The US sets its compass on two trading oceans Notebook.
By Edited by Alex Brummer
CANBERRA may seem an awful long way from exchanges on the floor of the House of Commons over the European Monetary System.
But were it not for the perceived economic might of a more unified Economic Community, the dozen or so nations of the Pacific Rim, who have been meeting in Australia, might not have bothered.
The first, albeit tenative, steps towards forming a new Pacific-based economic union display an astute awareness of the way events are moving within Europe: movements with which Number 10 has yet to come to grips.
Not so long ago it seemed as if the world was to divide into three main trading blocks: the EC based around the West German economy; a Northern American block based around the US-Canadian free trade area, and a Pacific unit incorporating the Asian tigers with Japan and the yen at the centre.
But the Metternich-like skills of the US Secretary of State, Mr James Baker, are ensuring that America maintains a strong stake in each forum.
It firstly boldly asked for a seat at the top table at the European Community: a suggestion rudely rebuffed.
The US has talked of a genuine North American free trade zone incorporating the US, Canada and Mexico which would have the best of all worlds with high-technology skills and a cheap labour force south of the Rio Grande.
Now it is making a third bid for influence.
It has turned up in Canberra with Japan to develop Asia Pacific Economic Co-operation (APEC) and a new 12-nation organisation which will mimic the role of the Organisation for Economic Co-operation and Development in Europe.
Preliminary steps taken to conduct studies on trade, technology and investment flows in the region may seem insignificant.
But Mr Baker plainly views it as otherwise.
He noted that the Canberra meeting ' is the start of something which could grow into a very significant development not only for the region but for the global economy. '
If the more economically puny ASEAN countries (Indonesia, Malaysia, Singapore, Brunei, Thailand and the Philippines) were to bury their reservations, then the high growth from other partners, including such tigers as Thailand and South Korea alongside the more mature economies of Japan and Australia, could mean a dynamic coalition.
It would then be up to the US and Canada to decide whether they want to face towards the Atlantic or Pacific  or be caught between two great trading oceans.
Heading for default.
THE QUESTION of just who would even want to be a partner with the US was underlined last night as the American Administration headed for default for the first time in its history.
Congress was frantically trying to complete a bill raising the federal debt ceiling in time for President Bush to sign today.
Leaders on Capitol Hill virtually put all other business on hold as it sought to hammer out a debt ceiling increase.
The Treasury Secretary Nicholas Brady, a level headed figure, warned that the imbroglio may lead to higher interest costs for the taxpayer.
What should have been a routine exercise in extending the Government's borrowing power to $3.1 thousand billion became bogged down in wrangling over legislative initiatives lawmakers wanted to attach to the bill.
As a result of the stalemate, the Treasury has been forced to postpone $40billion in debt auctions this week.
Lack of congressional action also forced the Treasury to suspend new sales of US savings bonds and of special securities for state and local governments.
This market sensitive dispute has taken place as President Bush and Congress continued to spar on a primary cause for government borrowing  the budget deficit.
At a press conference to mark his election victory a year ago, Mr Bush threatened to veto the budget unless it contained real cuts.
Otherwise Congress would have to face the consequences of automatic across-the-board cuts under the Gramm-Rudman-Hollings budget deficit reduction law.
America may have changed Presidents a year ago, but the fiscal thicket remains as inpenetrable as ever.
Political expediency.
NO LONGER can the Government disguise the crisis surrounding electricity privatisation.
Ministers have already had to pull Britain's fleet of Magnox reactors out of the float and delay the sell-off date by up to six months.
But it has now become clear that further drastic amendments are needed to flotation plans.
After months of turning deaf ears to warnings by the City and industry, the Department of Energy has at last conceded that nuclear plant can not be included in the share float without state support.
This leaves the Energy Secretary, Mr John Wakeham, with two options: he can either agree to underwrite any cost escalations in nuclear handling costs after privatisation, or he can swallow his pride, and pull all nuclear plant out of the impending sale.
Whatever the outcome, the Government's willingness to continue pushing through the float during this Parliament shows how ministers are prepared to put political expediency before the interests of the industry.
For the nuclear element in electricity privatisation is the coping stone on which the flotation plans are based.
National Power was given 70 per cent of the CEGB's generating capacity in order to give it an economic mix of power.
The other 30 per cent is to be operated by PowerGen, the other CEGB successor company.
Take away or subsidise all nuclear power stations and you lose the commercial logic of the privatisation plans.
Electricity privatisation needs to go back to the drawing board.
At the very least, the CEGB should be divided into a wider range of generating companies to stimulate competition.
Is it worth sacrificing the long-term future of Britain's biggest state-owned industry to make political capital in the run-up to the next election?
Hanson puts crucial 21m Morgan stake up for auction.
By Ben Laurance
APIVOTAL 21million stake in besieged merchant bank Morgan Grenfell was yesterday put up for auction by Hanson as talks which could have heralded a Morgan-BZW merger broke down.
Hanson revealed that it had sold 100,000 shares in Morgan  but told investors it still owns 4.4million shares in the merchant bank.
The announcement was unnecessary under City disclosure rules and bank-watchers immediately interpreted the Hanson statement as an invitation to anyone with designs on Morgan to bid for the stake.
