Eurozone drowns in debt
WITH all eyes on the International Monetary Fund’s upcoming final inspection report on the UK, a second report on the economies of the eurozone likely will get much less attention. Yet it may be the strongest hand that Leave has yet to play. Suffice it to say the paper on the eurozone is hugely damning.
Throughout the referendum campaign we have been told how much better it is in the European Union. However, given that the single currency area is 19 out of 28 EU nations and most of its GDP, including that of the cornerstone German economy, it is hard to argue that the serious fault lines do not matter.
The IMF argues that ‘political divisions and Euroscepticism have weakened prospects for collective action’ to repair the damage. Turning around the eurozone will require structural reforms (such as freeing up labour markets), fiscal initiatives which could include tax cuts and infrastructure spending and continued work to bring down high debt levels.
At the core of eurozone decision making in Brussels and Frankfurt, political and financial leaders have failed to grasp one of the essential ingredients of a monetary union which is that there must be more risk sharing.
Voters in California do not generally object to the fact that more federal welfare and education expenditures per person is delivered to Mississippi than Sacramento. In much the same way England is supportive of the Scotland and Northern Ireland budgets through variants of the Barnett formula. The other fault lines between Britain and the eurozone are the banking systems. Britain moved rapidly to repair its banks in 2008, learning lessons from Sweden in the early 2000s. Eurozone banks are laden with €900bn of rotten loans, with Italy accounting for a big chunk. Indeed, concern about the impact of Brexit on an already very weak European banking system sent shares of lenders across the region crashing to a four-year low in latest trading.
Bad debt problems mean that the pipes of lending to the consumer and business are blocked despite the best effort of the European Central Bank to flood the system through quantitative easing.
No one could accuse the French IMF managing director Christine Lagarde of sparing eurozone blushes.
Cheap as chips
AMONG the reasons that BHS lost its mojo was that it was seen as out of touch with the times. Could the same be true of Poundland?
The theory of departing chief executive Jim McCarthy is that digesting the chain of 99p Stores, bought in September of 2015, has proved testing. Retail integration is never as easy as it looks. Wm Morrison never quite recovered from buying Safeway and the Co-op struggled with Somerfield. So there are precedents.
What potential buyer, South Africa’s Steinhoff, might like to consider is whether Poundland was a product of the austerity era in which it expanded and may never be the same high street force again. It was largely a creature of the Great Recession and now that incomes, consumer confidence and retail sales have come roaring back, shopping in pound stores might be less fashionable.
By all accounts Aldi and Lidl have moved with the times by stocking luxury products ranging from fine wines, to Atlantic smoked salmon to excellent dark chocolate. All that Poundland has managed is Toblerone and that might be extinct soon given the strength of the Swiss franc against sterling.
When McCarthy kindly turned up at my office a couple of years ago carrying a bag of one pound goodies having travelled down from Birmingham coach class in a shiny dark suit, I bought into the Poundland narrative. His enthusiasm about Spain, deep in eurozone recession, also seemed sensible. But the purchase of 99p Stores, just as the UK economy was zooming away, was hubristic. As we learned from Mike Ashley’s testimony before the Business Select Committee, moving from a tiny inflatable to an oil tanker can cause control problems.
As an experienced global retail group it is possible would-be buyer Steinhoff will have the magic touch. It is likely to have a much clearer run at a takeover of Poundland than with Home Retail Group and Darty when it was shoved aside. But it is hard to see much synergy between selling stuff for one pound and Bensons for Beds, its other UK property.
But like other South African enterprises seeking a global presence one suspects that chairman Christo Wiese might have geo-political motives for spreading his wings. Poundland investors who have watched the share price tumble until the last few days could have an exit route, even if it is at a discount price.
Unmasking Monaco
SIR Philip Green did his wife Lady Tina Green no favours during his six hours of hectoring testimony on Wednesday. His disclosure that Tina has sole access to the accounts of the family’s private companies almost certainly means the committee will be seeking evidence from the Monaco resident. She may be allowed to deliver her testimony in writing.
But there should be no doubt that the microscope is now going to fall on Taverta and the cash flows from the UK domiciled companies BHS and Arcadia to the secretive, offshore, tax avoiding empire.
Not perhaps before time.