Outlook: As election looms, Bush leaves dollar to the mercy of markets

Marconi spoils; Media quagmire

After another pummelling for the dollar on foreign exchange markets yesterday, the pound is back to levels against the American greenback not seen since Britain's ill fated membership of the ERM, and before that the early years of the Thatcher government more than twenty years ago. The way things are going, we'll soon be back at the $2 pound. As everyone should by now know, this is not so much a question of pound strength, as dollar weakness. Measured against the currencies of our major trading partners, the pound hasn't moved much at all in recent months. It's the dollar which is moving, not the currencies around it.

Does the US worry about a currency depreciation which is fast turning into a rout? Apparently not. Since Paul O'Neill's ignominious demise last year as US Treasury Secretary, the Bush administration has given up even the pretence of the strong dollar policy championed during the Clinton years. Mr O'Neill's successor, John Snow has instead openly adopted a let the markets decide approach. The thinking is brazenly political. By allowing the dollar to depreciate, the US makes its industry more competitive, which in turn helps employment and most important of all, helps George Bush secure his second term.

Yet the real curiosity of the new policy is that for the time being, it continues to allow the US to indulge itself in running massive current account and budget deficits. The result of a currency correction is normally to deprive its victim of these luxuries. The current account deficit ought to self correct, as imports become more expensive and exports more price competitive. The consequent inflationary pressures will meanwhile cause interest rates to rise, eventually making excessive borrowing prohibitively expensive and forcing the government to cut spending, raise taxes, or both.

This is not yet happening in the US. The reasons lie chiefly in the Far East with China and Japan, who in order to keep their currencies competitive with the dollar, are printing money with abandon to buy dollar assets. This in turn helps keep US inflation and interest rates low, which means both government and consumers can continue to enjoy the benefits of low prices and cheap credit.

No wonder the Americans refuse to call the dollar's crash a crisis. If this were a crisis, you would expect pain, and so far there's barely been a twinge of it. To the contrary, the dollar's fall seems to be allowing the US to grow, borrow and spend even more effectively than it was before.

The unanswered question is how much longer this happy state of affairs can continue. The only sure bet is that eventually these policies will prove inflationary, both in the US and the Far East, and that interest rates will then rise accordingly. However, for the time being, the effect is benign, which ought to continue easily long enough for Mr Bush to get re-elected. If the rest of his presidency is spent clearing up the mess, so be it; no serious attempt will be made to address the long term consequences of dollar weakness until he's safely back in the Whitehouse.

Marconi spoils

The ease with which senior executives achieve performance targets billed at the time they were set as so challenging as to be almost impossible never ceases to amaze. The latest example of it is Mike Parton, whose entitlement to performance related pay as chief executive of Marconi has already exceeded £15m less than a year after the company was deemed to be so utterly bust that it was thought necessary almost entirely to wipe out its former shareholders in a debt for equity refinancing.

Mr Parton has already "earned" 70 per cent of what he could be entitled to under the scheme, and it only requires the share price to rise a bit further before he gets the remaining 30 per cent. If only others who were with Marconi before the meltdown, as Mr Parton was, could enjoy such a happy ending. As the Marconi ship foundered, I argued that shareholders' best hope was to back a massive rescue rights issue, but directors, including Mr Parton, took the view that it was already too late for equity holders to salvage anything from the wreckage.

Mr Parton was lucky. He was in the right place at the right time, and the banks agreed an incentive package that would enrich him beyond the dreams of avarice should he achieve the impossible. Yet I suspect that things were never quite as bad as they were portrayed at Marconi. The banks over reacted and panicked. Mr Parton and colleagues have benefited to a degree that could never have happened in a more stable enterprise. Lucky them. Too bad about other stakeholders.

Media quagmire

Diversity of media opinion and ownership is so indisputably "a good thing" in democratic societies that anything public policy can do to safeguard it ought to be applauded. I'm not sure the same welcome can be extended to the Office of Communications (Ofcom) "guidance for the public interest test for media mergers", published this week. The proposed tests are so widely drawn and open to political judgement that virtually any media deal of significance could be blocked should the bureaucrats or ministers deem it appropriate.

Of course this has long been the case with media mergers. Newspapers have always been one of the few areas of the commercial landscape where ministers have carte blanche to play God in deciding who is allowed to buy what. Not so the great bulk of business activity, where the public interest is meant to extend only as far as safeguarding competition and national security.

Thus it was that David Sullivan, owner of the Sunday Sport, was banned in the early 1990s from buying the Bristol Evening Post on the grounds that he might seek to influence editorial policy in a manner which would harm the accurate presentation of news and the free expression of opinion, but Richard Desmond, a Labour Party donor and like Mr Sullivan, a publisher of adult magazines, was cleared to acquire the Express newspaper titles.

The one redeeming feature of the Ofcom guidelines is that they at least set out in black and white precisely what it is that policy makers can take into account in deciding who is fit and proper to own media assets. That said, it doesn't look as if the Ofcom regime will improve by one jot the arbitrary nature of the process, where decisions seem as much determined by political whim as hard and fast criteria. The guidelines set out a wealth of different grounds for interference from the political allegiances of the aspiring owner to the ratio in column inches of advertising to editorial. Hey, why not throw in determination of pagination and cover price for good measure?

One particular consideration - "what is the likely level of involvement of proprietors in editorial decisions, with evidence of track record from acquiring enterprise" - has been read as the end of any hope Richard Desmond might have had of acquiring The Daily Telegraph. The same clause could be used with equal effect to dash the Mail's ambitions, given that Associated's viciously anti-Blairite stance is dictated by the proprietor, never mind that it helps sell the newspaper.

Labour promised to take the politics out of competition policy, but Ofcom's contribution to the debate hardly seems to fit the script. The truth is that in trying to make competition and mergers policy more transparent, the Government has only succeeded in adding yet more layers of confusion and obstruction.

The interminable competition investigations that surrounded last year's supermarket bids for Safeway's were a complete waste of everyone's time, resulting, after a year of faffing around, in the always self evident conclusion that only Wm Morrison should be allowed to proceed. A recent ruling that the Office of Fair Trading must refer all bids which raise competition issues further clogs up a system already in severe danger of grinding to a halt.

jeremy.warner@independent.co.uk