Monti fails to respond to Jack's neutron bomb

Upward pressure; GlaxoSmithKline

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The chairman of General Electric is known as Jack "Neutron" Welch for a good reason. Yesterday he went positively ballistic. The mild-mannered European Competition Commissioner, Mario Monti, has in all probability put the kibosh on GE's $42bn takeover of Honeywell and the Americans just can't believe it. It was the largest industrial merger ever attempted, and it was also meant to be Mr Welch's swansong.

Why, he asks, is Brussels playing hardball when the deal has already been waved through by the anti-trust authorities in the US and Canada? Politics may have played a part. There is a good deal more antipathy towards the new American administration on the Continent than here and it may be more than coincidence that Brussels has slapped GE in the face just as President Bush conducts his first tour of Europe.

But there are also some powerful anti-trust arguments for blocking the deal. A merger of GE and Honeywell would allow the two companies to bundle their product lines together and so gain an important and perhaps unfair advantage in the aerospace market. A merger might also have allowed GE's aircraft leasing subsidiary, which buys one in 10 of all new planes, to ensure that they came equipped with Honeywell avionics as well as GE engines.

In many other industries such a bundling together of complimentary products under one roof wouldn't matter very much. Indeed, it is the rationale that drives many takeovers. But aeroengines are an exception. There are only three players of any significance in the world, and GE is already the dominant one. Barriers to entry are so high that there is no danger of it ever facing new competition.

The US Justice Department was apparently relaxed at the prospect of an all-embracing aerospace group with a wingspan covering everything from engines to aircraft systems. But it is easy to see why there was alarm elsewhere. Rolls-Royce has fought hard to dig its way back from receivership three decades ago to the point where it is now a genuine competitor to GE and firmly established as the world's number two aeroengine company. The GE-Honeywell deal could have undermined that.

This is not the first time, of course, that Brussels has rudely intervened in what the US assumed was an all-American affair. The Boeing-McDonnell Douglas merger only went through after Commissioner Monti's predecessor had extracted some big concessions. Then, as now, the US complained bitterly. But the lesson remains the same. Global companies that recognise no national borders need to be kept in check by regulators with a similar sweep. In the twilight of his career, Jack Welch has been forced to learn it the hard way.

Upward pressure

So where exactly is that wretched recession? All the data has so far defied the pessimists. In Britain there are few signs even of a widely based slowdown, let alone a looming recession, and the US has yet to record a quarter of negative growth. In Europe, growth is undoubtedly slowing, and from a level, what's more, which was never anything more than pedestrian in the first place. But the European Central Bank's prediction yesterday of a fall in eurozone growth from 3.4 per cent last year to between 2.2 and 2.8 per cent this year hardly amounts to economic Armageddon. It's still too early to be certain, but it looks as though the world has again avoided the contraction or worse that so many have been predicting.

Rather the reverse, in fact. In Britain we have once more reached a watershed for interest rates where the next move is much more likely to be up than down. Outside the bombed out technology, media and telecoms sectors, the economy seems to be motoring. Unemployment is still falling, average earnings are rising at two and a half times the rate of inflation, and judging by yesterday's numbers, retail sales remain buoyant. If there's a recession coming, someone forgot to tell the British consumer about it.

There's another reason too why in the absence of a further sharp deterioration in the international economy, the Bank of England's Monetary Policy Committee will soon be considering a reversal of recent interest rate cuts. Galvanised by the prospect of a referendum on the euro, the pound is falling, removing one of the main supports for subdued British inflation.

According to new research published yesterday by Lehman Brothers, the prospect of euro membership will by the end of this parliament have driven the exchange rate down to between 2.75 and 2.9 Deutschmarks to the pound, or an effective devaluation of between 10 and 15 per cent. This assumes of course that Tony Blair is indeed intent on taking us into the single currency. Plenty could happen to derail him, not least the Chancellor's assumed opposition. But if Lehman is right about the range, it's a hefty correction that sterling will go through.

Even in sclerotic Europe, such a devaluation would be inflationary, but in Britain, highly exposed as it is to the winds of international trade, it is likely to be doubly so. Of course there's a conundrum here, because membership of the single currency means that Britain will eventually have the same lower short-term interest rates as the rest of Europe. Getting from here to there, therefore, may be a quite rocky ride involving a fair degree of economic disruption. The upshot may be that until Britain is actually in the euro, short-term borrowing and mortgage costs may have gone as low as they are going to.

GlaxoSmithKline

A global corporation is a global corporation, and it shouldn't really come as a surprise to anyone that Britain has been hit much worse than anywhere else by the rationalisation of pharmaceutical manufacturing facilities announced yesterday by GlaxoSmithKline. It is no guarantee of the national interest, it would seem, to have created a national champion.

The pharma giant is domiciled in Britain, its primary listing is in Britain and its corporate headquarters are in Britain. But its largest market is in the US and its operational head office is in Philadelphia, which is where the decision to cut another 1,000 British jobs on top of the 2,000 already being implemented was taken. Just to complete the picture of internationalism, GSK is run by a Frenchman, Jean-Pierre Garnier, who lives, when he is not on an airplane, on the other side of the Atlantic.

Obviously sensitive to the charge that it is abandoning its roots, GSK was at pains to stress yesterday that Britain is clobbered disproportionately because it is the result of the merger of two British companies, which means the degree of capacity overlap is higher here than elsewhere. In a further blow to poor old Liverpool, the plant at Speke also suffers from the fact that its main product is environmentally unsound CFC-containing asthma inhalers.

GSK is keeping the great bulk of its research establishment in the UK, which is where the real value is created. All the same, it just shows how fickle modern business can be, and how quickly it can move its capital, labour and intellectual resources around the world. GSK is bending over backwards to make the job losses as painless as possible, but in the end, the modern corporation is a slave only to its markets.

j.warner@independent.co.uk