European Business News (EBN), 97-06-12

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Page last updated Thu, June 12 7:15 PM CET

CONTENTS

[01] U.S. May retail sales drop 0.1%, the third straight monthly decline

[02] European currency markets await Franco-German compromise, Brown's speech

[03] Electrolux announces $320 million restructuring

[04] Thyssen offers $700 million for US toolmaker Giddings & Lewis

[05] Santer says a stability pact accord could be reached before the Amsterdam summit

[06] U.K. seeks to delay implementation of Social Chapter

[07] OECD sees France, Germany and Italy missing EMU criteria

[08] Germany confirms oil reserve sale is under consideration

[09] UK inflation rises 0.2% to 2.6%

[10] Tobacco settlement still on track, Attorney claims

[11] Airbus accuses Boeing of trying to monopolize commercial aircraft market

[12] Boeing is considering a stretch version of its 747 jumbo is considering a stretch version of its 747 jumbo

[13] Corporate and Economic Briefs

[14] World News Briefs

[01] U.S. May retail sales drop 0.1%, the third straight monthly decline

Retail sales dropped 0.1% to $210.30 billion for the month as consumers eased their purchases of automobiles and other durable goods. It was the first time in more than 15 years that retail sales have weakened for three consecutive months, department officials said, possibly indicating a slowing of consumer demand.

The May decline followed revised drops of 0.9% in April and 0.3% in March. Commerce previously reported that retail sales fell 0.3% in April and were unchanged in March.

Most analysts had expected retail sales to rise modestly in May. A Dow Jones Newswires survey of 25 economists published on Tuesday predicted a 0.4% rise in May retail sales and a 0.3% rise in ex-autos.

The inflation-sensitive U.S. Treasury bond market leaped after the report, with the benchmark 30-year bond up nearly a full point. Its yield, which moves in the opposite direction, fell to 6.77% from 6.84% Wednesday. And the Dow-Jones indusrial average also soared on the news.

Auto manufacturers say spring sales of new cars have remained lacklustre. New cars account for nearly one-quarter of total retail sales, so swings in demand strongly affect the overall monthly figures.

Another key point of weakness in May retail business was in building materials and hardware, which fell 0.6% to $12 billion after a 0.3% decline in April. New housing activity has levelled off after a spurt at the start of the year when mild weather fostered more building.

Retail sales data are not adjusted for inflation.

[02] European currency markets await Franco-German compromise, Brown's speech

A compromise would indicate European economic and monetary union is likely to ahead on time, but with a softer euro. 'In the run up to the summit, the mark is weaker, the Euro-crosses are lower, the market is already reflecting the prospect of a softer euro,' Tim Fox, senior Treasury economist with Standard Chartered, said.

Brown reaffirmed the existing 2.5% target for underlying inflation, which excludes mortgage interest payments. As he unveiled new operating procedures for the Bank of England, allowing leeway of one percentage point either side of the target, it became clear that its monetary stance isn't going to be anywhere as tight as originally anticipated.

Instead, some analysts said, it will probably prove only slightly tighter than policy under the previous Conservative government.

'We are terribly close to saying that there is little difference between what we have now and what we had under the Conservatives,' said Simon Briscoe, chief economist at Nikko Europe in London.

'A lot of the Mansion House speech has been flagged in the Financial Times (newspaper) and if he comes out with penalties for the Bank of England for over or under shooting inflation targets it means growth and employment have been factored in and it is positive for U.K. markets,' said an analyst at Lehman's.

Traders said sterling had ignored May inflation figures showing a stronger- than-expected headline inflation figure up 0.4% month-on-month, and 2.6% year-on-year.

With regard to the Franco-German situation, 'Even if there is a ringing endorsement of the EMU timetable, it is a patched-up situation which doesn't belay some of the essential differences that remain,' Fox warned.

Market predictions also say the dollar could rise against the mark if the stability pact is signed at Amsterdam, lifting it as far as 1.7420 Deutsche marks on Monday.

[03] Electrolux announces $320 million restructuring

The company also said it would close 25 factories and 50 warehouses. Details on which facilities would be closed were not immediately available.

Electrolux expects the programme to involve restructuring charges of 2.5 billion kronor ($322 million), which it will post in the second quarter.

The stock market welcomed the restructuring news and Electrolux shares went up.

In April this year, Michael Treschow replaced Leif Johansson as chief executive for Electrolux and since then the market has widely expected Electrolux to take restructuring measures aimed at improving its operating margins.

The programme isn't aimed at certain plants, according to Electrolux's information officer Lars Goeran Johansson but ''instead it's up to all of Electrolux's business areas to review their operations,'' he said.

''We are convinced that this programme will be enough to reach our objectives (regarding operating margin and return on equity,'' Johansson said.

The company said the cost would be partly offset by a capital gain of about 600 million kronor from the divestment of Husqvarana Sewing Machines in the second quarter.

Electrolux also said the moves were aimed at achieving an operating margin of 6.5-7% and a long-term return on equity of 15%.

Electrolux currently employs 105,000 people worldwide, about 10,000 of them in Sweden.