Morgan Grenfell, once the high-flyer of British merchant banking, now finds itself with few British allies.
The Hanson stake is up for sale.
Banque Indosuez of France already owns more than 10 per cent and wants to buy a further 9.8 per cent.
And with the ending of merger talks with BZW, it is hard to see how Morgan Grenfell can preserve its independence without falling into the hands of an overseas concern.
A possible bid could come from West Germany or Japan.
BZW's decision to break off talks came after a top-level meeting between executives at the investment bank and Morgan yesterday.
Discussions had been taking place since the middle of last week.
Morgan has been looking for a white knight for the last two weeks since insurance broker Willis Faber announced it was selling its 20 per cent stake in the merchant bank to Banque Indosuez, part of Compagnie Financiere de Suez.
Willis Faber is holding back almost half the shares until it receives shareholder backing for the sale at a meeting on November 29.
If someone wants to make a move on Morgan, the would-be predator will have to move before the Willis Faber meeting.
Shares in Morgan edged up 1p to 469p last night.
Tie Rack looks rather out of fashion as sales slow down Outlook.
By Roger Cowe
THE good news is that Tie Rack is in better shape than Sock Shop.
The bad news is revealed partly by the results for the first half year and partly by the company's prediction that its borrowings will only be down to half shareholders' funds even at the end-of-year low point after the Christmas rush.
The hole-in-the-wall tie and scarf retailer is going through a sticky patch in its drive to adorn the world's necks.
That is due partly to the sticky summer which saw Englishmen dare to walk open-necked in daylight.
Also partly to the time-honoured practice of coming unstuck in the United States.
And partly to the general malaise which afflicts the entire retail sector (except for Marks and Spencer, of course).
Tie Rack is the ultimate boom stock of the 1980s.
An entrepreneurial idea which took off.
A company launched on the stock market almost exactly at the top of the market in the summer of 1987  and which has gone steadily down ever since, as the graph illustrates.
And one which found that its ambitious expansion plans were rather more difficult in practice than on paper.
Details are sparse, with the company not even revealing interest costs (which must be enormous, especially in this slow first half year).
But the picture is one of sluggish sales and high overheads.
The result is a warning from chairman Roy Bishko that full year results will be ' significantly lower '.
There are now 242 shops, 31 more than at the start of the year.
That increase accounts for the large sales increase, exaggerated by the initial stocks sold to franchises.
Comparable sales in shops which were open last year were in fact down.
In the UK, the company says that was because of the hot weather, and the train dispute which clearly affected traffic past their many shops in railway stations.
Tie Rack estimates that those factors cost it sales of between 400,000 and 500,000.
But things have now improved and sales in comparable shops are currently ahead of last year, if only by a neck.
The US, where Tie Rack now has 41 shops, has also been responsible for the first half loss.
About 30 of the shops are now profitable, according to Mr Bishko, but not profitable enough to cover overheads  which are rather higher than he had anticipated.
Mr Bishko says sales volumes need to rise by a fifth or a quarter for the US operation to break even, and more stores will be needed before it makes a satisfactory profit.
He is optimistic, naturally, on the basis of sales growth in the earlier stores, but there will be only one new store in the US this year.
Indeed the pace of expansion has slowed to a crawl everywhere, even though much of that expansion in the past has been financed by franchising.
The vast majority of the UK shops are franchised, as are the eight in Scandinavia and the seven in Eire.
Four in Holland and 13 in France have been developed with local partners, leaving 14 Australian and 23 Canadian shops owned by the group as well as the 41 in the US.
In retrospect the pace of international expansion may seem extravagant, especially since the franchising route which has eased the financial pain of UK expansion was not thought practicable abroad.
But that is all part of the prescription for these go-go (and now stop-stop) 1980s companies.
Will Tie Rack come to a full stop?
Probably not, even though the next couple of years will be tough and even though Mr Bishko has a habit of losing senior managers with an abandon bordering on carelessness.
Even at 19.99 for a top-of-the-range silk masterpiece, ties are not exactly big ticket items.
And while (at least in my personal experience) men are more likely than women to stop buying such adornments when times are tough, gravy and similar substances will keep going astray, creating a steady replacement market.
It would be interesting to know how Mr Bishko's shareholders feel about the future.
But since half the shares are owned by the shadowy, South African-linked Vadep Holdings we (and even Mr Bishko) are unlikely to find out.
Although with no dividend increase and the shares languishing at just 46p after yesterday's fall, even the patience of anonymous South Africans must be sorely tested.
Wall Street hit by job fears as Shearson cuts 800 staff.
By Mary Brasier in New York
SHEARSON Lehman, the securities house, has sparked fears of a fresh wave of job cuts on Wall Street with a decision to make up to 800 employees redundant.
The cuts are the third time Shearson has laid off staff since the market crash of 1987, and are the highest on Wall Street this year.
They are expected to fall across the board among the firm's 38,500 employees but will be confined to New York.
A spokesman for Shearson said UK staff would not be affected and the group is not withdrawing from any area of business.
Shearson yesterday blamed the continued slowdown in market activity and excess capacity for the redundancies.
The market plunge on October 13 when the Dow Jones index fell 190 points was a factor, said spokesman Steven Fagan.
But Shearson like other Wall Street firms has been forced to review its payroll by the dearth of corporate finance fees on top of the chronic decline in market volume and commissions.
