Jeremy Warner's Outlook: Phoenix Four are the main culprits in the slow death of a dog called Rover

World economy. Just stop worrying; Dixons embraces the Russian bear
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The Independent Online

They seem a decent lot, the workforce of MG Rover. If I were a Longbridge employee, I'm not sure I'd be so magnanimous. Unions went out of their way yesterday to say the Government was not to blame for the collapse of the last British-owned volume car producer. Even Michael Howard, leader of the opposition, struggled to say he would have done things differently, other than to drone on about how red tape is stifling British business and that in the Government's shoes he would have intervened earlier.

They seem a decent lot, the workforce of MG Rover. If I were a Longbridge employee, I'm not sure I'd be so magnanimous. Unions went out of their way yesterday to say the Government was not to blame for the collapse of the last British-owned volume car producer. Even Michael Howard, leader of the opposition, struggled to say he would have done things differently, other than to drone on about how red tape is stifling British business and that in the Government's shoes he would have intervened earlier.

It wouldn't have done any good. The writing has been on the wall for Rover ever since BMW admitted defeat five years ago, and abandoned the English patient to its fate, guiltily stuffing a £500m cheque into its back pocket to see the company on its way. It was that cheque which made Rover so attractive to the Phoenix Four. They've been living on it ever since, but it was always going to run out eventually.

Yet not before John Towers, the chairman, and his three musketeers, had spirited away £50m for themselves. If anyone is to blame for letting the workforce down so badly, it is Mr Towers, whose handling of this industrial disaster story, not to mention BMW's money, will now be subjected to forensic examination.

Labour would hardly have planned for such a calamitous event right slap bang in the middle of an election campaign, but perhaps sadly, the political fallout is in the end likely to be of only marginal significance. The Prime Minister and his Chancellor appeared at Longbridge yesterday afternoon rather in the way of politicians visiting the scene of a natural disaster. There was sympathy and the promise of lots of money for the "victims" and their families, but few seemed minded to blame them for what had just occurred.

Except, perhaps, the Chinese. It was Shanghai Automotive Industries Corporation (SAIC) that brought matters to a head by writing to the Government and the administrators saying that it was not willing to acquire Rover or any part of it as a going concern. As the week progressed, SAIC began to believe it was being used by the Government as a way of spinning out Rover's demise until after the election.

As long as an offer from SAIC remained a possibility, however remote, the patient could be kept alive on a drip feed of state aid. Since SAIC had already made apparent that it wouldn't enter into any transaction with Rover unless the Government could guarantee the company wouldn't become insolvent for at least two years, this was cynicism of the worst kind. Ministers knew Longbridge was beyond saving, yet they were prepared to use taxpayers' money to keep it alive just as long as there was an election to win.

The workforce, it seems, have been among Rover's most loyal customers in recent years, taking advantage of a financing facility provided by the company to buy the very vehicles they were being paid to produce. In a further sorry twist to this tragic affair, many of the workers have in effect been paying their own salaries out of borrowings they can't even begin to pay off from the bare minimum, statutory redundancy they will receive. The Phoenix Four have much to answer for. As for the £150m package promised by the Prime Minister yesterday to ease the workers' pain, that works out at £30,000 a job. A sensible use of taxpayers' money? Don't be silly. There's an election to win.

World economy. Just stop worrying

As central bankers and finance ministers assemble in Washington this weekend for the spring meeting of the International Monetary Fund and World Bank, the world economy is said to be in a more perilous condition than in ages. This, of course, is said every year, for if everything was deemed perfectly fine, there would be nothing to talk about.

In fact, the world economy is in reasonably good shape. After recording the best growth in more than 30 years last year, things are predicted to slow in 2005. Yet with the IMF forecasting 4.3 per cent, world growth in output is likely to remain robustly above trend. So what's everyone worrying about?

In its World Economic Outlook published this week, the IMF identifies two major concerns. One is the rising oil price. Perhaps surprisingly, this has so far had very little obvious adverse effect on the world economy, but if Goldman Sachs and others are right in thinking that Chinese demand will create a "super spike" in the price, then plainly things would start to get pretty awkward.

Yet it is in the burgeoning size of current account imbalances that the IMF's chief economist, Raghuram Rajan, sees the main threat to stability. This in turn is caused, at least in part, by strongly divergent patterns of growth, with both the euro area and Japan growing much less strongly than other major regions of the world.

The upshot is an Alice in Wonderland economy, where there are large and growing current account deficits in the US and Britain counterbalanced by large and growing surpluses in emerging Asia, Japan and Germany. Savings rates are generally high in the economies with big surpluses and low to non-existent in the US and Britain. In essence, Asia has been financing US consumption. As Mr Rajan observes, it is hard to think that a situation where young, relatively poor countries save more than they invest while the rich ageing countries of the world do not is a long-run sustainable equilibrium.

Exchange rates should in theory have already brought about the necessary adjustments. Thus far, however, dollar depreciation has had little effect on these imbalances. In part, this is because the main depreciation has taken place against the eurozone, where growth is weak.

Currency pegs and intervention have largely prevented any correction against high-growth Asian economies, or indeed against low-growth Japan. Meanwhile, exceptionally loose monetary conditions in the US have kept the savings rate low and consumption high. Few economists think any of this sustainable. The longer it is allowed to carry on, the more painful the subsequent adjustment through interest rates and living standards.

Yet interestingly, the apparently unsustainable has been sustained for an awfully long time now without any adverse consequences. After such a long period of relatively benign economic conditions, it is as well not to be complacent, yet the thing that Mr Rajan seems to be missing in warning of the dangers posed by imbalances is that the world has changed.

Rapid industrialisation in China and the rest of Asia is creating a vast pool of new capacity and demand. For the time being, the imbalances rather suit these regions, as indeed it does the US. As for Europe and Japan, the solution - structural reform - lies in their own hands. I'm not saying there's nothing to worry about, yet come this time next year it seems likely there will be the same dire warnings of trouble to come but not much will have changed in the meantime. What was it that Keynes said? Look after the short term and the long run will take care of itself.

Dixons embraces the Russian bear

John Clare, chief executive of Dixons, has pulled off a blinder by taking out an option to buy Russia's Eldorado. For a relatively small upfront payment, he gains the rights to take control of the market leader in one of the fastest growing retail markets in the world. The situation back home meanwhile grows steadily more challenging. The Russian bear, despite the capricious Vladimir Putin, looks a good deal more inviting.

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