Constitution blow leaves privatisation hanging in balance

WILL the newly weakened French government kick-start the country's stalled €18bn privatisation programme or kill it? Determined to quell popular fears spawned by high unemployment and job losses, the new prime minister, Dominique de Villepin, has promised a return to the 'French model' of economic tinkering and social solidarity.

But his desire to increase spending and simultaneously trim the budget deficit will merely exacerbate pressure to raise funds from asset sales already being prepared.

In the run-up to the referendum in which French voters rejected the European Constitution, president Jacques Chirac froze plans for an initial public offer of state utility Gaz de France (GdF) that would have raised more than €4bn. But the sell-off, designed to appease European Union disquiet at the lack of competition in French gas markets and fund the group's international expansion, could begin within days of a phone call to its investment bank advisers.

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The IPO was to be a ground-breaker for the flotation of Electricit de France, Europe's largest power group, this autumn. Unlike GdF, EdF desperately needs at least €10bn in cash to fund its agreed joint takeover (with AEM of Milan) of Italian generator Edison and rebuild a balance sheet ravaged by over-expansion and losses in Latin America. The planned sale would value EdF at up to €60bn. A third state company is also jostling for the right to raise up to €4bn through an early IPO: Areva, the nuclear engineering group that built EdF's 80 nuclear generating plants.

Despite de Villepin's opposition to economic liberalisation, Chirac has saddled him with a powerful pair of believers in privatisation and market opening as numbers two and three in the new government. The breakneck IPO programme was launched last autumn by France's most popular politician, Nicolas Sarkozy, days before he quit government to chair Chirac's centre-right UMP political party and prepare to challenge for the presidency in 2007.

Now Sarkozy is back, retaining the party chair but taking charge of an enlarged interior ministry with the rank of deputy prime minister. A fierce critic of the failed 'French model', Sarkozy will be able to draw support for the IPO programme from Thierry Breton, the finance minister who, until February, ran privatised France Tlcom.

Having spent the previous two years clearing up the mess created by over-expansion at the telecoms operator during state ownership, Breton is acutely aware of the need to free French business from the dead hand of the state.

European banking

ALESSANDRO Profumo has always been one of the more impressive of Italian businessmen, but he is pushing his luck with the proposed takeover by Unicredito of Germany's HVB. No one doubts he has the right vision for the future of banking in Europe, but does he have the experience and the sheer bloody-mindedness for the execution?

It's to Profumo's credit that he sees the necessity of European banking consolidation where so many of his peers want to keep the barriers up. But he's already tilted at, and failed to land, Spain's Banco Bilbao Vizcaya Argentaria and Germany's Commerzbank. And there are legions of problems ahead with a proposed takeover of HVB. The unions are already talking tough, there aren't that many obvious synergies that would satisfy investors, and it can't be long before Germany's politicians get stuck in to the loss of a German asset.

Martin Peter at Independent Research in Frankfurt is bearish on the reported deal. "This would be negative for Unicredito," he says, adding that the reported offer was "significantly higher than fair value". Peter promised to reduce his buy rating on the Italian bank if it bids for HVB, which has "too many problems and hidden risks".

Analysts remain concerned about HVB's whopping credit risk. The bank this week placed a €5.5bn credit portfolio on the open market; that barely dented some €230bn in risk-related assets - one of the biggest exposures in Europe. In short, HVB is badly in need of help, and if a tie-up prompts more movement in the European banking sector, so much the better.


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THE prospect of a trade war over aviation subsidies between Europe and the US is as depressing as it is predictable, and is down to the overinflated egos of politicians on both sides of the Atlantic. Both sides will end up compromising, but not until vast sums of money have been spent on lawyers, lobbyists and analysts. You and I, of course, will pick up the bill.

After months of shadow boxing, the European Union and the US have decided to take their argument over the billions of dollars and euros in state aid given to plane makers Boeing and Airbus to the World Trade Organisation. Last week, less than 24 hours after Washington launched a formal complaint against Airbus, the European Commission announced that it was filing a counter suit to challenge the legality of the subsidies paid to Boeing.

The most recent argument has been triggered by Airbus's A350 which looks to be doing rather well. But both sides have been muttering about each other's behaviour for years. The recipe for resolving this issue should be simple. Both sides should cut their subsidies deeply, or axe them altogether. No need for the WTO and its two-year long inquiry. No need for that state aid on either side of the Atlantic.

Sadly this case is more about the egos of the key players on both sides. In the European corner is Peter Mandelson, the new trade commissioner, who needs to look tough after the French constitutional 'non' and has a point to prove to some of his former colleagues back in the UK.

In the other corner is Robert Portman, successor to the impressive Robert Zoellick as deputy secretary of state. Portman is a close Bush ally who needs to look tough. Playing hardball with the Europeans will go down well in Congress, where the Bush administration needs support for what it views as a key trade priority - the central American free trade agreement. The danger is that with two relative new boys in the job, the world will drift into a costly dispute neither wants.

The EU and US negotiators should be locked in a room together and told only to come out when they have a deal - and keep the WTO and its lawyers well away.