The cuts will remove another two per cent from the payroll following layoffs of 1200 last year and a further round which saw 300 jobs go.
After Black Monday, large firms like Shearson have built up their corporate finance departments and relied increasingly on them to generate earnings.
But the collapse of the United Airlines bid and the troubles of the junk bond market have blocked new deals.
The main axe is expected to fall on the firm's back office operations and among administrative staff in an effort to contain expenses.
Analysts say that Shearson is paying the price for overmanning during the market boom which ended in 1987.
Magnet finance chief quits.
Magnet's finance director Albert King has suddenly left the company, it was disclosed last night.
The company would not comment.
The troubled DIY group has been in talks with its bankers arranging a refinancing of the 553million loans taken out at the time of the management buy-out.
US interest rates fall.
US interest rates fell yesterday as the Federal Reserve gave the first sign that it is prepared to ease monetary policy.
The Fed's injection of funds triggered a fall in rates from 8 ? per cent to just over 8 ? per cent.
The action sparked a rally in bond prices and the Dow Jones closed 14.96 up at 2597.13..
Barclays' US move.
Barclays plans to sell part of its US finance arm, Barclays American Corporation, according to a report in the American Banker newspaper.
It said Barclays will sell part of the consumer and business finance company within the next few months.
Check on 737s.
Airlines have been asked to check new Boeing 737s after an alert by the US Federal Aviation Authority that a bolt may have been left off the plane's forward door during production.
The alert stems from a check by Boeing of its quality control records and covers 18 planes completed in the last two months.
Settlement pressure.
The pressure for an insurance market settlement of the 305 million losses from Dick Outhwaite's syndicates has intensified after the $50million threat of legal action against the corporation of Lloyd's for breach of fiduciary duty from US investors.
Huhne runner-up.
Christopher Huhne, the Guardian's Economics Editor, was yesterday the runner-up in the press awards for articles on 1992 presented by Arrows, the Cheshire trade finance group.
Dan Atkinson, deputy city and economics editor of the Press Association was the winner, and Anthony Hilton, the financial editor of the Evening Standard came third.
Economics column, page 15.
Coniston in union talks.
Coniston Partners, the New York-based investment firm seeking to oust United Airlines' board, is due to meet the engineers union today to discuss its plans for the big US carrier.
It met the flight attendants' union on Monday and is also hoping to talk to the pilots' union.
Pembridge buys more.
Pembridge, Roland Franklin's vehicle for the 697million bid for DRG, bought more shares yesterday.
It now claims to have 56 per cent of DRG, but Mr Franklin would not say when the bid would go unconditional.
He is waiting for the shares to be registered in Pembridge's name.
Docks hopes' dashed '.
The transport union TGWU yesterday claimed the last hope of reviving the Manchester docks had been jeopardised by the Manchester Ship Canal company's indifference to obtaining a new shipping service which union officials valued at 1.5million annually.
Buy-out move planned by B&amp;C.
By Lisa Buckingham
ALEVERAGED buy-out for British&amp;Commonwealth will be mounted by the company's management if an unacceptably low takeover offer is tabled, the chairman, John Gunn, pledged yesterday.
He admitted that with prevailing high interest rates he was not particularly keen to mount a management bid, but would do so if it was the only way to safeguard shareholder value.
B&amp;C, the one-time star of the financial services sector, is planning to raise at least 130 million from the sale of its Gartmore fund management business which was announced yesterday.
Aetna, the large US insurance group is understood to be a front runner on the 20-strong list of potential buyers for Gartmore.
Analysts added, however, that the company was expected to attract interest from Japan and Europe.
Opening bids will have to be lodged by December 11 with a decision on the sale expected by the end of January 1990.
B&amp;C says it has received a stream of offers for Gartmore, the international group which employs about 500 people and has some 6.4billion under management, over the past two to three years.
But Mr Gunn said other disposals should take that total to between 400million and 500million before the end of next year.
Disposals such as Woodchester, London Forfaiting, the three Gartmore trusts, and two divisions of Atlantic Computers should raise another 225million, Mr Gunn said yesterday.
Analysts also expect the company to shed its large stake in merchant bank Singer &amp; Friedlander.
He said that although speculation was mounting that a bid for B&amp;C was on the cards, there was no evidence, so far, of stake-building and no offers had been received.
The business sales were designed to cut the 30 per cent of B&amp;C's borrowings which are currently under fluctuating interests rates  roughly 200 million of its overall loans.
Mr Gunn said B&amp;C's predicament, with shares at the levels of roughly five years ago, was' a little embarrassing ' but he predicted the group would be back in City favour by the end of next year.
' The problem is that British&amp;Commonwealthstill has a credibility problem.
If Gunn said ' I 'm a human being ' half the analysts would say he was a cardboard cutout.
It is not a question of loathing  rather sanguine hatred following the dive in the share price, ' said one analyst.
Shares in British&amp;Commonwealth have dived from about 550p to 120p but Mr Gunn, said he is confident of captivating City confidence once more.
He admitted taking his hand off the tiller at the group but denied any boardroom rift over strategy.
Caparo raises offer price.
Swraj Paul's Caparo Automotive group raised its cash offer for Armstrong Equipment to 185p yesterday, valuing the fasteners manufacturer at 98million, and promptly increased its holding to 46.7 per cent.
