US interest rates are already 5.25 per cent, euro rates are set to rise again on 3rd August, the next move in British rates looks likely to be up, and as deflation recedes, even Japan has finally raised rates. After years of borrowing cheap to take ever more exotic speculative gambles, investors are rediscovering risk and retrenching. This is not yet a bear market. The Dow, the FTSE and Morgan Stanley's international stock market index remain up so far this year—just. But markets may tumble once people realise that even in a more flexible and globalised economy, higher energy prices eventually feed through into higher inflation and lower growth. To keep a lid on rising prices, interest rates may have to rise much further than previously expected, pricking bubbly house prices and hurting heavily indebted consumers. Though the prospect of higher inflation and slower growth sounds like a rerun of the 1970s, it is unlikely to be that bad—rather what US economist Nouriel Roubini calls "stagflation lite."
20:20:20 vision to save Doha
The leaders of the world's most powerful economies—the US, the EU, Canada, China, India, Brazil and Mexico—have tried to break the deadlock in the Doha round of world trade talks by setting a mid-August deadline for reaching an ambitious and balanced framework agreement. Trade negotiators have been instructed to stop stonewalling and seek compromises instead, while Pascal Lamy, the WTO's boss, has received a mandate to bang heads together in the marathon negotiating sessions that doubtless lie ahead.
The main bones of contention remain the EU's high farm tariffs, the US's hefty agricultural subsidies and the steep industrial import duties of Brazil, India and other developing countries. In June, Lamy floated a 20:20:20 formula for a possible agreement, whereby the US would cap its farm subsidies at $20bn a year, developing countries would limit their industrial goods tariffs to 20 per cent and the EU would accept a proposal by the Group of 20 poor countries to cut its agricultural tariffs by an average of 54 per cent. But now that he has the public backing of all the big players, Lamy should aim higher.
An ambitious deal would not only bring bigger benefits, especially for developing countries; it may also be easier to sell politically. A modest deal would still be tough, since EU and US farmers will fight tooth and nail against any cut in agricultural support, but it would offer little for exporters to get excited about. They might prefer to spend their political capital on more rewarding bilateral trade deals instead. But a more ambitious deal would not only make cuts in US farm subsidies easier to swallow, by giving US farmers new export opportunities in Europe and elsewhere. It would also give US and EU exporters of manufactures and services eyeing up new markets in India and China something to fight for.
EU populism 1: mobile operators
Seldom does the Daily Mail say something positive about Europe, let alone an EU commissioner from Luxembourg who proposes to impose on British business new regulations described by one executive as "close to socialism." Yet the Mail has been singing the praises of Viviane Reding, the EU's telecoms commissioner, for her plans to slash the cost of using mobile phones abroad. It's a pity that Reding's proposals are half-baked. Mobile operators certainly make a packet from the "roaming" fees levied on phone calls made and received abroad, but Britain's mobile telecoms market is generally highly competitive. Prices continue to fall, and new operators, such as Tesco and easymobile, keep established players such as Orange and T-Mobile on their toes. Since most of their customers primarily use their phones within Britain, it is normal, and perfectly legitimate, that operators have until now focused their price-cutting on domestic charges. Besides, even before Reding first announced her plans, Vodafone had started to target customers who use their phone abroad a lot with cheaper prices through its Passport scheme. But despite the evidence that competition is working well, Reding felt compelled to intervene—in a potentially very damaging way. She proposes to set arbitrary caps on both wholesale and retail roaming prices, in effect gumming up the rapidly evolving mobile market by making it a regulated utility. Her plans, which still need the approval of the European parliament and the EU's 25 countries, should be roundly rejected. Where's the Mail when you need it to attack barmy Brussels initiatives?
EU populism 2: Microsoft
Reding is not the only EU commissioner who has succumbed to misguided populism. Neelie Kroes, the formidable competition commissioner, has made a mockery of due process by fining Microsoft €280.5m (£193m) for failing to comply with an antitrust judgement against it, the first such financial penalty the EU has imposed. She is promising even stiffer fines in the future. Kroes may be right that Microsoft has exploited the quasi-monopoly of its Windows operating system to crush competitors in related markets, but she is jumping the gun by fining it. The European court of justice, which has already struck down several high-profile EU antitrust decisions, is still considering Microsoft's appeal. Besides, Microsoft has stuck to the timetable agreed with the commission for handing over the technical information about Windows that rival firms need to write software that works well with it.
