The final triumph of free market principles
COMMENT: 'From very different perspectives and political positions, Mr Tietmeyer and Mr Brown seem to be coming round to the same point of view'
Tuesday 21 January 1997
That's remarkable enough for any beneficiary of the German economic miracle, but for the president of the Bundesbank it looks like a form of heresy. What's this? Unskilled workers should not command high rates of pay, labour regulations are too rigid, collective wage bargaining is not sufficiently flexible, Germany in particular should get away from the idea that the service industries are a humiliating form of work? Hans Tietmeyer is not a politician, he's said this kind of thing before (though not as strongly), and it may be some time before sentiments of this type are echoed publicly by Helmut Kohl. All the same, by German standards, he's tilting at some very sacred cows.
In a different way, so is the Labour Party in its now very public public pronouncements on the importance of sound public finances and low rates of taxation. That this kind of thing should no longer be thought surprising coming from the shadow chancellor is almost as revealing as Mr Tietmeyer's conversion to the cause of flexible labour markets. Are we beginning to witness the final triumph of Anglo-Saxon free market principles? From very different perspectives and political positions, Mr Tietmeyer and Mr Brown seem to be coming round to the same point of view.
The problem for Mr Brown is that it is all very well to say these things, quite another for him to deliver. It remains to be seen what sort of a credibility gap he has to close with the electorate; with the markets it is still a big one.
The rhetoric is fine, but he's got a hill to climb convincing financial markets that he's as serious about it as claimed. Income tax is in any case only part of the equation here. If he has to rely on the windfall profits tax and other wheezes to make the books balance, he could be in trouble.
There is no such thing as a popular tax, however much a windfall levy on the utilities might look like one. While proposals for this tax languished in the pounds 3bn-pounds 5bn range, Labour looked like getting away with it, just about. But if it is true that Mr Brown's office is now looking at a pounds 10bn levy - and his comments on income tax yesterday only tend to support the suggestion that he is - then that is a very different matter.
This is not money that it is going to be magicked out of thin air. Ultimately it will be the shareholders who pay. There are about 8 million of them spread across the utilities, and the sums involved begin to look large enough to make an electoral difference. As Mr Brown is about to discover, squaring the circle between Labour's social commitments, its policy of low taxation, Maastricht and the financial markets will be quite as hard as Mr Tietmeyer paints it.
Demergers are no panacea
The City was beginning to have its doubts about demergers, but the woeful performance of Thorn since its divorce from EMI has confirmed that the great business school idea of the early 1990s is no panacea. Since Thorn EMI did the splits in August last year, the rental arm's shares have slumped 47 per cent.
That would not matter so much if the music business had played a more cheerful tune, but it too has fallen, by 16 per cent as bid speculation evaporated.
The theory of demergers is fine as far as it goes. When a valuable gem such as ICI's pharmaceuticals arm is hidden from view behind a lower-rated business like bulk chemicals, it doesn't take a genius to recognise the potential of spinning it off into a racier sector.
The same was true of Racal's progeny, especially Vodafone, where the potential of the mobile phone revolution was always likely to be diluted by the stock market rating on dull defence electronics contracts.
But the list of failed demergers is lengthening. Hanson's ran aground last year when the City realised the conglomerate's four-way split was little more than a dividend cut in fancy clothing. Guinness has turned its back on a break-up. Most tellingly, Sir Christopher Hogg, architect of the Courtaulds demerger, has said he is unconvinced it is the solution to Allied Domecq's deep-seated problems. BAT Industries, likewise, cannot see how demerging tobacco from insurance would add to shareholder value, even though it admits there is no logic in co-existence.
With the benefit of hindsight it is now clear that it was always going to be better to travel than to arrive with Thorn EMI. In the months leading up to last summer's split, optimistic estimates of the value of the music arm to one of the US entertainment giants drove the share price to dizzy heights while no-one really gave a second thought to the dull old rental arm.
Which was a mistake, because dull it was, is and is likely to remain. As yesterday's trading statement confirmed the market in the US for renting commodity products like video recorders and television is drying up as fast as a price war is driving down the cost of buying the machines outright.
What's left of the market is being undermined in the courts where American lawyers have cottoned onto the usurious effective interest rates rent- to-buy contracts imply. The move into car rental, an area already well served by specialists, is a further sign of desperation. Being EMI's unnoticed sibling had its attractions, it seems.
Whistle blown on gravy train
The gravy train may not yet have hit the buffers but at least the whistle has been blown. Pressure from institutional investors has finally forced Prism Rail to scrap a share ratchet scheme that enriched its founding investors beyond their wildest dreams. But no matter.
Prism's directors own 30 per cent and are likely to be in the money again when a larger player chooses to swallow them in the inevitable consolidation to come. History will judge them as clever arbitrageurs who made their money paying peanuts for train operating companies sold in haste
Diving in at the deep end is no excuse for shirking the style stakes
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