This tally is boosted by Caparo's purchase of JHFenner's 6.32 per cent holding.
Fenner, the Hull-based power transmission engineer, bought the stake when the original bid was announced and had offered to act as white knight to Armstrong and to distribute their fasteners through its own international network.
' It is no surprise that JHFenner has decided to sell their shares to us at our generous increased offer price, ' Dr Paul said.
The Armstrong chairman, Roy Watts, said the Caparo bid was too low by any standard.
' A bid of 185p clearly undervalues Armstrong and Dr Paul knows it, ' he said.
' It really is time he got on with running his own business and let us run ours.
Nobody benefits from all this. '
During the day, holders of a further 11.1 per cent of Armstrong shares ignored the chairman's appeal and sold to Caparo.
Parkland holds steady.
Parkland Textiles, the Bradford-based woollen yarn spinner and clothing maker, yesterday showed a small increase in profits, despite a difficult six months trading.
Mr Michael Rowley, finance director, said the group had foreseen the problems and had made an effort to increase income from interest, which came in at 64,000 as against a charge of 78,000 at the halfway stage last year.
Pre-tax profits were up 7.5 per cent at 1.48million on turnover marginally ahead at 29.5million.
Cash in the bank stands at about 1million, but the company has a 2.6million loan at 10 per cent.
Chief executive Paul Hanson, with an eye on falling consumer demand in the UK, hopes to double exports by the end of the financial year.
Meanwhile, the interim dividend has been raised to 2.2p.
Steely effort from GEI.
GEI International, the packaging machinery and special wire and cutting steels manufacturer, lifted profit again in the first half of the year.
The search for internationally-oriented acquisitions in packaging goes on, backed by cash resources of about 15million.
The Allspeeds drives and controls subsidiary is the only remaining poor performer, but its losses have been stopped.
Because of the Midland Bright Drawn Steel sale, after the Steel Stampings disposal to Parkland last year, turnover was reduced to 33.7million, from 636.2million in the six months to September 30.
Pre-tax profit rose to 2.95million, from 2.52million, excluding the extraordinary gain of 249,000 on the sale.
Profitability in the main business rose further and Sanderson Kayser and other special steels held their ground.
The interim dividend is raised to 2.35p, from 2.14p net a share, covered by earnings up 0.75p to 4.97p.
In short...
KENNING Motor Group, a subsidiary of Ron Brierley's quoted UK motor dealership, Tozer Kemsley and Millbourn, achieved a slim increase in pre-tax profit to 1.6million (against 1.59million last year) in the six months to the end of June, although turnover fell from 96.5million in 1988 to 88.7million.
The markets.
Stock markets preferred to take notice of the continued strength of sterling, rather than Wall Street's fresh tumble of nearly 50 points.
So an early mark-down of a few pence was soon recouped, and by the close the FTSE index had reversed the initial fall of over nearly eight points as New York showed signs of a more stable performance.
Gilts improved a quarter as fears of another hike in interest rates receded.
For equities it was a day for special situations.
Mining stocks made the running as gold and kindred metal prices advanced afresh.
Insurances also did well, helped by a report in an American newspaper predicting higher premiums after the earthquake and hurricane disasters earlier this year.
Elsewhere price movements were small.
Stores were drab, unsettled by heavier-than-expected losses at Tie Rack, 47p, down 7p.
Storehouse, where brokers have been downgrading their forecasts almost monthly, slipped 6p to 106p ahead of tomorrow's figures.
In contrast, food retailers were supported ahead of today's interim statement from Sainsbury, but Iceland Frozen Foods plunged 39p to 280p as Hoare Govett and at least two other brokers downgraded their forecasts.
There was excitement in the merchant banking sector during the afternoon as talks between Morgan Grenfell and BZW broke down.
Morgan Grenfell shares, up 14p to 485p before the news, dropped immediately to 430p, before bouncing back almost as quickly to close unchanged at 468p.
Paris: Interest-rate concerns and the weak tone of US issues combined to send stocks lower in light trading.
CAC Index: 500.6 (511.1).
Frankfurt: Shares closed lower, following Wall Street's lead.
Hong Kong: Stocks fell.
Hang Seng index: 2,738.09 (2,756.12).
Tokyo: Stocks closed lower for the third consecutive trading day.
Nikkei index: 35,270.46 (35,434.00).
French trust group suspends dealings over pricing fears.
By Teresa Hunter
THE French-owned unit-trust company Dumenil has suspended dealings in its funds, worth 33 million, after the disclosure that there may have been pricing errors in recent valuations.
This is the first time a unit trust company has had to suspend funds under the Financial Services Act's pricing regulations, which oblige it to cease trading once an error is suspected.
It means Dumenil's 12,000 investors are locked into their investments until the investigation is complete.
As the suspension of a unit trust over a pricing error is unprecedented, it is not known when units can be traded again.
One month has been suggested as a possible suspension period.
Dumenil, which specialises in single country European funds, claims it became concerned ' very recently ' that its valuations on two funds in particular were out-of-line with general movements in the market.
The marketing director, Nigel Herrick, said: ' The market would fall, but our prices would not show a corresponding movement. '
Unit trust industry sources claim that rumours began circulating as long as three months ago that Dumenil had a problem with valuations.
