OPINION: CRACKS IN THE KYOTO CONSENSUS

The Independent, 19 June 2005 http://news.independent.co.uk/business/comment/story.jsp?story=647912

By Mark Tinker

The latest budget argument between Tony Blair and Jacques Chirac is pure theatre. Mr Chirac is trying to distract attention from the disastrous (for him) referendum, while Mr Blair is seizing the opportunity to look tough and Eurosceptic. But both must be somewhat rattled by the implication from their electorates that the privileged political elites need to pay a little more attention to their constituencies. So a nice global warming summit where they can emote with their "subjects" on the new religion and blame George Bush should make them feel better.

But even here this might not last, for cracks are appearing in the Kyoto consensus. This is an economics and markets column and not a political one, so I'll restrict my views on Kyoto to noting that even if I were convinced of the science predicting a 0.7 per cent increase in temperatures over the next 200 years (which I am not), I would still have a huge economic problem with the proposed solutions.

On the ground, the Germans are unhappy at the huge implied costs of the emissions targets, with the likely winners of the coming election proposing radical changes in restrictions on German firms.

The markets' response to all this remains practical: oil prices are going higher and the price of uranium has risen by 50 per cent so far this year. In the meantime, tax breaks for wind farms and the profits to be made from emissions trading are producing some unlikely Kyoto enthusiasts at the outer fringes of capitalism.

While the politicians seek distractions from Europe's economic problems, the economic talking heads have come out with their usual prescription: the European Central Bank (ECB) must cut interest rates. Bound to work - after all, look at what happened in the US, or for that matter the UK. Except, of course, it won't.

In the UK, lower interest rates put money back into the pockets of everybody with a mortgage, just as higher rates take it out. But in Europe, not only are there fewer mortgages, but they tend to be fixed rate. Moreover, while many people in the UK consider their house to be their savings pot, in Europe it is money in the bank. Cut the return on savings and people save more, not less. The same applied in Japan in the 1990s.

The US has the best of both worlds: rates are long-term fixed, so higher short-term rates don't hit you but you can refinance if they fall.

If the politicians do prevail on the ECB to cut rates, the euro will probably drop further. With the referendum having lifted the scales from the eyes of those who thought all the global imbalances were America's fault (a bit like global warming, really), the euro has fallen over 10 per cent against the dollar this year.

The real problem in France is structural. A key reason why unemployment is running at almost 10 per cent is that the marginal price of labour is simply too high. Employer national insurance is 100 per cent, so labour has to be charged out at more than double the wage rate received by the employee. Government gets its cut first.

And while the Netherlands may be more competitive than France, with a minimum wage of EUR1,250 (£830) a month, the Dutch are looking anxiously at a new EU entrant, Latvia, where it is a mere EUR121.

Sorry to the faithful, but the enthusiasm for Kyoto smacks of political theatre as well. When it involves little more than a smokescreen for higher taxes and a bill for the Americans, it's a free lunch. However, with the Danes and the Swiss finding emissions going up rather than down, and the New Zealanders discovering that it will cost them $500m (£275m) in 2012, rather than their benefiting by that amount, the unity looks a little shaky.

Mark Tinker is a director of Execution Stockbrokers: mark.tinker@executionlimited.com