CNBC Business | EUROPEAN DISPATCHES

EUROPEAN DISPATCHES

Political and economic events across the continent

THE EU

Competition commissioner Neelie Kroes published an inquiry into Europe’s energy sector that makes bad reading for Germany’s E.ON and RWE and France’s EDF and Gaz de France, among others. Last year’s high prices are blamed, at least in part, on lack of competition and inefficiency in the market, and the report calls for the unbundling of generation and distribution in order to address these problems. With concern growing at Gazprom providing an increasing proportion of EU gas, and increasing activity by Russia’s largely state-owned oil companies, energy security can be expected to dominate EU decision-making over 2007.

EUROPE

There was more gloom at Airbus Industrie after the pan-European company released figures showing customers ordered only 790 new planes last year against 1,044 from its great US rival, Boeing. Airbus has been plagued by a series of crises, including wiring problems on its much-vaunted super-jumbo the A380, which has left deliveries two years behind schedule and cost the company around €5bn to date. On the positive side, Airbus announced that it had “passed a major milestone” in fixing the wiring problems and that deliveries would commence later this year, with Singapore Airlines due to receive the first A380s in October. Other customers can expect to see their airplanes in early 2008 – assuming there are no further production delays.

SWEDEN

Germany’s leading truck maker, MAN, withdrew its hostile €10.2bn bid for Scania after Volkswagen – a key shareholder in both companies – signalled its opposition, suggesting the two companies should negotiate a peaceful merger. Scania indicated that it was not opposed to talks, although the stance of the Wallenberg Family, which owns
30.65% of Scania, is less clear. A merged company, also including Volkswagen’s Brazilian-based truck operation, would create Europe’s largest truck-making business. The European Commission has already green-lighted a merger between MAN and Scania.

THE UK

The Bank of England surprised markets by raising interest rates 25 basis points to 5.25%; eurozone rates held at 3.5%. The move had not been expected so early in the year and reflected the bank’s concerns over high inflation (retail price inflation is currently running at 3.9%) and the continuing house price boom, particularly in London and the south-east. House prices in the most desirable parts of central London in 2006 rose 24%, fuelled by record City bonuses, while the average price of a UK house reached £200,000.

SWITZERLAND

Shockwaves reverberated through the Swiss business world as 19 top executives and consultants went on trial in Zurich for their role in the collapse of Swissair, the national airline, which went bankrupt in October 2001. The company’s entire board of directors found themselves in the dock. The trial is expected to take several months and will determine how Swissair – once considered one of Europe’s finest airlines, with global routes and cash reserves of almost €2.5bn in the early 1990s – fell from grace. The trial, which will focus on mismanagement by top directors, is the biggest in Swiss corporate history.

SERBIA

Parliamentary elections confirmed that nationalism is alive and kicking in Serbia. The extreme nationalist Radical Party emerged as the largest party, with 28% of the vote, though is unable to rule without entering a coalition; the pro-market/pro-EU Democratic Party (of President Boris Tadic) got around 23%, and Prime Minister Vojislav Kostunica’s conservative-nationalist Democratic Party of Serbia was third with 16%. Horse-trading is expected to take weeks, with Kosovo’s future – to be decided by the UN later this year – a major complicating issue. Kostunica is well-placed to remain prime minister, despite being viewed with distaste by Serbs who want an unequivocal alignment with the West. Democratic Party candidate Bozidar Djelic, a former finance minister and strongly pro-West, is also a strong contender.

POLAND

The business community and parliamentary opposition voiced concern over the government’s appointment of Slawomir Skrzypek as Central Bank governor to replace the much-respected, outgoing Leszek Balcerowicz. The new governor is relatively inexperienced but close to Prime Minister Jaroslaw Kaczynski. The appointment comes after the controversial decision to strip the Central Bank of its authority to regulate commercial banks and instead set up a new single regulatory body, answerable to the government, with officials appointed directly by the prime minister. Among the new governor’s priorities will be determining a date when Poland should enter the euro; to date, Skrzypek has been ambivalent on the issue.

BELARUS

One year after Gazprom interrupted energy supplies to Ukraine, Georgia and Moldova to make them pay more – and demonstrate their subservience to Moscow – it was close ally Belarus’s turn. President Alexander Lukashenko was obliged to back down from charging Russia a €35-a-tonne export duty for the oil passing through its pipeline, though not before oil shipments through the country had been disrupted; he had attempted to impose the duty to compensate for a hike in Russian oil prices. The fracas saw the EU take the unprecedented step of declaring its sympathy for Belarus and reminded policy makers once again how untrustworthy an energy partner Russia is proving to be.

RUSSIA

Gazprom, the state-owned gas entity Europeans love to hate, announced it would be seeking to improve its image in the West through a major PR campaign. The company appointed Washington-based PR consortium PBN and declared it would spend some €8.5 million this year improving perceptions of its brand. The announcement came after a month in which Gazprom, seen in the West as a tool of Kremlin foreign policy, bullied Belarus to accept higher energy prices, edged Royal Dutch Shell to one side to get a majority stake in the vast Sakhalin gas project, and in January managed again to be the focus of EU energy security concerns.

SLOVENIA

The only country of the 2004 enlargement intake deemed to have met the EU’s Maastricht Criteria for membership of the euro joined on 1 January. For Slovenia it was the fourth change of currency in 16 years: after dumping the Yugoslav dinar in 1991, it used an interim coupon currency before adopting the tolar. There were few glitches in the transition (the tolar and euro co-existed for just two weeks), although as in other countries there were complaints that some day-to-day items had risen in price. Cyprus and Malta are expected to become the next new members of the eurozone in January 2008.

TURKEY

With elections due in November, the government postponed ambitious plans to privatise the electricity distribution network through fears that voters might anticipate it leading to higher energy prices. The sell-off would have raised around €2.3bn but would also have been highly controversial; energy prices in Turkey are among the highest in the OECD, with petrol costing almost €1.5 a litre. Opinion polls show that the governing Justice and Development Party (AKP) is still ahead, but also that the far right, ultra-nationalist Nationalist Action Party (MHP) is now supported by around 12–15% of the population, fuelled by widespread disaffection over Turkey’s recent treatment by the EU.

CYPRUS

Cyprus’s financial sector was thrown into disarray after Marfin Popular Bank, the island’s second-largest, launched a €6.16bn hostile bid for Bank of Cyprus. The latter had rejected an earlier bid from Greece-based Piraeus Bank, which holds some 8.5% of Bank of Cyprus stock. Critics say a merger between the two would create a group controlling 70% of Cyprus’s banking sector, with consumers suffering a resultant loss of competition. Marfin merged with Laiki Bank and Egnatia Bank last year, and has ambitions also to take over Piraeus Bank, creating the largest mortgage lender in Greece. Analysts expect further consolidation of Cypriot and Greek banks, facilitated by regulators permitting the two countries to joint trade stocks last October.

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March 2007

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