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June 2007
News & Views
EUROPEAN DISPATCHES
Political and economic news
THE UK
THE UK
As the pound broke through the $2 barrier – a 26-year high – there are growing concerns that the economy is overheating. The housing market and consumer spending remain undampened by recent interest rate hikes, while the current account deficit has already reached record highs (hitting some €63.4bn last year, against around €42.9bn in 2005). Observers expect a further rise in interest rates in either May or June, possibly by as much as 0.5%, with the currency expected to appreciate further against the dollar.
THE NETHERLANDS
The world’s fifth-largest bank appeared to have been created as Barclays €64.6bn bid for ABN Amro won the support of the latter’s board. At the time of going to press, however, Royal Bank of Scotland had proposed a hostile counterbid of €72.3bn, with many ABN Amro shareholders demanding the opening of a bidding war. Under the Barclays deal, ABN Amro would sell La Salle, its US bank, to Bank of America for €15.4bn; the merged bank would be called Barclays and would be headquartered in the Netherlands but paying taxes in the UK
GERMANY
The widening corruption scandal at Siemens, Europe’s largest and best-known engineering group, prompted the departure of company chairman Heinrich von Pierer and charismatic CEO Klaus Kleinfeld. The former left with immediate effect, while the latter is to step down after his contract expires in September. Despite neither men being implicated in the kickback scandal – Kleinfeld has always emphasised a zero-tolerance attitude towards corruption – board members wanting to limit the damage from Germany’s biggest ever corporate governance scandal said fresh faces at the top were needed. Kleinfeld did much to modernise Siemens during his two-year tenure as CEO, although many resented his US-influenced leadership style
ITALY
Days after AT&T withdrew from buying part of Telecom Italia (TI) from Pirelli, US ambassador Ronald Spogli launched a ferocious attack on Italy’s hostility to foreign capital. Writing in a leading Italian newspaper, he said that “barriers are often erected in the way of foreign investors” and suggested that this explained why Italy’s growth rate is the lowest in the eurozone. The collapse of the AT&T deal is the latest in a series of failed foreign investments: last year an agreed merger between Spain’s Albertis and Italy’s Autostrade collapsed, while in 2005 – notoriously – disgraced former central bank head Antonio Fazio allegedly blocked ABN Amro from buying Antonveneta, in contravention of EU rules. Prime Minister Romano Prodi has said he wants TI to remain Italian.
SPAIN
Fears grew that the Spanish construction market – one of the fastest-growing in Europe, fuelled by a boom in foreign and domestic home ownership – is heading for the rocks. Late April saw panic selling of real estate stocks prompted by concerns that the market – which has also been afflicted by corruption scandals – was becoming oversaturated: with prices rising throughout 2006, new builds in 2007 have been running well in excess of demand and many potential buyers have been put off by the overdevelopment. Construction has been a major contributor to Spanish economic growth in recent years – in 2006 alone, GDP rose by some 3.5%.
ROMANIA
A long-running political crisis reached boiling point, with parliament voting to suspend President Traian Basescu for alleged violation of his office. The Romanian public is now obligated to vote on impeachment; the referendum is expected be held by mid-May. Relations between the rightist president and his right-of-centre government, headed by Prime Minister Calin PopescuTariceanu, have been strained for months, with the latter’s technocratic style at odds with Basescu’s charismatic populism. The referendum outcome remains far from clear, not least because Basescu is Romania’s most popular politician and because the country’s constitutional court has found no evidence of wrongdoing.
UKRAINE
The stand-off between reformist president Viktor Yushchenko and pro-Moscow prime minister Viktor Yanukovich continued, with the latter refusing to recognise the former’s suspension of the Rada (parliament) on 2 April and his call for early elections. The Ukrainian Supreme Court had yet to rule on the legality of the suspension as CNBC European Business went to press, but Yushchenko offered to withdraw his suspension of the Rada in exchange for the government agreeing key legislative changes including a ban on parliamentarians switching their allegiance. In another encouraging move, Yanukovich gave a major interview to a leading Western newspaper expressing a desire to improve relations with the West and speed economic reforms.
RUSSIA
First-quarter economic figures show that Russia’s economy continues to grow fast, with GDP increasing at 7.9%, fuelled mainly by the energy and natural resource sector. Critics say that continued high oil and gas prices have discouraged much-needed reforms in other areas of the economy (despite manufacturing output rising 14.5%), however, while the return to state control in the energy sector is discouraging investment, the adoption of improved management techniques and new joint ventures with foreign companies. Meanwhile, the rouble continues to appreciate, raising doubts about the competitiveness of the non-energy sector.
SWITZERLAND
A major pay survey by headhunting group Heidrick & Struggles revealed that Swiss company directors are by far the best paid in Europe, pocketing an average of almost €140,000 a year – almost twice the €72,000 average – in 2006. The next best paid company directors were in Spain (averaging €96,000) and the UK (€92,700); the worst paid were in France (€43,500). Heidrick & Struggles says executive pay across Europe has doubled since 1999 and risen by 14% over the past two years.
RUSSIA
As the country’s dwindling band of reformers mourned the passing of former president Boris Yeltsin, there was more evidence of Moscow’s deteriorating relations with the West. EU trade commissioner Peter Mandelson said trust was at its lowest ebb since the Cold War and called for a grand bargain in which both sides invested in each other’s energy markets. Large numbers of senior Russian businessmen stayed away from this year’s Russian Economic Forum in London, with concerns of a Kremlin-led boycott. Relations between the UK and Russia have soured over the former’s refusal to deport exiled oligarch Boris Berezovsky and the latter’s lack of cooperation in the investigation into the death of Alexander Litvinenko.
SERBIA
At a meeting in Belgrade, the Black Sea Economic Cooperation (BSEC) agreed to construct a 4,700 km road around the Black Sea connecting the six nations that border it – Turkey, Georgia, Russia, Ukraine, Romania and Bulgaria. No completion date or cost for the project was announced. Turkey – which this year assumes the BSEC presidency, replacing Serbia – has said the project aims to boost the organisation’s effectiveness and cooperation with other organisations. The BSEC was established 15 years ago to promote economic and trade relations between countries within the Black Sea region.
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