labour markets, where fiercely defended rules and protections conspire to prevent meaningful job creation in the private sector. Europe has also been incredibly slow to deregulate her industries, from energy to telecommunications, and dismantle her national boundaries. This is required by the single market but supposed national interest continues to reign supreme. Competition is still too often seen as more of a threat to jobs and growth than the boon it really is.

There will be a lot more hot air in Brussels this week, as there was in Lisbon five years ago, but after the fine words, political leaders will return to their constituencies and do nothing at all. Worryingly, Britain seems only too happy to go the same way. Few would begrudge the employment protections introduced by Labour over the past eight years, from the minimum wage to enhanced parental leave and rights of union recognition. But they all chip away at the incentive to create jobs, wealth and growth until eventually businesses that are already at the margin of viability decide it is no longer worth the candle.

There are also alarming signs of the same lack of political will as rules on the Continent, with the Government apparently prepared to withdraw key proposals for public sector pensions reform ­ in particular raising the retirement age from 60 to 65 ­ at least until after the election. Never mind Europe's failure to achieve the economic leadership position it aspires to. We seem only too determined to follow the same path here in Britain too.

Legal flotations

Absolutely Not. We don't need capital and we certainly don't need an IPO. That broadly summarises the reaction of top City law firms yesterday to government proposals that might eventually allow them to float on the stock market. We'll have to wait for the White Paper to know for sure whether this is the Government's intention, but that was the implication of Lord Falconer's remarks yesterday, and if Tesco is allowed to own a law practice, there is no logical reason why it shouldn't also be owned collectively by outside investors.

Top City lawyers are already exceptionally well paid ­ though not as highly as their counterparts in investment banking ­ and it is certainly true that most partnerships don't need much in the way of extra capital. The borrowed capital of partners, which is highly tax efficient, is generally sufficient. City law firms don't lend, underwrite, invest, or engage in proprietary trading, so there's no need as with other many other areas of financial services for a substantial cushion of risk capital.

However, the need for capital is rarely the primary reason for floating a big partnership. As with Goldman Sachs, these things are driven as much by greed as strategic considerations. For a big name, such as Freshfields or Clifford Chance, there is the opportunity for the present generation of partners to crystallise the goodwill of the business, built up over generations, and sell the profits out into the indefinite future. For Freshfields' 500 partners, this could be worth as much as £4m apiece. Hard to resist, whatever their attachment might be to the traditions of partnership.

Enriching the partners of Clifford Chance beyond the dreams of avarice is certainly not the Lord Chancellor's objective in seeking to deregulate the legal profession, but as with a myriad of City securities firms that were sold off and floated at the time of Big Bang in the mid-1980s, that's all too likely to be a primary effect. Whether this amounts to progress is for others to decide. Only one thing is certain. Whether the partners cash in their chips or not, the fees will keep rising.

British Energy

Mike Alexander was chief executive of the nuclear generator British Energy until yesterday when he "decided to seek a new challenge elsewhere", or so the press release tells us. The challenge in Mr Alexander's case is to find a new job, having been unceremoniously ousted from the one he had by his chairman Adrian Montague, thereby trouncing his reputation.

The precise reasons are a bit of mystery. The board seemingly decided that Mr Alexander was just the wrong man for the job long-term, if only because he'd never run a nuclear power station before arriving at British Energy. Never mind the fact that those who had, the previous management, ran the company into a state of financial meltdown.

Never one to call a spade a spade, British Energy hid behind the usual euphemisms and empty words of appreciation for all the sterling work Mr Alexander had done. For years, British Energy was the company which dare not speak its real name as Britain's primary producer of nuclear power, so we should not be too surprised at the disconnect between what it does and what it says. As it happens, British Energy has a penchant for changing its top brass without satisfactory explanation. A little more candour and a little less sophistry would come in useful when companies despatch chief executives, even for one as secretive as British Energy.

Mr Alexander has been asked to make way for an older man in the shape of Bill Coley, one of British Energy's non-execs. As a former president of Duke Power, one of America's biggest nuclear companies, he does at least know his atoms from his neutrons. One of British Energy's biggest challenges over the past couple of years, aside from remaining solvent, has been to improve the reliability of its reactors. But, having been brought out of retirement at the age of 61, he cannot be anything other than a stop-gap replacement.

After all the unplanned shutdowns of the past two years, his job will be to keep the reactors burning. But as for having a hand in the nuclear renaissance Tony Blair seems determined to announce after the election, it looks like that will be left to others.

jeremy.warner@independent.co.uk

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