Outlook: Tunnel coup proving only a Pyrrhic victory

Inflation/oil prices; Climate change

From the sublime to the ridiculous. Having pulled off one of the most sensational boardroom coups in European corporate history, the newly installed, wholly French, slate of directors at Eurotunnel is planning to - er - carry out exactly the same restructuring plan as the substantially British board that preceded it. The new crew at the helm has also decided to retain the same team of investment banking advisers and and legal negotiators. So much for La Revolution.

Hope has always sprung eternal among investors in the Channel Tunnel, but it hasn't taken Jacques Maillot, the new chairman, long to figure out that their best chance of salvaging at least something from the wreckage lies with the pre-existing plan.

This involves halving Eurotunnel's £6.4bn debt mountain by persuading SNCF, the French state-owned rail company, and London & Continental Railways, the high-speed channel tunnel rail link company, to take share stakes in the tunnel, either by injecting assets or cash. Some future revenue streams would also be securitised. As a quid pro quo, Eurotunnel would cut access charges for the railways, which it hopes over time would stimulate more traffic and thereby end up being revenue neutral.

Even this plan looks fanciful enough, and personally I'd put its chances of success at little more than zero. Yet against what the perpetrators of the coup d'etat were hoping to achieve, it seems like a paradigm of realistic thinking. M. Maillot was voted into office on a three-pronged programme of reform which involved raising access charges to generate more revenue, getting the British and French governments to cough up a large slug of state aid, and on the can't pay, won't pay principle, simply telling debt holders that a substantial part of their loans were cancelled. And pigs might fly. The British and French governments are specifically banned from state aid by the Channel Tunnel Treaty. It is in any case hard to see why they would agree such a proposal even if they could. The same goes for the railways. Why would they pay more when they don't have to? As for the banks, we are more likely to see a camel pass through the eye of a needle than a banker voluntarily cancel his loan.

I'm sticking with my initial judgment that the end game at Eurotunnel is a massive debt-for-equity swop that will see existing shareholders diluted out of any meaningful existence. That prospect has been increased by the French coup, not lessened by it.

Inflation/oil prices

By adopting the Consumer Price Index for inflation targeting purposes, the Chancellor has already ensured that house prices and council taxes, two of the most inflationary forces in the land, are removed from the official definition of inflation. Perhaps he should consider removing oil and petrol from the index as well, for somewhat inconveniently, the cost of energy is roaring ahead too.

At 1.1 per cent, the rate of inflation as measured by the CPI bears virtually no relation to most people's cost of living. It's meant to be an average, of course, and by definition, few out of a population of nearly 60 million will conform exactly with any average.

Even so, it's hard to find anyone with a lower rate of inflation in their cost of living than 1.1 per cent. For growing numbers of people, the inflation rate according to the CPI looks like little more than wishful thinking. According to the latest figures, private sector earnings growth is now running at 3.7 per cent, significantly higher than a year ago. In itself, that's bound to be inflationary, but the reasons for it are perhaps just as instructive.

In part, it is because of the tightness of the labour market, which gives the workforce increased bargaining power in their pay demands. Employees are also able to cite the exorbitant cost of housing and the sometimes extreme inflation taking place in the cost of many services. For many of us, the fact that the price of flat screen TV is gently deflating is neither here nor there, as we are still perfectly happy to get by with the antiquated monstrosity we bought 10 years ago.

Yet in theory, if not in practice, the CPI is the measure by which monetary policy is meant to be set. It's all very confusing, possibly deliberately so. Rightly or wrongly, there is a growing suspicion that monetary policy is easier than it perhaps ought to be, notwithstanding this week's hike in rates. This suits the Chancellor very well in the run up to a general election. It may not be quite so good for the long-term health of the UK economy.

And so to oil prices, which unfortunately for the Chancellor, will eventually have some effect even on the insipid CPI. The price of fuel at the pumps is now higher than it was at the time of the fuel protests in September 2000. If things don't ease soon, the Chancellor will face pressure to drop the planned 2p to 2.5p a litre increase in fuel duties, scheduled to take effect on 1 September, making his problems with the public finances more acute still.

It is with some justification that OPEC sometimes insists that consumer nations should fix the mote in their own eye before complaining about the failure of the producer countries to address the rising price of crude, for fuel tax in Britain and Europe dwarfs the cost of the crude oil. That hasn't stopped Tony Blair from giving OPEC a dressing down about it all.

In the US, the effect of rising fuel prices on disposable income is proportionately much greater, if only because fuel taxes are so much lower. Nor has America had the protection of a strong currency to mitigate the effect. From a British perspective, it seems hard to believe that anyone would get too upset by the prospect of $2 a gallon - or roughly 30p a litre - but in gas guzzling America such a price is seen as daylight robbery. Once people start to make the link between war in Iraq and steadily rising prices at the pumps, it might even damage President George Bush's chances of re-election.

OPEC claims it is powerless to affect a price which is now so far adrift of the official target range that the benchmark might as well not exist at all. This is somewhat disingenuous, for Saudi Arabia alone has so much unused capacity that it could easily turn up the taps and flood the world with supply. Even so, there is an element of truth in what OPEC officials claim. The rising oil price is less to do with any short-term excess of demand over supply, or to a run down in American inventories, as to worries about the threat to the security of supply from tension in the Middle East.

The meltdown in Iraq is one thing. Much more concerning, there have been a number of attacks on Saudi oil installations in recent weeks and the oil markets are alive with speculation that more are pending. Popular insurgency in Saudi, which accounts for roughly a third of all oil supplies, could spell disaster for the world economy.

Still, for the time being, things are not as bad as they perhaps seem. The oil price is at a 13-year high in nominal terms, but adjusted for inflation it is still quite a bit lower than the peak of the spike hit just before the Gulf war of 1991, and hugely lower than the punishing levels reached in the 1970s. When the price hits $50 a barrel, then is the time to start really worrying, but presumably OPEC will be galvanised into action well before then. The Chancellor will have to hope so, anyway.

Climate change

I lazily confused climate change with the hole in the ozone layer in yesterday's column. They are, of course, completely different issues, caused by different emissions, and subject to quite separate protocols. Many thanks for the large number of e-mails pointing out the error, particularly the more abusive ones, which I am ashamed to say were well deserved. Climate change is not a subject for frivolous commentary, however much British business might feel it is being unfairly punished relative to its Continental counterparts by Government efforts to address it.