The company stresses the problem has been very short-lived.
But as a precaution it has suspended all its funds, until an investigation pinpoints the root of the problem.
Unit trust prices are calculated on computers using market information supplied by the WM Company.
There is no suggestion that the WM data has been faulty.
Mr Herrick said: ' This is an in-house problem.
Right now we do not know the extent of that problem.
We do not know which, if any, funds are affected and we do not know whether there has been an over valuation or an under valuation. '
Dumenil has called in Touche Ross as independent accountants to assess the scale of the problem.
The regulatory bodies, including the Securities and Investments Board, the Investment Managers Regulatory Organisation and the Life Assurance and Unit Trust Regulatory Organisation are keeping a close eye on the investigation procedure.
If it is proved that unit holders who have traded units recently have suffered as a result of pricing errors, some form of compensation will be made available.
Midland Bank, one of the trustees of the Dumenil funds, stepped in to calm investors' fears.
A Midland spokesman said: ' The assets of the trust have been and continue to be under the control of the trustee whose objective remains that of insuring that the interests of the investors are protected. '
The aftershocks of the European row tell us that the big tremors are still to come Economics.
By Christopher Huhne
WHATEVER the hopes of the Conservative party's managers, the divisions over European policy are not going to go away.
There is bound, sooner or later, to be a battle royal over membership of the European Monetary System, the result of which will be either an almost unprecedented humiliation for Mrs Thatcher or the reshaping yet again of a Cabinet in her own image.
On present betting, there is a fair chance the pound will finally join the system by the end of next year.
Mrs Thatcher interprets the Madrid formula more as a pretext for not joining the EMS than as a set of three conditions for joining it.
Moreover, she has been advised by Sir Alan Walters that, once exchange controls have finally been removed by France and Italy in July 1990, the new freedom of capital flows will break the fixed exchange rate system apart.
On that fond hope, she is likely to be disappointed.
The remaining controls, mainly affecting restrictions on bank deposits, are small.
At some point in the second half of next year, and perhaps even earlier if President Mitterrand decides to bring forward the abolition of French controls, the Government is going to be faced with an inescapable decision.
Controls will have gone.
British inflation will be down (an odd condition, since one reason for the system is to help reduce inflation).
There will have been progress on the creation of a single European market, especially in financial services.
Reasonable people will decide that each of the Madrid conditions has been met.
At that stage, the pressures for full membership are bound to mount at home and overseas.
The pound may now stay at its new post-Lawson level or even decline further.
But at an exchange rate of, say, DM2.70 (instead of the present DM2.90) the trade-offs for the new Chancellor will begin to look different.
He will want to avoid a further decline for fear that import price rises will push up inflation.
For good electoral reasons, EMS membership will look an increasingly attractive alternative to a tighter monetary policy.
The going will be tough enough as it is.
The former Chancellor, Mr Lawson, gave a foretaste of the Treasury's Autumn Statement forecast when, in his resignation speech, he pointed out that ' we are once again on the downswing and I see no need for any further policy tightening.
While this downswing will not be as sharp as the previous downturn (in 1979-81), not least given the very much lower level of inflation that we now have, a dull 1989 is bound to be followed by a difficult 1990. '
The downturn will not, though, undermine the case for EMS membership.
A mild recession will correct but not eliminate the deficit, which is bound to remain high, and may even rise again as another pre-election consumer spree gathers pace.
Outside the EMS, the markets would become worried once again about the Government's real commitment to exchange rate stability.
They would insist on inflationary falls in the pound, or a deflationary tightening of monetary policy.
What better than EMS membership to reassure them?
The external pressures for EMS membership will also mount.
It will become increasingly clear that Britain is paying a high political price for its refusal to participate in the EMS, not least in the almost immediate reflex reaction against any British proposals to affect the design of a future monetary union.
No one watching the French reaction to the unfolding events in central Europe should doubt the political importance which the Elysee attaches to monetary union as a way of anchoring west Germany to this end of the Continent.
A single currency is also on the agenda because the balance of the economic argument has also swung sharply in its favour over the last decade, as Professor Michael Artis has pointed out (1).
He guesstimates that the existence of different European currencies cost about 1.5 per cent of Europe's total income each year, merely in terms of the losses incurred by traders and investors when they change currencies.
Even more important, the prospect of a single currency would eliminate an ormous source of uncertainty for businesses.
It would probably unleash another burst of investment as firms took advantage of opportunities which had hitherto been regarded as too risky.
After all, businesses can insure against the exchange rate risk on particular deals  for example, their exports to France  by accepting less sterling today in exchange for the known future quantity of francs.
But they can not hedge investments in the same way (even if the markets looked far beyond a year or so, which they do not).
Assume, for example, that Jaguar had insured itself against a fall of the dollar by covering several years of earnings.
The fall of the dollar would still mean that every Jaguar car sold in the US was less profitable, although the company might have made lots of money on its foreign exchange transactions.
The rational company would cash in its profits on the speculation  and still cut production and investment as it was priced out of the US market.
Exchange rate uncertainty is thus bound to reduce investment.
Some idea of the potential gains from a single currency can be had by looking at previous historical periods when people really believed that exchange rates were fixed.
