How to have your EMU cake and eat it
City & Business
Sunday 28 September 1997
The markets must make their own judgement on the truth of the FT's story, but there seems a fair possibility that they are being hoodwinked here. Let me put it in a different way. Is the Government really preparing for a fundamental shift in policy on EMU, or is this just a presentational change, an attempt by ministers to sound positive as Britain prepares to take up the EU presidency next year while actually not altering their underlying position one jot?
In other words, is this not all about obtaining some of the political and economic benefits of EMU while, for the moment at least, remaining outside it? Being seen as part of the inner circle in Europe, even if not really in it, is plainly a highly desirable thing if reaction on Friday is anything to go by. Continental politicians welcomed the apparent change in tack with open arms. The economic effect was better still - a more competitive exchange rate against the mark and the franc and lower government borrowing costs as bond yields drop down to German and French levels. Whoever spun that story to the FT must have been delighted with the result.
In his column for The Independent, Gavyn Davies, chief economist at Goldman Sachs, has been musing for some months now on how the Government might achieve this presentational shift. One suggestion is to call an early referendum which would empower the Prime Minister to take us into EMU if he thought the circumstances right. The signal thus sent to markets and to Europe would be that the British people wanted to be part of it. On the other hand, there would be no commitment.
Another approach would be for the Government to say it would back entry into EMU once circumstances were right. In reality, this is probably not so very different to saying, "We won't enter until the conditions are right" - broadly the Government's position to date - but in presentational terms it seems a lot more positive.
The trouble is that the FT article actually went rather further than this to suggest a government commitment to entry at the earliest opportunity. Indeed many market operators saw the story as part of a deliberate softening up for the possible announcement of Britain's entry in the first wave.
This strikes me as the most unlikely of all possibilities. Admittedly this is a new government, and it is quite possible that the electorate feels less strongly about EMU these days, that people would indeed be prepared to vote for it in a referendum. But would any political leader in their right mind really want to take us back into a fixed-exchange- rate mechanism so soon after our catastrophic experience with the ERM? New government or not, this seems implausible. Practically, it would also be very difficult to enter in the first wave. The Bank of England, though now independent, is not independent enough for Maastricht. Though we satisfy most of the Maastricht convergence criteria, there is one crucial area in which we fail - currency stability. The pound has been many things since it was ignominiously kicked out of the ERM, but stable it has not been.
I've also got my doubts about whether the Government would really want to commit to a referendum on EMU so soon after being elected. Tony Blair has long said he wants to see convergence not just in the public finances and inflation rates of member states but also in their labour and capital markets, and on a whole host of other measures too, before deciding it is safe to join. All this would argue in favour of the Chancellor again fudging it when he makes his long expected statement towards the end of the year. It will sound a lot more positive about Europe's grand design, it may even say that we will enter at an early opportunity, but I would be amazed if it went further. Whether that will be enough to justify the ecstatic reaction of markets on Friday is anyone's guess.
Mr Levi goes for goal
DID ANYONE notice in Saturday's newspapers that English National Investment Company, a little known investment trust with net assets at the last count of just pounds 15.2m, has bought AEK, one of Greece's leading football clubs? No probably not, for this was a comparatively small deal - just pounds 5m - and even if a football fanatic, you are unlikely to follow the fortunes of AEK. All the same, the transaction seems worthy of some attention, if only because it is the first in a promised string of leisure/sport/entertainment acquisitions from ENI.
The plan is to grow this company into a major enterprise comprising a range of different branded leisure and media interests. To that end, ENI raised some pounds 50m of new equity capital in the City last week. The whole thing is the brainchild of a bright young 35-year-old called Daniel Levi. He's determined to hit the big time. If all this sounds a bit reminiscent of Andrew Regan and Lanica Trust, there are plenty of reasons for believing it is actually very different.
Mr Levi is the prodigy of Joe Lewis, the Bahamas-based billionaire and the largest shareholder in ENI. Already Mr Levi has assembled a quite impressive management team around him as well as involving some impressive backers, including Richemont, the Swiss-based cigarettes and luxury goods group. If the strategy of small acquisitions in the leisure and entertainment industry sounds a little unfocused, there does seem to be some sound thinking behind it all. AEK is a case in point. A top club for pounds 5m would be unthinkable in Britain these days. In many other countries, however, the revenue-earning potential of football is still not yet properly appreciated.
Mr Levi may find it harder to generate value out of these businesses than he thinks. Others have tried and failed. But his attempt looks worth following and we'll certainly be hearing a lot more of him over the next few years.
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