Commentary from the Economist, Xmas 1997

So EMU is a gamble? It would seem that the John Major's Conservative government did almost get one thing right: They did at least discuss the issues with respect to EMU whereas virtually all other European governments to date have not gotten down to the real issues. In May of 1998 the Central Council will decide which countries will join the initial wave of EMU. Also, the fixed parities that are to be launched January 1999. Britain will likely opt out but argue for input to key decisions - and will not get any.

The Maastricht treaty calls for four key main kinds of convergence: on inflation, interest rates, budget deficits, and public debt. These rules remain a mixture of unnecessary and potentially counter-productive. But what matters more are the measures not being discussed: that of labour-market flexibility and national responses to changes in interest rates.

When EMU comes into operation governments will no longer be able to use changes in monetary policy to stabilise their national economies-cutting interest rates and depreciating their currencies in recessions, raising rates and appreciating their currencies in booms. In Europe today monetary policy shoulders much of the burden of managing adjustments to economic fluctuations. Once national monetary policy is abolished, the burden must fall elsewhere: partly on fiscal policy and partly on the labour market. Yet most of Europe's government have already said they will not utilise fiscal policy to resolve these issues. Note Germany's "stability pact" which makes the Maastricht budget-deficit criterion a permanent rule. So Europe's nations will be left with only changes in wages to adjust to swings in the economic cycle.

However, if a country's labour-market is inflexible then wages will not fall and employment will have to bear the brunt of economic cycles. Europe has a more rigid labour market than either Britain (thanks to the Conservatives) and the USA, where unemployment is lower. If Europe does not fix this mismatch, there will be trouble a brewing in the new EMU.

An issue facing the United States is that the budget deficit will balloon after the year 2002 due to basic demographic changes. This is forecasted now - how about a debt reduction Bill?

The black economy accounts for the following % of GDP:

• Switzerland 6%
• Japan 9%
• USA 9%
• Britain 12%
• Germany 15%
• France 15%
• Sweden 18%
• Spain 23%
• Italy 24%
• Poland 45%
• Russia 100%

Source: F. Schneider, University of Linz; The Economist.

This is the market that is not taxed.

Cricket: Former Australian all-rounder Keith Miller and the Bedser twins Alec and Eric were among the 3,000 who attended the memorial service for Dennis Compton at Westminster Abbey on July 1^st, while a further 3,000 were locked out. So great was the demand that Middlesex had thought of staging it at Lord's. Few venues, though, can rival Westminster Abbey when the nation is in the mood to give thanks for the life of its heroes.

J.J. Warr gave the address with a well rehearsed eulogy that combined due reverence for the brilliance of Denis as a sportsman with a humorous reflection of the great man's foibles. As he (Denis) said at the time of the miners' strike in 1972 of Ted Heath's attempt to impose a three-day working week: "I'm not going to work an extra day for anyone." The Wombwell Cricket Lovers Society has instituted a Denis Compton Memorial Award, which will reflect the players characteristic flair and ebullience.

From The Cricketer, August 1997.

TROUBLED TIGERS

+ Currencies and stockmarkets plunged across EAST ASIA while banks, builders and manufacturers went bust in their hundreds. Worst hit were Thailand, Indonesia and South Korea, whose currencies all fell by more than 40% against the dollar, swelling firms' foreign-currency debt burdens. Governments dithered, but all three were forced to turn to the IMF for a bail-out.

+ East Asia's abrupt reversals fuelled fears of GLOBAL DEFLATION. But in December IMF economists reduced their 1998 growth forecasts for America and Western Europe by only a quarter point, to 2.4% and 2.7% respectively. Japan, where umpteen "reform" packages have failed to solve the country's financial mess, will suffer more from its neighbours' troubles. The IMF cut its growth forecast to only 1.1%. Japan's economic woes pushed the YEN to a five-and-a-half-year low of Yen130.

+ Despite the financial mayhem in Asia, WALL STREET had another good year. The Dow Jones industrial average rose 23% through December 30th, despite a drop in the second half of the year. After peaking at 8,259 in August, it closed at 7,916. European bourses also boomed -- Morgan Stanley's European share-price index rose 22.4%. It was a bad year for GOLD: its price fell below $300 per ounce, to its lowest level for 17 years. The WORLD TRADE ORGANISATION brokered global agreements to unlock markets in information-technology, telecoms and financial services. But Bill Clinton failed to win fast-track authority from Congress to bring other Latin American countries into the North American Free-Trade Agreement.