Mr Tam Bayoumi has calculated the average size of capital flows each year in the major economies under the Gold Standard from 1880 to 1913, and has shown that they were much larger than during the post-war period from 1965 to 1986.
Indeed, the average flow, as a percentage of GDP, for eight countries in the sample before 1914 was 3.25 per cent a year; the average flow for ten countries post-1965 was only 1 per cent (2).
The advocates of the Government's ' competing currencies' approach suggest that many of these gains would occur by merely moving to a ' hard ' EMS in which currencies became progressively more fixed (3).
However, the evidence so far suggests that it is not enough to persuade businesspeople that rates will really be fixed forever.
Moreover, the process of establishing credibility is long drawn out.
The French, despite an exceptionally tough policy, still have interest rates above the German level because they are unable to persuade the markets they mean what they say when they rule out a devaluation.
Nor is it sensible to argue, as the Treasury has, that a European system of central banks in charge of a single currency might prove more inflationary than a fixed exchange rate system where each monetary authority competed to provide a stable benchmark of value.
It is impossible to make any such comparison without knowing what the institutional arrangements of the system would be.
If the system's charter allowed for a bank governor to be shot at dawn for every month the inflation rate exceeded 1 per cent, it might prove even more counter-inflationary than the Bundesbank.
The potential political and economic gains ensure that the impetus towards a currency union in Europe is likely to prove much stronger today than it did in the turbulent Seventies.
And that, in turn, is likely to feed back on the Government in the form of pressures from the most irresistible of all Tory constituencies, the City.
After all, what would be more likely to gain from a brave new world of free capital flows than the greatest financial centre in Europe?
This week has not seen the end of the row about Europe in the Conservative party, but merely a regrouping of forces for the battle still to come.
(1) ' Europe without currency barriers' Samuel Brittan, Michael Artis, The Social Market Foundation, London, 5.00.
(2) ' Savings-investment correlations: immobile capital, government policy or endogenous behaviour? '
Tamim Bayoumi, International Monetary Fund working paper 89/66. (3) An evolutionary approach to EMU, HM Treasury, November 1989.
MPs begin Jaguar probe.
By Andrew Cornelius Industrial Editor
MPs today begin investigating the events which led to the Government dropping its golden share in Jaguar and the subsequent deal to sell the company to Ford.
The investigation by the all-party Trade and Industry Committee opens as Labour accuse the Government of ' wiping its hands of the future of Jaguar, its workforce and the West Midlands car industry. '
Mr Doug Henderson, Labour's trade and industry spokesman, made the accusation after discussing the Jaguar deal with Mr Derek Barron, chairman of Ford of Britain.
He said: ' I am astonished that the Government, which hailed Jaguar as the flagship of the privatisation programme, has now wiped its hands of the future of the company, its workforce and the West Midlands car industry. '
He had written to the Office of Fair Trading to ask if, in the absence of any interest by the Government, it would seek formal assurances from Ford on future investment levels, research and development expenditure, training, component sourcing and the development of the dealer network.
Jaguar shareholders will be sent details of Ford's 1.6billion takeover terms in a circular due to be posted today to shareholders in the UK and also the US, where a simultaneous offer is to be made to investors holding Jaguar shares in the form of American Depository Receipts.
They will be invited to vote on the Ford takeover terms and also to change the company's articles of association to allow a single investor to buy more than 15 per cent of the shares at an extraordinary meeting scheduled for December 1.
The Government has promised to lift its protective golden share in the business, which would otherwise expire at the end of 1990, if 75 per cent of Jaguar shareholders vote in favour of this change.
Brittan attacks Thatcher on EMS.
By Larry Elliott Economics Correspondent
BRITAIN'S senior EC commissioner Sir Leon Brittan upped the stakes in the Cabinet row over Europe last night when he said the UK should join the exchange rate mechanism of the European Monetary System within the next few months.
In a thinly disguised attack on the Prime Minister and her former adviser Professor Sir Alan Walters, Sir Leon said the countries which had become full members of the exchange rate mechanism had enjoyed lower interest rates and lower inflation.
' It really is a bit strange to have been arguing the merits of ERM membership in academic abstraction, when the practical effects are there for all to see.
Academics, like accountants, should be on tap, and not on top. '
In a step-by-step assault on the softly-softly approach to Europe being peddled by Downing Street, the former Conservative cabinet minister also made it clear that Mrs Thatcher's hard-line opposition to the concept of monetary union with the other 11 EC nations was jeopardising the chances of London becoming the base for a European central bank.
' I see no reasons for us to shy away from the concept of a Federal Reserve-type of European Central Bank, operating as in the United States on a decentralised basis', Sir Leon said in a lecture in London.
' If it were based in London, which as Europe's financial powerhouse would be a natural home for it, the benefits to the City would be enormous.
But there will, of course, be no chance of that happening unless Britain were to show its enthusiasm for the project from the outset. '
Sir Leon dismissed arguments that a pan-European central bank would mean the United Kingdom would have to surrender sovereignty and relinquish control over monetary policy.
Commenting on the increase in UK base rates to 15 per cent last month, he added: ' What sort of expression of sovereignty is it to have to race after the Bundesbank within minutes of its unilaterally deciding to put up interest rates?
