Outlook: Are Europe's fixed-rate mortgages really such a good idea?

The subtext of the Chancellor's announcement in his Budget speech that he is appointing Professor David Miles, head of the financial services division at Imperial College Business School, to examine why there is such a poor market in long-term fixed-rate mortgages in Britain is presumably that the development of such a market would be "a good thing".

I'm not at all sure it would and I doubt whether Gordon Brown does either if he were candid about it. On the face of it, long-term fixed-rate mortgages have plenty to commend them, enabling as they do householders to plan their finances with the certainty of knowing exactly how much they'll be spending on the mortgage each month. The Chancellor sees the further benefit of increased macroeconomic stability, since the housing market and through it consumption wouldn't be so sensitive to the ups and downs of short-term interest rates if everyone were on long-term deals.

That's how they do things in Europe and it's largely how things are done in the US too. Only in Britain among the developed economies is there still a high degree of reliance on variable-rate mortgages or on shorter fixed-rate products. As we know from experience in the early 1990s, this can wreak terrible damage on the wider economy when interest rates rise sharply. Disposable incomes shrink, the affordability of housing diminishes and consumption hits the buffers.

Right now, on the other hand, the British economy is being supported by the same effect in reverse. When the Chancellor boasted in his Budget speech about how much better the British economy was doing than Germany and France, he forgot to mention that a primary cause is that falling interest rates have fed directly through to a virtuous circle of rising consumption and house prices.

The fact that so many people are owner occupiers in Britain – 70 per cent against fewer than 40 per cent in Germany and 50 per cent in France – means that the whole economy is much more sensitive to interest rate movements and house prices. It also means that the UK can easily make adjustments to boost flagging demand through monetary policy in a way that may not be possible in the eurozone.

I find myself in a roundabout way making a eurosceptic argument, which I don't want to do, but as Mr Brown implicitly acknowledged by ordering two reviews of the housing market in his Budget speech (the other is to be by Kate Barker, into the poor supply of new housing stock), housing is a core difference between the British and eurozone economies, and therefore a key barrier to entry of the euro. A background paper on the housing market, which the Chancellor has presumably already read, has been prepared as part of the Treasury's five economic tests.

I think we can take it as read that Britain will fail one or more of these tests when the outcome is announced in June, allowing the Government to delay into the indefinite future any further consideration of a referendum. It is very much Mr Brown's style to prepare the ground and pre-announce, and the Miles review ought to be seen in that context. Yes, the housing market makes us different, so it would be mad to join as things stand, but as it happens a review has already begun into why it's different and what can be done about it.

According to Martin Essex, senior economist at Capital Economics, a 1 per cent rise in short-term interest rates would reduce British GDP by nearly 1 per cent but the effect in Germany and France would be less than half that. Mr Essex makes the observation that the European Central Bank is already hard pressed to agree a rate that is right for existing eurozone countries and, if Britain were to join them, the decision would become impossible.

I'm not sure I agree with that, if only because all economies in the end find their own equilibrium and, after a period of adjustment, Britain would learn to cope with an interest rate set to control inflation across the whole economic zone. But the point is none the less well made. Does the Chancellor really want to become more like Europe by moving owner occupiers on to long-term fixed-rate mortgages when Britain's greater sensitivity to interest rate movements has been one of the key factors supporting its superior economic performance in recent years? I don't think so.

Any examination of the facts would suggest Europe should be moving closer to the British market, not the other way around. Despite the fact that Britain has a higher base rate than the eurozone, the average mortgage rate paid by homeowners right now is lower than in Germany and much of the rest of the eurozone.

Of course, that wouldn't remain so if rates rose but, as things stand, you can buy whatever you want in Britain, which must be an advantage over Germany where there is little choice other than long-term fixed-rate deals, typically carrying 25 per cent penalties for early redemption. I think Sheila McKechnie, chief executive of the Consumers' Association, might have something to say about that.

As it happens, there are quite a few long-term fixed-rate products on the market in Britain already, and at very reasonable rates too. Halifax offers a 10-year fix at 5.29 per cent, but out of its 2.5 million borrowers, only 300 have taken it up, largely because like the German fixes, it carries high redemption charges. The truth is that British householders on the whole prefer flexibility to certainty.

Long-term fixed-rate mortgages are the most common way of borrowing for house purchase in the US too, where mortgages are packaged up, securitised and sold to the capital markets as bonds. However, these bonds carry an implicit government guarantee, which makes the exercise both easier and cheaper. The Chancellor would be reluctant to introduce anything similar. Any movement to the US system would in any case require a massive structural change in the mortgage market.

So despite their superficial appeal, fixed-rate mortgages may not be particularly good for the consumer. They would, on the other hand, be very good news for the bigger mortgage lenders, reducing the rate of churn, and because they would need to be backed by big reserves of capital, considerably reducing the level of competition in the mortgage market.

I'm not sure what Professor Miles hopes to achieve with his review, but it will have served its purpose if, when the Chancellor comes to reject the case for a referendum later this year, he's able to say he's addressing some of the supposed economic incompatabilities the five tests have highlighted.

Marconi débâcle

Never mind Marconi's tardiness in releasing price-sensitive information to the market, it has taken the Financial Services Authority nearly two years to find Marconi guilty of failing to release a profits warning "without delay".

The FSA finds against Sir Roger Hurn and Lord Simpson of Dunkeld, former chairman and chief executive of Marconi respectively, on the narrow point of whether they should have put out the final calamitous profits warning a day earlier than they did. But the truth of the matter is that this breach of the rules was typical of the recklessness and negligence that came to characterise the management of this once great company.

John Mayo, who as deputy chief executive escapes reprimand because he was abroad at the time, had been in a state of denial worthy of Mohammed Saeed al-Sahaf for most of the previous year, in believing that while much larger rivals were falling like nine pins Marconi had somehow managed to buck the trend.

Of course Marconi's top brass misled investors by failing to alert them to the full horror of the company's position when they first saw the figures. The deeper mystery is why management refused to recognise the evidence of a profound slowdown at a much earlier stage. The FSA says it accepts the view that earlier management figures indicating gathering losses could not be relied on because they contained inaccuracies and inconsistencies. Not many others do.