MERGER MANIA

+ COMMERCIAL BANKS consolidated. Europe saw its first big cross-border mergers: the Netherlands' ING bought Belgium's Banque Bruxelles Lambert and Sweden's Nordbanken merged with Merita of Finland. In countries which until recently had spurned restructuring, such as Switzerland, Germany and Austria, banks linked up to cut costs before monetary union. The largest deal was Swiss Bank Corporation's merger with Union Bank of Switzerland.

+ INVESTMENT BANKS scrambled for partners as the barriers between traditional investment banking, stock-broking and fund management blurred further, particularly in America. Morgan Stanley merged with Dean Witter, Discover; Bankers Trust bought Alex Brown; Salomon Brothers succumbed to the advances of Travelers Group,and Merrill Lynch snapped up Britain's Mercury Asset Management.

+ With unexpected haste, Britain's new Labour government granted partial independence to the BANK OF ENGLAND.

BEAKS V GEEKS

+ America's trustbusters turned up the heat on MICROSOFT. The Justice Department barred the world's largest software firm from forcing its web browser on buyers of Windows 95, its ubiquitous operating system. Internet Explorer, Microsoft's browser, almost caught up with the market leader, Netscape's  Navigator, and Microsoft made a $1 billion investment in Comcast, America's fourth-largest cable-television firm.

+ Also probed by the Federal Trade Commission was INTEL, which makes 90% of the microprocessors used in PCs. A bigger threat to Intel's profits, perhaps, was the cheap-and-simple computer: sub-$1,000 PCs, which accounted for only 9% of the American consumer market in 1996, vaulted to 39% in October.

+ ELECTRIC CARS accelerated. First Daimler-Benz then Ford invested heavily in Ballard Power Systems, a Canadian firm that claims a world lead in fuel cells to power electric vehicles. And Toyota launched a hybrid car with a petrol engine for the open road and a clean electric one for towns. Other green machines hit roadblocks, however: MERCEDES-BENZ's two small conventional cars, the A-class and the Smart, earned the nickname kippen (flipper) by rolling over during tests.

+ Latin America's governments continued to PRIVATISE big companies. Brazil alone expected to sell assets worth $20 billion by the end of 1997, including the sale in May of CVRD, the world's largest iron-ore producer.

+ The European Union's competition commissioner, KAREL VAN MIERT,  brought Europe and America to the brink of a trade war by trying to block the merger of Boeing and McDonnell Douglas, but finally backed down. He continues to stymie a tie-up between British Airways and American Airlines.

+ America continued to bash CIGARETTE makers. The biggest tobacco firms agreed in June to pay $368.5 billion over 25 years to settle lawsuits, and to submit to oversight by the Food and Drug Administration. President Clinton seeks to impose harsher conditions.

SLIMMING PAINS

+ MANAGED-CARE firms continued to grow by trimming America's medical bills, despite the spectacular 62% share-price tumble of the most dynamic company, Oxford Health Plans, in October. Millions of overweight people also grew fatter as two slimming pills were withdrawn amid fears of lethal side effects.

+ Scientists CLONED a sheep named Dolly, hoping that the discovery may help drug research, but newspaper headlines imagined armies of cloned humans.

+ Records were broken in the ENTERTAINMENT industry. The Spice Girls became the first pop group to achieve four consecutive number-one hits and be booed off stage within 16 months. Elton John's Diana tribute, "Candle in the Wind", eclipsed Bing Crosby's 1942 croon "White Christmas" to become the best-selling single of all time. And "Titanic", at $200m the most expensive movie ever made, looked set to confound   pundits by becoming the worlds number one revenue generating film of all time.

Internet Worries:

Financial Times, Thursday Frbruary 5^th 1998

Brussels sets out plan for worldwide internet charter.

The European Commission yesterday unveliled plans for the international charter aimed at establishing principles governing business on the internet. It would encourage operation between governments on legal and technical issues such as data protection, copyrightm taxation and control of pornography.

Financial Times, Friday February 6^th 1998

Internet Trade: US tax haven or hell?

States debating how to tax internet sales are wasting their time and possible money as technology outpaces bureaucracy. In theory creating a "tax free" zone on the internet could encourage intra-state elcectronic commerce. But it could put Main Street businesses at a disadvantage and deprive states and cities of revenue. Nearly 49% of total state tax revenues are generated by sales tax, according to the National Governors' Association.