ECB's slow progress towards 2%

Nobody could ever accuse the ECB of being hasty. Wim Duisenberg's announcement yesterday of a half-point cut in interest rates to 2.75% was the first move in 13 months - 13 months in which the eurozone economy has progressively and appreciably weakened. Gerhard Schröder indulged in a bit of statistical jiggery pokery in the run up to the German election in September, but ever since unemployment has continued to rise. Make no mistake, Germany needed yesterday's cut and needed it badly.

The good thing about the decision was that it was a sizeable reduction. The bad thing about it was that the ECB is still behind the curve, and will remain so as disappointing economic data continues to roll in. Consider these forecasts from the OECD: the US, where interest rates are 1.25%, is expected to have growth of 2.3% this year, 2.6% next year and 3.6% in 2004. Growth for the eurozone is put at 0.8%, 1.8% and 2.7% respectively. The Fed's determination to avoid recession means that US rates are the lowest since 1961: the ECB's determination to avoid higher inflation means eurozone rates are at their lowest for three years. In 1999, when dotcom mania was at its height, the ECB thought rates of 2.5% appropriate. After the first synchronised downturn in the world's leading economies for a quarter of a century, only now has it cut rates to 2.75%.

Unlike the Bank of England, the ECB is reactive rather than proactive. For some months, every financial analyst has been screaming that inflationary pressure has been waning, but the ECB wanted hard evidence before acting. That evidence will continue to pile up, with inflation in the eurozone falling rapidly in the first few months of next year and approaching deflationary levels in Germany. Another quarter-point cut is a cast-iron certainty, but it is quite probable that further economic torpor will push rates down to 2% before too long.

Way forward


The initial reaction to France Télécom's stabilisation plan was promising. The shares have been given the cold shoulder since the hi-tech bubble burst, but one or two "buy" recommendations were spotted yesterday, and even the debt rating agencies seemed to be taking a more positive view.

On paper, the plan - €15bn in cash from shareholders, €15bn in debt reduction from cash flow, while refinancing another €15bn of debt - is straight forward. The group will cut costs by slashing investment, axing the dividend and allowing natural attrition to take care of the otherwise politically sensitive issue of job cuts.

Orange expects to be debt-free in the next two to three years and generate €5-7bn more cash than expected by 2005. The Wannadoo internet business is promising to triple earnings while international network business Equant is forecasting free cash flow in 2003.

To a company which is €70bn in debt, €9bn now with another €6bn to come is a whole lot better than nothing. But the French authorities still need to persuade Brussels that the €9bn is the French government acting as a shareholder, rather than a creative way of handing out state aid. A Brussels block would wreck the whole deal.

Thierry Breton will also be keeping his fingers crossed that the cost savings come through as quickly as he expects. France's unions may have something to say. Even though the focus is on natural wastage, 22,000 is a chunky number.

Ruled out


For years the accountancy profession has protested that it would prefer to bury merger accounting rather than praise it. That hasn't stopped big corporations taking full and enthusiastic advantage of the reporting benefits.

It has taken Sir David Tweedie, as chairman of the international accounting standards board, to finally lay this disagreeable practice to rest. Draft rules on accounting for business combinations follow the US model and outlaw merger accounting once and for all. Although British rules still permit the approach, from 2005 the European commission will force all listed companies to comply with the IASB's rules.

At a stroke Sir David has removed the disturbing and confusing anomaly which has given companies a choice of how they account for a business combination. Technically, merger accounting can only be used when specific criteria are met. Mysteriously, some of the bigger deals have defied logic and somehow managed to meet those criteria.

When BP acquired Amoco in 1999 the transaction was accounted for using the merger rules, which dictate that neither company can be seen to obtain control or be dominant. Yet if you mentioned that to any of the umpteen Amoco executives who subsequently lost their jobs they would laugh.

Sir David's insistence that merger accounting be outlawed will be opposed by those who have enjoyed its liberal attitude to goodwill. Under merger accounting no goodwill arises. This is important because it removes the uncomfortable obligation for the enlarged group to deal with what is often a significant number.

By removing this privilege, Sir David may unwittingly trigger a curious scramble to take advantage of merger accounting while it is still on offer. We might even be in for a mini-M&A boom.