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Stagflation lite

US interest rates are already 5.25 per cent, euro rates are set to rise
again on 3rd August, the next move in British rates looks likely to be
up, and as deflation recedes, even Japan has finally raised rates.
After years of borrowing cheap to take ever more exotic speculative
gambles, investors are rediscovering risk and retrenching. This is not
yet a bear market. The Dow, the FTSE and Morgan Stanley’s international
stock market index remain up so far this year—just. But markets may
tumble once people realise that even in a more flexible and globalised
economy, higher energy prices eventually feed through into higher
inflation and lower growth. To keep a lid on rising prices, interest
rates may have to rise much further than previously expected, pricking
bubbly house prices and hurting heavily indebted consumers. Though the
prospect of higher inflation and slower growth sounds like a rerun of
the 1970s, it is unlikely to be that bad—rather what US economist
Nouriel Roubini calls "stagflation lite."

20:20:20 vision to save Doha

The leaders of the world’s most powerful economies—the US, the EU,
Canada, China, India, Brazil and Mexico—have tried to break the
deadlock in the Doha round of world trade talks by setting a mid-August
deadline for reaching an ambitious and balanced framework agreement.
Trade negotiators have been instructed to stop stonewalling and seek
compromises instead, while Pascal Lamy, the WTO’s boss, has received a
mandate to bang heads together in the marathon negotiating sessions
that doubtless lie ahead.

The main bones of contention remain the EU’s high farm tariffs, the
US’s hefty agricultural subsidies and the steep industrial import
duties of Brazil, India and other developing countries. In June, Lamy
floated a 20:20:20 formula for a possible agreement, whereby the US
would cap its farm subsidies at $20bn a year, developing countries
would limit their industrial goods tariffs to 20 per cent and the EU
would accept a proposal by the Group of 20 poor countries to cut its
agricultural tariffs by an average of 54 per cent. But now that he has
the public backing of all the big players, Lamy should aim higher.

An ambitious deal would not only bring bigger benefits, especially for
developing countries; it may also be easier to sell politically. A
modest deal would still be tough, since EU and US farmers will fight
tooth and nail against any cut in agricultural support, but it would
offer little for exporters to get excited about. They might prefer to
spend their political capital on more rewarding bilateral trade deals
instead. But a more ambitious deal would not only make cuts in US farm
subsidies easier to swallow, by giving US farmers new export
opportunities in Europe and elsewhere. It would also give US and EU
exporters of manufactures and services eyeing up new markets in India
and China something to fight for.

EU populism 1: mobile operators

Seldom does the Daily Mail say something positive about Europe, let
alone an EU commissioner from Luxembourg who proposes to impose on
British business new regulations described by one executive as "close
to socialism." Yet the Mail has been singing the praises of Viviane
Reding, the EU’s telecoms commissioner, for her plans to slash the cost
of using mobile phones abroad. It’s a pity that Reding’s proposals are
half-baked. Mobile operators certainly make a packet from the "roaming"
fees levied on phone calls made and received abroad, but Britain’s
mobile telecoms market is generally highly competitive. Prices continue
to fall, and new operators, such as Tesco and easymobile, keep
established players such as Orange and T-Mobile on their toes. Since
most of their customers primarily use their phones within Britain, it
is normal, and perfectly legitimate, that operators have until now
focused their price-cutting on domestic charges. Besides, even before
Reding first announced her plans, Vodafone had started to target
customers who use their phone abroad a lot with cheaper prices through
its Passport scheme. But despite the evidence that competition is
working well, Reding felt compelled to intervene—in a potentially very
damaging way. She proposes to set arbitrary caps on both wholesale and
retail roaming prices, in effect gumming up the rapidly evolving mobile
market by making it a regulated utility. Her plans, which still need
the approval of the European parliament and the EU’s 25 countries,
should be roundly rejected. Where’s the Mail when you need it to attack
barmy Brussels initiatives?

EU populism 2: Microsoft

Reding is not the only EU commissioner who has succumbed to misguided
populism. Neelie Kroes, the formidable competition commissioner, has
made a mockery of due process by fining Microsoft €280.5m (£193m) for
failing to comply with an antitrust judgement against it, the first
such financial penalty the EU has imposed. She is promising even
stiffer fines in the future. Kroes may be right that Microsoft has
exploited the quasi-monopoly of its Windows operating system to crush
competitors in related markets, but she is jumping the gun by fining
it. The European court of justice, which has already struck down
several high-profile EU antitrust decisions, is still considering
Microsoft’s appeal. Besides, Microsoft has stuck to the timetable
agreed with the commission for handing over the technical information
about Windows that rival firms need to write software that works well
with it.

Posted 26 Jul 2006 in Published articles

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