On 11 November, the European Commission announced that it was imposing fines totalling €173 million on plastic additives producers for operating a price fixing and market sharing cartel. There were 24 companies involved in the cartel. As Competition Commissioner, Neelie Kroes, said, “These companies must learn the hard way that breaking the law does not pay and that repeat offenders will face stiffer penalties. The companies’ elaborate precautions to cover their tracks did not prevent the Commission from revealing the full extent of their determined efforts to rip-off their customers”.
An interesting feature of this particular case is that one of the companies fined is AC Treuhand, a Swiss-based consultancy company. It is not a plastics producer, but took on the role of organising the cartel. Neelie Kroes said that “the company’s Swiss premises were chosen for secret meetings of cartel participants as they were outside the EU and beyond the commission’s jurisdiction. This made it harder for the watchdog to seize documents.”
Antitrust: Commission fines plastic additives producers €173 million for price fixing and market sharing cartels Europa Press Release (11/11/09)
FACTBOX-EU fines heat stabilisers cartel 173 mln euros Reuters (11/11/09)
EU fines consultant for alleged cartel role Financial Times, Nikki Tait (11/11/09)
EU cartel fine for plastics firms BBC News (11/11/09)
EU fines plastics cartel euro173 million Forbes (11/11/09)
Questions
- What conditions must apply if a cartel is to succeed in raising prices? To what extent did these conditions apply to the plastic additives cartel?
- What powers does the European Commission have under Article 81 of the Treaty of Amsterdam? (See and also. See also page 369 in Sloman and Wride Economics 7th ed.)
- Are cartel activities necessarily against the interests of the consumer? Explain.
The Bank of England’s latest quarterly Inflation Report was published on November 11. With all the gloomy news over the past few months the report is pleasantly up-beat – certainly for the longer term. As Mervyn King, Governor of the Bank of England, states in his opening remarks to the publication of the report, “The considerable stimulus from the past easing of monetary and fiscal policy and the depreciation of sterling should lead to a recovery in economic activity.”
Nevertheless, recovery will be slow, especially at first. This means that it will be some time before output returns to pre-recession levels. “Despite a recovery in economic growth, output is unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis trend. That is in large part because the impact of the downturn on the supply capacity of the economy is expected to persist. But it is also because there is likely to be sustained weakness of demand relative to that capacity.”
There is surprisingly good news too on employment and unemployment. Although unemployment has risen sharply in recent months, the rate of increase is slowing and “There was a small increase of 6000 in the number of people in employment to 28.93 million, the first quarterly increase since May–July 2008 (see Labour market statistics, November 2009).
So should we be putting out the flags? Can the Bank of England ease off on quantitative easing (see Easing up on quantitative easing)? Or does it still need to keep on increasing money supply, especially as fiscal policy will have to get a lot tighter? The following articles consider the issues.
Mervyn King: economy remains ‘uncertain’ (video) Channel 4 News, Faisal Islam (11/11/09)
Bank of England governor dampens hopes of swift UK recovery Guardian, Graeme Wearden (11/11/09)
Recovery has only just started, warns sombre King Guardian, Heather Stewart (11/11/09)
Cautious good cheer BBC News, Stephanomics (11/11/09)
Bank of England’s Mervyn King says UK only just started on recovery road Telegraph (11/11/09)
The Bank of England’s Inflation Report is useless. Here’s why. Telegraph, Edmund Conway (11/11/09)
Bank of England raises growth and inflation forecasts: economists react (includes video) Telegraph (11/11/09)
Bank of England talks up hopes of strong recovery Times Online, Robert Lindsay (11/11/09)
Bank of England cautions on economic recovery BusinessWeek, Jane Wardell(11/11/09)
Just who benefits from quantitative easing? WalesOnline (11/11/09)
Inflation Report: Forget the fan charts, what we need is a clear economic policy Telegraph, Jeremy Warner (11/11/09)
We’ve no choice but to keep inflating Independent, Hamish McRae (11/11/09)
Is there a break in the economic gloom? (video) BBC Newsnight, Paul Mason (12/11/09)
The Bank of England Inflation Report can be found at the following site, which contains links to the full report, the Governor’s opening remarks, charts, a podcast and a webcast:
Inflation Report November 2009 Bank of England
Questions
- Explain what the three fan charts, Charts 1, 2 and 3 on pages 6, 7 and 8 of the Inflation Report, show.
- Why is the Bank of England more optimistic than in its previous report (August 2009)?
- Why did the sterling exchange rate fall on the publication of the report?
- Has the policy of expansionary monetary policy proved to be beneficial and should the Bank of England continue to pursue an expansionary monetary policy?
- What determines the balance of effects of an expansionary monetary policy on (a) asset prices; (b) real output; and (c) inflation?
- How have relatively flexible labour markets affected the impact of recession on (a) wage rates; (b) unemployment?
To mark the 20th anniversary of the fall of the Berlin wall, the BBC World Service commissioned a survey across 27 countries to gather people’s views about capitalism and whether it is working well. The findings are striking. Only 11% felt that it is working well. “Most thought regulation and reform of the capitalist system were necessary. There were also sharp divisions around the world on whether the end of the Soviet Union was a good thing.”
The following articles look at the detailed findings of the poll and consider its implications for the functioning and reform of the world economy.
