Bank freedom points away from boom and bust

COMMENT: 'It would make a mockery of the move to independence if the Bank's new Monetary Policy Committee were to refrain from giving its honest analysis of the economy for fear of trampling on the Chancellor's sensibilities'
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Gordon Brown's decision to give the Bank of England operational independence has acquired a small but hardened core of critics who claim it is all a terrible mistake to separate monetary from fiscal policy. The same people will be saying "told you so" now that the Bank has unequivocally indicated that future interest rate moves will depend on what's in the Budget.

In fact, the Inflation Report's expression of concern about the imbalance in the economy, and the corresponding need to use tax rather than interest rate levers to correct it, is no more than most City economists and business organisations have been saying all year. The strength of the pound means there is a real dilemma in relying on monetary policy alone to slow down home demand.

It would make a mockery of the move to independence if the Bank's new Monetary Policy Committee were to refrain from giving its honest analysis of the economy for fear of trampling on the Chancellor's sensibilities. The whole point of the decision was to hand over, subject to proper accountability and transparency, partial control of the economy to people who are not subject to day-to-day political pressures. One of the virtues of Mr Brown's welcome step is precisely that the Bank will police his own tax and spending choices.

As it happens, the Inflation Report's veiled judgement that a tough Budget will do the trick might easily result in the opposite reaction to the one desired. If Gordon Brown proved himself as virtuous on the fiscal as the monetary front, it might well confirm financial markets in their love affair with the pound, and have the perverse effect of taking the exchange rate even higher.

Even so, freedom for the Bank of England has to mean freedom to say what it thinks about inflation prospects in the broadest sense. Until all the institutional changes are in place, it is impossible to predict how well its relationship with the Chancellor will work. We do not know yet who will be on the new Monetary Policy Committee, nor how the feeble Treasury Select Committee will be beefed up to hold it to account, nor precisely what inflation target the Government will set next month. Whatever the answers to these questions, both interest rates and taxes are more likely to be set from now on for the lasting benefit of the economy than in our boom-bust past.

How Arnault could get his own back

Bernard Arnault of LVMH has been left out in the cold in Guinness's proposed merger with Grand Metropolitan; here's how he might get his own back. First, he has to reconcile himself to the fact that his own interests and those of other Guinness shareholders are not the same. His is a quite different agenda to that of other shareholders. For them, shareholder value is the only game in town. Mr Arnault's interest is a much longer- term and strategic one.

He wants control of Guinness's United Distillers spirits business so that it can be more fully integrated with his own drinks group, Moet Hennessy. The rest of Guinness - its large and profitable brewing interests - is for the birds as far as Mr Arnault is concerned. Temperamentally, as well as culturally and commercially, he is not interested in low-margin, high- volume beer.

If the GrandMet merger goes ahead, he'll have lost the war. His shareholding in Guinness will get diluted down to 7 per cent, he'll get booted off the board, he'll have lost the upper hand in the arrangements Moet already has with United Distillers, and with Guinness sitting there as a 33 per cent shareholder in Moet, he'll be in a bid-or-be-bid-for position with his own company. No wonder he's so opposed to the merger with GrandMet.

The problem is that the alternative he's put forward, a three-way merger between Moet, United Distillers, and GrandMet's spirits division, IDV, is a mission impossible. GrandMet would never contemplate it, nor would this typically Gallic, grand industrial strategy, be likely to deliver the sort of short-term gain Anglo Saxon investors demand of such things. How then to bring his own interests into line with those of other Guinness shareholders?

By himself he probably lacks the financial fire-power directly to counter the GrandMet merger with a rival offer for Guinness. But it shouldn't be beyond the wit of clever investment bankers to design a breakup bid for Guinness that would deliver him what he wants while at the same time generating better value for others. A big premium would have to be paid, but as Mr Arnault recently showed with his purchase of Chateau d'Yquem, this is a man prepared to take a very long-term view of these things. With the GrandMet proposal likely to be marooned with the competition authorities for six months or more, he is in with more than a chance; there would be no similar competition concerns raised by a merger of United and Moet. Too ambitious? Possibly, but Mr Arnault is a very ambitious man.

Aerospatiale chief spies another ambush

Paranoid? Moi? When it comes to seeing an ambush around every corner it is hard to beat Yves Michot, chairman of Aerospatiale, the mighty French aerospace group. Mr Michot has spotted British Aerospace and Daimler Benz lining up their sights on Thomson CSF and fired off a round of chaff to confuse the enemy.

Far from welcoming this fine attempt at constructing a pan-European defence grouping, Mr Michot concludes bizarrely that unless the Brits and the Germans are stopped they will be signing the "death warrant" for another example of European collaboration, Airbus Industrie.

Has Mr Michot got his flight controls mixed up? Do Airbus A340s come secretly armed with 20 millimetre canons? In short, what on earth is the link between the bidding contest for Thomson CSF, a manufacturer of electronic warfare wizardry, and Airbus Industrie, a manufacturer of commercial jetliners? The answer is there isn't one except that Aerospatiale is involved in the latter (along with BAe and DASA) but it has been excluded from direct involvement in the former. Although M Michot may not put in a bid, Dassault, the company with which Aerospatiale will be merged when it too is privatised has been allowed to tender for Thomson. Hence Mr Michot's Airbus card, designed to disguise what is actually a calculated piece of jingoism designed to appeal to French chauvinism.

Having said that, Mr Michot's bellicose comments serve a dual purpose, which is to throw a spanner in the works as BAe and DASA as Airbus presses ahead with conversion to a plc and an eventual stock market listing. Aerospatiale has always been the least enthusiastic supporter of the plan, seeing it as a ruse to diminish French influence over Airbus.

This is not the end of the story. BAe and DASA are vying with Aerospatiale for supremacy when the inevitable consolidation of Europe's aerospace and defence industry takes place. Just because Mr Michot is paranoid, it doesn't mean they are not out to get him.

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