Outlook: They've shot the messenger in dispensing with Michel Bon

Black Wednesday Â

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MobilCom considers legal action against France Telecom

As corporate road crashes go, they don't come much more grisly than France Telecom, even for a sector that has produced more burnt out wrecks than the annual Grand Depart. Michel Bon, the amiable French technocrat who has been running the show since privatisation in 1997 has duly paid for it with his job, but the French government still appears to be no nearer knowing how to sort it out.

Mr Bon made lots of mistakes during the telecoms scramble for growth and assets, not least his disastrous entanglement with MobilCom, the redundant German mobile phone company, and NTL, the equally cash hungry UK cable operator. But his sins were no worse than anyone else's, while strategically and operationally, France Telecom remains as well positioned as any. Wanadoo has been established as Europe's premier internet operator, Orange is still going gangbusters, and the fixed network remains as robust as any.

So what went wrong? France Telecom's main problem was and still is the French Government, which wants the benefits of privatisation but is not prepared to pay the price by ending government involvement. It was the French government that urged Mr Bon to go out and conquer the world, but it was never prepared to give him the equity to do it. With the government unwilling to cede control, Mr Bon was instead forced to pay cash for his acquisitions and in the process he had to devise ever more byzantine financial structures to keep the creditors at bay. The capital markets were only too willing to lend, if only because they thought that everything was implicitly underwritten by the French state.

In the UK, British Telecom was even more disastrously run than France Telecom, but at least the City was able rapidly to deal with the problem once its seriousness became known. The company was broken up, new management installed and a rescue rights issue launched to finance the rump. France Telecom might have done the same, but ministers were not prepared to tolerate either the breakup of such a grand design or the necessary dilution of the government's controlling stake. Bizarrely, France Telecom workers still carry the status of civil servants. Privatisation plainly doesn't mean the same thing in France as it does here.

The French government's failure to nip the problem in the bud has made it infinitely more serious. One solution might be to underwrite the debt in the hope the company can eventually trade and sell its way out of the hole it has dug for itself, but this wouldn't address any of the immediate liquidity problems. The capital markets would only support a rights issue if the Government agreed to take up its share, which it cannot do without further damaging the already parlous state of the public finances.

Jean-Pierre Raffarin, the new French prime minister, looks like a rabbit caught in the headlights of an oncoming car. The Anglo Saxon approach would be to let the company go to the wall. The good bits, such as Orange, would survive and prosper. But at heart Mr Raffarin is not much of a reformer and the chances of such pragmatism entering in on the dirigiste darkness are about as likely as a month of Sundays. What a mess.

Black Wednesday

Just in case you hadn't noticed, Monday is the 10th anniversary of Britain's ignominious exit from the European Exchange Rate Mechanism – "Black", or "White" Wednesday, depending on your point of view. For both sides in the euro debate, it was a defining moment.

For the pro-euro lobby, Black Wednesday set British membership of the single currency back years by burning our bridges with the Europeans and poisoning the public consciousness against participation. For the europhobes, the débâcle seems so unambiguously to make the case against British membership of the single currency that it is game set and match.

For two years, Britain attempted to support a fixed, inappropriately high exchange rate with inappropriately high interest rates, thereby greatly exaggerating the recession of the early 1990s. What's more, the Europeans didn't even want us. When George Soros mounted his famous attack on the pound, our European "partners" failed to come to the rescue. The Bundesbank and others were apparently perfectly happy to see us forced out. Do we really want to go through all that again by joining the single currency?

As it happens, the pound is today worth 11 per cent more than it was at the central ERM rate then. If only we could massage the rate down as "low" as the 2.95 German marks to the pound that ruled during our days in the ERM, even the most convinced eurosceptic might think that an appropriate rate at which to join. Still, that was then and this is now. At the time we were in recession and Germany wasn't. The reverse is true today. The entry rate was too high, so much so that the Treasury privately gave it no more than a year before Britain would be forced to devalue.

So why on earth did we join? In part it was for the purpose of stamping on inflation. High interest rates would have been necessary anyway to choke off the inflationary effects of the Lawson boom. The high exchange rate reinforced the anti-inflationary medicine. After that it became a matter of political pride to maintain the rate. John Major, then Prime Minister, had boasted of being able "to look the Deutschmark in the face" and he was unprepared to confront the humiliation of devaluation.

In the summer of 1992, the Danes voted against Maastricht, shaking confidence in the single currency project and providing speculators with the opportunity to pick off the weaker players. By selling vulnerable currencies such as the pound and the Italian lira, the markets were able to drive interest rates to politically unacceptable levels and force the devaluations they had been looking for.

So much for history. Should the experience count against British membership of the single currency? The scares are still very much there, but the dispassionate view is, no, it makes no difference at all. The ERM and the single currency are different animals. The ERM was an exchange rate peg supported by local interest rates. Experience then and since has shown such pegs to be wholly inappropriate policy tools and sitting ducks for disruptive currency speculation. The euro is something quite different. The single interest rate and monetary regime makes it impossible to speculate against particular parts of the eurozone, only against the whole.

The single interest rate still has the effect of imposing a policy stance that is inappropriately high for some regions and inappropriately low for others. In that respect, the single currency may not seem so very different from the ERM but the argument is often exaggerated. European interest rates are probably still too low for Britain, but not unarguably so, and while they might seem far too high for Germany, the single currency has actually got very little to do with Germany's economic woes. That's much more down to Germany's refusal to confront structural change and the continued very high costs of attempting to absorb a Third World country, East Germany. More than 10 years after reunification, Germany is still essentially two economies – one still prosperous and growing, the other still struggling to emerge from the dark ages.

Black or White Wednesday? Well, neither really. Just another moment in time.

jeremy.warner@independent.co.uk