Global poll: Wide dissatisfaction with capitalism 20 years after fall of Berlin Wall BBC Press Office (9/11/09)
Free market flawed, says survey BBC News, James Robbins (9/11/09)
Wide dissatisfaction with capitalism, years after fall of Berlin Wall Dawn.com (Pakistan) (9/11/09)
Capitalism confronted with growing doubts Global Times (China) (11/11/09)
The fall of the Berlin wall – Pt 1 (video), The fall of the Berlin wall – Pt 2 (video), Al Jazeera (on YouTube), Riz Khan (9/11/09)
Column : Why Berlin was a win for all of us Financial Express (India), Lord Desai (Emeritus Professor, London School of Economics) (9/11/09)
The real lesson of 1989 is that nothing is ever settled Guardian, Seumas Milne (12/11/09)
The Wall fell and hope rose – for a while Otago Times (New Zealand), Andrew Rawnsley (10/11/09)
New name for a new economy? BBC News, Stephanomics (13/11/09)
Questions
- What are the alternatives to free-market capitalism?
- Do you agree that “however flawed free-market capitalism is, it is still the best of all systems”? Explain your answer.
- In what ways does free-market captialism fail to provide the optimum allocation and distribution of resources?
- What forms can government intervention take to influence markets?
Northern Rock seems to have had a fixed place in the news for the past year or so. Unfortunately, the advertising it’s been getting hasn’t been positive. The usual picture was one of a Northern Rock branch and a few hundred people queuing outside, ready to withdraw their savings.
In the financial crisis, the banking sector has been at the forefront of economic policy and billions of pounds of public money have been invested in banks simply to keep them afloat and encourage them to keep lending. But now the government, in a measure approved by the European Commission, is considering selliing part of Northern Rock, by splitting it into a ‘good bank’, which will be returned to the private sector, and a ‘bad bank’, which will have to remain nationalised. This bad bank would gradually run down its assets and eventually be liquidated. Similar plans are being considered for the part-nationalised Royal Bank of Scotland and Lloyds Banking Group.
Northern Rock’s loan book will be cut from £100bn pre-crisis to just £20bn to ensure that a bank which enjoyed state support should not have “an unfair competitive advantage”. Savers with Northern Rock will find themselves in the ‘good’ bank, while mortgage customers with arrears and those who are regarded as risky, will be seen as ‘bad’ bank clients.
The buyers of these banks remain unknown. Tesco was considered to be a possible buyer of Northern Rock but has pulled out, with plans to build a new full-service bank itself. Established banks, such as Barclays, will not be allowed to make a purchase and the FSA has stated that standards will not be dropped to allow new competitors to enter the market, especially given that much of the banking crisis is due to poor standards and insufficient regulation. National Australia Bank, the owners of Yorkshire and Clydesdale, is a possible buyer, as too is Virgin Money, even though it would require new finance and possibly new partners. Some potential bidders may be ruled out by competition considerations. So let the games begin!
The following articles look at the banking situation and the possible developments.
Where Gordon Brown feared to tread, Kroes is ready to trample Telegraph, Alistair Osborne (28/10/09)
Lloyds eyes capital raising plans BBC News (29/10/09)
Tesco rules out Northern Rock takeover Guardian, Julia Finch (28/10/09)
EU approves Northern Rock split BBC News (28/10/09)
The Business Podcast: The break-up of Northern Rock Guardian (28/10/09)
Lloyds Banking share price could scupper offer SME Web, Roberta Murray (29/10/09)
Roll up, roll up, for the great bank sell off Independent, Richard Northedge (8/11/09)
Treasury says Northern Rock may lose savers as Government pulls out The Times, Francis Elliott and Suzy Jagger (5/11/09)
Union fears for 25,000 jobs as EU insists Lloyds and RBS must shed branches Guardian, Jill Treanor (3/11/09)
Decision time for Lloyds shareholders BBC News, Money Talk, Justin Urquhart Stewart (11/11/09)
The Business podcast: The break-up of Northern Rock Guardian (28/10/09)
Details of the European Commission ruling on the restructuring of Northern Rock can be found at:
State aid: Commission approves restructuring package for Northern Rock
Questions
- What started all the trouble at Northern Rock?
- What are the arguments (a) for and (b) against the break up of Northern Rock and the other banks that received state aid? Do you think the right decision has been made?
- The BBC News article ‘Lloyds eyes capital raising plans’ refers to 43% of Lloyds being owned by the tax payer. What does this mean and how has it happened?
- Why do you think Tesco has decided not to put in a bid to take over Northern Rock?
- Consider the potential bidders for these new ‘good’ and ‘bad’ banks. In each case, consider the (a) advantages and (b) disadvantages. Then, explain the type of take-over or merger this would be and whether there could be any competition considerations.
- One of the aims of recent developments in the banking sector is to increase competition. Why is this so important and how will it affect consumers and businesses?
The following article by Will Hutton looks at the relative efficiency of private- and public-sector organisations. The public sector is typically characterised as inefficient and providing a poorer level of service and poorer quality products than the private sector. After all, the private sector is driven by the profit motive, where providing a good service would seem to be a key ingredient in making more profit.
Yet when you look around you, this portrayal can be seen as far too simplistic. On the one hand, much of the public sector has been forced to be efficient, following many years of tight budgets. At the same time, many in the public sector are keen to deliver a good service, not only because that is required by their employers, but because they are motivated by a sense of public duty and professionalism. On the other hand, there are many market failings in large parts of the private sector, where monopoly power, asymmetric information and externalities are rife. Read the article and see if you agree with Will Hutton’s analysis.
These money-grubbing companies make the public sector look good Observer (1/11/09)
Questions
- What are the incentives to encourage either private-sector companies or public-sector organisations (a) to be efficient in the sense of cutting out waste (X-efficiency); (b) to be allocatively efficient; and (c) to provide a high quality of service to customers / clients / patients / students, etc.?
- What market failures may prevent private-sector companies from achieving (a) to (c) above?
- What organisational failures may prevent public-sector organisations from achieving (a) to (c) above?
- How is Goodhart’s Law relevant to the setting of performance targets in both the private and public sectors?