' Wouldn't we have more control over our affairs if the Bank of England had a major say in what happened, as part of a decentralised European banking authority? '
Sir Leon said there was no need for the United Kingdom to wait for its inflation rate to reach the European average before joining the exchange rate mechanism, nor to hold back until the further removal of capital and exchange controls next summer.
' Joining the ERM is not a prize to be given to our partners when they come up to scratch, but a benefit to ourselves if only we would take it, ' he said.
Hopes rise for European compromise deal on greater telecoms competition.
By John Palmer and Peter Large
OUTLINES of a compromise deal to open Europe's telecoms industry to greater competition emerged in Brussels last night after a day-long meeting of EC industry ministers.
Earlier yesterday, the UK telecoms authority Oftel announced it was launching an inquiry into how effective competition had been in improving Britain's phone services.
Although any European agreement will not be reached before next month, it looks as though the Commission may be winning its battle to eliminate national protectionism.
Eight of the 12 EC governments remain opposed to attempts by the EC Commissioner for competition policy, Sir Leon Brittan, to impose greater competition on national telecoms authorities.
But they agreed with a proposal from the French Government, which is currently responsible for the EC Council of Ministers, to discuss an amendment which would allow the Commission to grant temporary exemptions to countries facing problems with liberalisation.
The Commission aims to open up the 60billion telecoms industry as part of the 1992 single European market.
The strategy has been to abolish national protectionism in the sales of terminal equipment, to lay down one set of technical standards throughout the EC, to separate the regulatory and business sides of the telecoms authorities, and to open public purchasing of equipment to pan-European tender.
The British Industry Minister, Mr Eric Forth, said last night that the Commission's latest proposals were ' a well balanced attempt to allay the fears of some delegations about the consequences of liberalisation for their national suppliers. '
Meanwhile, in Paris, GPT, the 1.8billion quasi-British telecoms combine, was launching a company to exploit the liberalisation of the French market.
Last year the trade in telecoms equipment between Britain and France barely reached 20million, but today GPT alone has short-list bids for 18million of French public contracts.
The new subsidiary, GPTelecom, is headed by Rupert Soames, son of the former British Ambassador to France and EC vice-president.
Mr Soames said that whatever the state of liberalisation elsewhere in Europe, the French market was moving at a pheneomenal rate.
GPT was formed to unite the telecoms businesses of GEC and Plessey, but as a result of the Plessey takeover it is now owned 60 per cent by GEC and 40 per cent by the German group, Siemens.
Siemens products for communications networks will be sold in France through GPTelecom, and Mr Soames said the agreement was likely to be widened so that all telecoms products of Siemens and GPT would be marketed in France through the single channel.
The new look at the effectiveness of British liberalisation was announced by Sir Bryan Carsberg, head of Oftel, at the annual meeting of the Telecoms Users' Association.
He said that after 3 ? years of competition between British Telecom and the Cable and Wireless subsidiary, Mercury Communications, it was time to survey customers' experience and, if necessary, ' identify practices which might still be inhibiting competition '.
He needed to be sure that current arrangements were working as well as possible before the Government's review next year of whether competition in basic telecoms should be extended beyond the two companies.
Sir Bryan said he had received ' some indications' that BT's position as a designated maintainer of company phone exchanges could ' inhibit progress for prospective Mercury customers'.
He was also considering whether the code of practice which governs the quality of connections between private lines and the public phone network should be advisory rather than mandatory.
' It seems to me to be inconsistent with the spirit of liberalisation to have a mandatory code that necessitates a cumbersome and bureaucratic certification process. '
BAT drops its French bankers.
By Financial staff
THE tobacco-to-insurance giant, BAT Industries, yesterday sacked one of its big bankers, Paribas, after the French finance group's decision to back Sir James Goldsmith's hostile 13.4billion takeover bid.
BAT, which had refused to take action against its main French financial advisers at the time Sir James's assault was mounted, has decided to appoint Credit Lyonnais.
The large UK-based group retains roughly 70 international financial bankers and Paribas had acted as BAT's senior adviser in France when the company joined the Paris bourse.
BAT described Paribas's actions as' pretty fickle. '
The French bank is the latest in a string of financial advisers to be sacked by British groups after backing hostile takeover bids.
Paribas had helped Axa Midi in plans to buy BAT's Farmers unit in America.
BAT is in the process of a restructuring programme which involves selling its US retailing operations, its paper businesses and other interests.
Perrier in 250m soft drink sale.
By Financial staff
PERRIER, the French group which has come to epitomise ' designer ' water, has put its soft drinks division up for sale for around 250million.
The move follows the group's decision to concentrate on its most profitable business, mineral water, which it says is expanding ' dramatically ' throughout the world.
Cadbury has been tipped to buy Perrier's soft drinks business, which includes Pchitt lemonade, Bali syrup, and the bottling of Gigi lemonade.
Cadbury, which declined to comment on speculation, recently acquired the Gigi brand name when it bought Crush from Procter&amp;Gamble, but it is understood it would be reluctant to pay much more than 150million for the Perrier business.
An extra impetus for the disposal came at the start of the week when Pepsi decided to end its franchise relationship with Perrier, citing poor sales performance.
Some interpreted Pepsi's decision as a prelude to a bid for Perrier's soft drinks business, which analysts predicted might also attract offers from Coca-Cola, Suntory of Japan, or Guinness through its LVMH connection.
