Dollar gives Europe a kick up the backside


I can remember, quite clearly, when sterling nearly hit parity with the dollar. It was in the summer of 1984, when the British economy was reeling from the effects of the miners' strike and the Thatcher government's monetarist experiment. The psychological effect of a pound, which not so long ago had been worth four dollars, falling beneath the mighty greenback served as a kick up the backside. The next five years were ones of unprecedented boom - even allowing for the stock market correction of 1987. And if you ignore the folly of Lamont and Major's half- hearted attempts to join the Exchange Rate Mechanism, you could argue that the British economy has never looked back.

So may it be for Europe. Last week, after drifting downwards for most of this year and flirting with parity, the euro dropped below $1 for the first time in its 11-month life. Many Eurosceptics predicted this could be the start of a spiral downwards, breaking the fledgling currency in its fall. Although the squabbling between the big guns of European politics on Friday snuffed out any chances of a minor rally at the end of the week, predictions are that the euro will hover around the one-dollar mark for most of this month, before rallying in the spring.

The euro's recent fall should be good for Europe. Exporters and investors are happy and the French and Italian markets have had bumper years.

Given the choice between the British situation - high interest rates and a strong currency - and the continental scenario - low interest rates and a weak currency - which one would most businesses choose?

So why is there suddenly a political row? The answer is psychology. The Germans in particular, but also the French, do not want their currency perceived as weak because they feel it is a reflection on the relative strengths of their economies and, dare we say, their virility. They are desperate to find a solution that will make the euro strong again.

The first thing they have to realise is that the euro's weakness is, to a great extent, a factor of interest rates. US rates are higher than Europe's, and there is a perception that they may go higher - while last month's 0.5 per cent hike may well be the end of the European Central Bank's tightening of the screws.

The second is that the American economy has gone through one of the best periods in its history, largely pushed ahead by the e-commerce revolution, which has its epicentre in California. Compared with the US, any economy would pale.

The third is that the structural problems of European business - protectionism, inefficient corporate structures and unprovided pension liabilities - have still not been addressed. Wim Duisenberg hinted at this in his comments about Germany's fortress attitude to Vodafone's bid for Mannesmann, and was attacked for it. Yet for once the dull Dutchman was preaching a gospel that even the greatest opponents of the ECB can agree with.

But if Europe's politicians were to come round to Duisenberg's way of thinking, the economies of the Continent might undergo an epiphany. If France and Germany liberalised their attitudes, some of the badly needed reconstruction could take place. As the micro economies of Europe sort themselves out, so too will the macro situation. The euro will rise like the pound did. And remember, only seven years after being nearly pounds 1 to $1, the pound was worth double that.

Wolfson's worries

While Lord Wolfson of Sunningdale will no doubt celebrate the decline of the euro, he has had another collapse to worry about - the one in the GUS share price. At current levels, the Experian credit rating business is worth more than the entire group, which only goes to show how bad an acquisition Argos was. Lord Wolfson may have attempted to soothe the worries of some Experian executives by making one of their number, John Pearce, chief executive of GUS. But unless he does something soon to unleash the value of Experian, someone else will.

Uphill task for HSBC

The murder of Edmond Safra has robbed world banking of one of its few true entrepreneurs. His creation of Republic and Safra banks was a great feat, perhaps only eclipsed by the brilliant deal to sell them to HSBC for more than $10bn.

While one could justify the purchase of Republic - albeit before it became embroiled in the Princeton Economics scandal - for its retail network in New York, Safra Bank is another matter. The Swiss-based business serves a relatively small number of wealthy people, and their business is valued at around $17,000 per account in the deal.

Even with the founder still on board to smooth the transition to HSBC, this was going to be a tricky assimilation. But without Mr Safra's charm and guidance, one wonders how these high-net-worth individuals will react to their business being transacted not by a sober, learned banker from the Levant, but by a spotty graduate from Guildford.


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