It's that Wadhwani again as Bank gets an earful

Barnevik exit; Galileo project

Time for the Bank of England to pull its socks up and jolly well reform its Medium-Term Macro-economic Mode (MTMM). As things stand, the forecasting model is simply not good enough. It is missing or poorly measuring important variables, causing the Bank of England habitually to over-estimate the risk of inflation and under-estimate the threat to growth. So get a move on there, Sir Edward George. There is "much work to be done".

No, this is not The Independent speaking out with its customary table-thumping bravado, though it is certainly a view with which we might have some sympathy. Rather it is the Monetary Policy Committee's resident dove, Sushil Wadhwani. Ever since he joined the MPC, Mr Wadhwani has been a thorn in Sir Edward's side. While still a fresher, he gave a speech entitled "Give growth a chance", in which he implicitly criticised the Bank for apparently doing the opposite. Then he kicked up a fuss about having to rely on the Bank of England's small army of economists for the research he needs to do his job. Instead he wanted his own private army of researchers, which eventually he got.

Plainly they've been kept busy since. Mr Wadhwani's speech to the Edinburgh University Economics Society is his most controversial yet. In it he implies that because of faults in the forecasting model, the Bank could be nearly two percentage points out in its central inflation forecast, which if true has really very profound implications for interest rate policy indeed.

At the last MPC meeting, which voted for a half-point cut in interest rates, Mr Wadhwani appeared to be in favour of going even further and having a 0.75 per cent reduction. Only the realisation that it would have frightened the life out of the markets to cut by so much prevented him from voting for such a move.

Mr Wadhwani's central argument is that the MTMM has been over-estimating the degree of capacity utilisation in the UK economy. In fact, there is a lot more slack than the Bank has been assuming. If past forecasting errors are extrapolated into the future, then you come out with a forecast for inflation that is markedly different from the Bank's central projection of 2.5 per cent in two years' time. Instead it would be between 0.9 and 1.8 percentage points lower. In other words, the degree of inflationary pressure in the UK economy is a good deal less than the Bank has assumed.

Mr Wadhwani's related view on the stock market is equally controversial. Despite the bear market of the past one-and-a-half years, which has seen the FTSE 100 fall by nearly a quarter, he believes the stock market is still overvalued, and at high risk of further setbacks. By common agreement, Mr Wadhwani is an exceptionally clever man, but when it comes to the stock market, even the brainiest person's view tends to be not much better than anybody else's.

All the same, he makes a convincing case. If you buy the Wadhwani view on subdued inflation and overcapacity in the wider economy, then it will remain difficult for companies to push through price increases. Meanwhile, wage cost pressure continues unabated. In such circumstances, the only way companies can deliver the sharp rebound in earnings the stock market is banking on is by taking the axe to costs and investment, which will obviously eventually affect demand. The key point is that companies are unlikely to be able to deliver the inflated rates of return that investors assume in supporting equities at present levels. Quite so.

As for Mr Wadhwani's broadside against his employer, the Bank of England, at least in this country we can have a public debate about such issues, which is more than can be said for the unaccountable and almost wholly impenetrable European Central Bank.

Barnevik exit

It just goes to show that in business it rarely pays to outstay your welcome. The Swedish industrialist Percy Barnevik used to be regarded as one of the world's truly great chief executives, an example of European management at its best. In his eight years at the helm of ABB, formed out of the merger in the late 1980s of Sweden's Asea and Switzerland's Brown Boveri, Mr Barnevik presided over a period of outstanding growth in revenues, earnings and shareholder value. Whole textbooks were written on his decentralised approach to management and he won just about every accolade going.

Yesterday he announced he was stepping down as chairman after admitting that he shares much of the blame for the collapse in fortunes that has beset ABB in the past couple of years. He should have severed all connections when he gave up the chief executive's role in 1997. With the company at its zenith, it was the time to go. Instead he chose to hang on as non-executive chairman and things have been going wrong almost ever since.

The problem is a familiar enough one. Since standing back from the day-to-day running of ABB, Mr Barnevik has been spreading himself too thinly and taken his eye off the ball. In public at least, he has not appeared particularly engaged with any of his myriad charges.

As chairman of Investor, the Wallenbergs' industrial holding company, Mr Barnevik is responsible for a huge array of different business interests, including major stakes in Saab, Ericsson, SAS, OM Group and just about every other big Swedish company. Few of them are doing well at the moment, with the possible exception of the British-based drugs giant AstraZeneca, whose chairmanship Mr Barnevik somehow manages to squeeze in alongside everything else. Investors can only hope that Astra too is not about to go off the boil.

Galileo project

The Galileo project probably doesn't feature prominently on Stephen Byers' radar screen right now given his difficulties with trains, planes and special advisers. But it is about to become an issue. Galileo is Europe's answer to the Americans' GPS global satellite navigation system and promises to revolutionise everything from tracking stolen vehicles to locating the nearest Pizza Express. Unless ministers agree to cough up some money to help fund it, Britain risks being left in Europe's slow lane once more.

Mr Byers wonders, not unreasonably, why the private sector is so loath to put up the cash itself if Galileo is going to be such a runaway success. Until last week he had the backing of the Germans in his suspicions. But even they have now fallen into line with the rest of Europe and agreed to provide 120m euros of development funds in return for 25 per cent of the work. Today Loyola de Palacio, the exotically named EC transport commissioner, is in town to put the thumb screws on Mr Byers for a UK contribution.

Mr Byers may be right to resist. There is a genuine concern about how popular Galileo will prove, since it plans to charge for use, whilst GPS is free. But the history of other European industrial partnerships, such as Airbus and Arianespace, demonstrates that the earlier you join, the greater the influence you exert, and the more you benefit. Can Britain afford to be the odd man out this time?

j.warner@independent.co.uk