Marcel Richard, Perrier's financial director, declined to mention the impact of Pepsi's decision.
But it is understood that Pepsi's market share in France for cola drinks dropped from 18 per cent in the early 1980s to roughly 10 per cent despite an expanding market.
For Perrier the sale of soft drinks have become vastly less important than the revenue from bottled water.
Soft drink sales last year were 115million, less than a tenth of the group's revenue.
Much of the upheaval in the world's soft drinks markets has been prompted by the US giants, Pepsi and Coke, which are now looking aggressively for expansion in Europe.
Coca-Cola is said to control around 80 per cent of the French cola market and Pepsi is keen to strike back.
Polly Peck sells textile arm to Hong Kong company.
POLLY PECK is selling its barely profitable textile subsidiary, Polly Peck Far East, to a Hong Kong-controlled British Virgin Islands registered company in preference to the privatisation proposals announced a month ago, writes Robin Stoddart.
After the repurchase of PPFE's Portuguese offshoot and a United States marketing business, along with its electronics section, 27.5million will be realised from the deal, including a special dividend.
It will cover a further part of the purchase costs of Polly Peck's recent acquisitions of Del Monte, the American fresh fruit distributor and Sansui Electric of Japan, on top of the proceeds of the recent rights issue.
Brave Dragon, PPFE's buyer is owned by Wing Tai Exporters in partnership with Sung Hung Kai, the Hong Kong property giant.
It will offer holders of the outstanding 26 per cent of the PPFE capital the same terms and also make a fractionally higher cash offer than under the privatisation proposal to the larger number of warrantholders.
However, it intends to retain the Hong Kong share quotations.
A special dividend, worth 17 million to Polly Peck, is being paid before the change of ownership.
The US, Portuguese and Shell Electric subsidiary repurchases are valued at 10.8million.
After the offer closes, Mr Asil Nadir and other Polly Peck directors will resign from PPFE, though if it is not unconditional by December 14, the privatisation offer, worth 6 per cent less, will go ahead.
Polly Peck raised half of the 560million Del Monte Fresh Fruit purchase cost through its three-for-seven rights issue, but it has just paid 69million for control of Sansui.
Under the privatisation proposal it was offering almost 14million for the rest of PPFE, which had made little progress since the Hong Kong flotation.
MP claims that Met fraud squad leaked Fraser report to Lonrho.
By Daniel John
THE copy of the confidential Department of Trade and Industry report into the House of Fraser takeover which was passed to the Observer newspaper was leaked by officers of the Metropolitan Police fraud squad, it was alleged yesterday.
According to a House of Commons motion, the leak was traced through a system of numbered copies of the 752-page document, which was sent out to the authorities investigating possible criminal proceedings resulting from the report's conclusions.
Mr Dale Campbell-Savours, Labour MP for Workington, claims that the leak inquiry, which followed publication of parts of the report in a special edition of the Observer, discovered that copy 26 had been sent to the paper's owners, Lonrho.
It is the first time the fraud squad has been directly accused of leaking the report.
The MP's motion and three parliamentary questions directed at the Attorney-General, Sir Patrick Mayhew, allege the copy was given to the fraud squad to help its investigations into the successful 615million bid for Fraser by the Fayed brothers in 1985.
Two fraud squad officers, Detective Inspector Graham Gooch and Detective Sergeant Ken Morgan, were sent out to Egypt as part of the investigation being conducted alongside an investigation by the Serious Fraud Office.
However, they were later taken off the case and transferred to other duties.
Mr Campbell-Savours alleges that senior Scotland Yard officers then decided the team should not have any further contact with the Observer or Lonrho.
But his motion adds: ' This House therefore questions why an officer chose to ignore that instruction by meeting the City editor of the Observer at least twice including on the eve of publication of the special edition '.
The motion goes on to say that it draws the ' natural and disturbing inference ' that the meetings and copy number 26 were linked.
And Mr Campbell-Savours called on the Lonrho chief executive, Mr Tiny Rowland, to relinquish control over the Observer.
The questions, listed for today in the Commons order paper, ask whether the fraud squad had the copy, if any disciplinary action had been taken against any officer and whether criminal inquiries are being pursued.
The SFO refused comment on the MP's allegations or on when it will decide if any prosecutions should follow from the Fraser takeover.
However, a decision is believed to be imminient and reports suggest the SFO will take no further action.
This would allow the report to be published as the Government has promised.
A Scotland Yard spokesman said no disciplinary action had been taken against any officers and that nobody had been suspended.
He said Scotland Yard could not pre-empt any Commons questions until they had been answered.
Mr Campbell-Savours last night withdrew his questions on procedural grounds but said he will retable them.
The Attorney General's office said: ' They will be answered by the appropriate minister '.
Publication of the report by the Observer in March this year caused a furore and prompted a special committee of Law Lords to decide whether Lonrho had been guilty of contempt of court before its appeal to the House of Lords on the Fraser bid.
They concluded the company, which has bitterly contested the Fayeds ownership of the stores group, had ' taken the law into own hands' but cleared it of contempt.
Lonrho last night reiterated its claim that it had received the copy of the report in a brown paper envelope.
' We have no knowledge of where it came from, ' said a spokesman.