[04] Thyssen offers $700 million for US toolmaker Giddings & Lewis

A Thyssen spokeswoman said Thyssen will first seek a majority stake in Giddings & Lewis, and, in a second step, will then seek to acquire all shares in the company.

The total price for the acquisition of the whole company would equal $700 million, Thyssen said. Thyssen said Giddings & Lewis will recommend that its shareholders accept the offer.

'Thyssen and G&L are convinced that joining forces would benefit both sides, because there is an excellent basis to build a technological team and significant synergy effects can be achieved,' a Thyssen statement said.

G&L has annual turnover of around $700 million, making it the biggest machine tool maker in the U.S. Around half of its sales are to the auto industry. The company has eight plants in the U.S., and one each in Canada, Germany and Britain.

[05] Santer says a stability pact accord could be reached before the Amsterdam summit

Separately, E.U. finance commissioner Yves-Thibault de Silguy echoed Santer's statements following a one-hour meeting with French President Jacques Chirac. .

'In that we agree with the aims of stability, if we do not want to change the modalities nor the nature, and if we also agree on the timetable for monetary and economic union, believe - with the proposals we made during the Ecofin meeting last Monday - all elements are on the table to reach an agreement,' Santer said after his meetings with Chirac and French Prime Minister Lionel Jospin.

Asked to disclose the proposals made during the meeting of finance ministers, he replied, 'Growth and jobs.' He did not elaborate.

De Silguy said an accord could be reached by the time of the E.U. summit in Amsterdam next Monday and Tuesday. He said no definitive language on the additions requested by France on June 9 had yet been formulated, but that a 'certain consensus was taking shape.'

De Silguy said there was a broad consensus in Europe to draw upon the clauses in the Maastricht Treaty on economic and monetary union which allow for the broader policy coordination requested by France.

'Articles 102 and 103 permit a greater policy coordination,' De Silguy said, clauses which 'can and must be developed.'

De Silguy didn't say whether the E.U. finance ministers would meet Sunday to finalize the stability pact before heads of state start the summit.

Last night, Chirac said he expected an agreement on additions to the stability pact to be reached before the upcoming E.U. summit in Amsterdam June 16-17.

[06] U.K. seeks to delay implementation of Social Chapter

Barbara Nolan, spokeswoman for E.U. social affairs minister Padraig Flynn, said the U.K. raised the delay option this week in meetings among officials of E.U. member states and that it drew a 'mixed reaction' from those present.

British Prime Minister Tony Blair is expected to raise the issue at a two- day European summit opening in Amsterdam that is to adopt a new E.U. treaty.

'I imagine the issue will be pursued in the I.G.C. context,' Nolan said, referring to the E.U.'s intergovernmental conference that is supposed to conclude at the Amsterdam E.U. summit next week and lead to reforms of the Maastricht Treaty.

E.U. officials were disappointed Blair cannot move faster to apply E.U. social laws to Britain. His Conservative predecessors resisted this, seeing E.U. social laws as killers of British jobs and economic opportunities.

'The British say they cannot do this until late 1999, at the earliest. Or, once the new treaty has been ratified in all 15 member states. Well, that may take four years!' said one official, who spoke on condition of anonymity.

British officials said it takes complex legal footwork to undo the 'opt- out' the Conservative government won in 1991 from the E.U. Treaty's Social Chapter.

Nolan said the commission, for its part, would like to see any social legislation adopted by E.U. member states 'integrated in national law as speedily as possible.'

The social chapter is one facet of the IGC negotiations that E.U. officials are scrambling to wrap up ahead of the summit Monday and Tuesday.

[07] OECD sees France, Germany and Italy missing EMU criteria

But some of the countries who have been on the periphery of the single currency, including Spain and Portugal will make the grade, the OECD said. Southern European country Italy falls into the same boat as Germany and France, however, with the OECD estimating all three to have 1997 budget deficits of 3.2% of their gross domestic products.

The European Commission refused to comment about the OECD forecasts. 'The Commission does not comment on other people's forecasts,' a spokesman said.

The Maastricht Treaty requires a deficit-to-GDP ratio of 3.0% for membership in the single currency, although it is unclear whether the E.U. heads of states who choose the countries taking part in monetary union will actually stick to a 3.0% ratio or allow some minor deviations.

The OECD also said it expects strong growth in 1997 and in 1998 in most member countries. It also recommended further monetary easing in continental Europe to help spur growth and spur employment, without raising the risk of inflation.

The semi-annual worldwide outlook was significantly more positive on 1997 growth than it was six months ago, upping its estimate for 1997 gross domestic product growth for all OECD member countries to 3.0% from an estimate of 2.5% in December 1996. For 1997, the OECD's growth outlook was unchanged at a rise of 2.7%.

The OECD predicts that Spain's deficit-to-GDP ratio will be 3.0%, while Portugal's is estimated at 2.9%.

The OECD said that the estimates are based on measures already announced by the companies and stated policy intentions that are ''embodied in well- defined programmes.'

Other EMU contenders making the grade, according to the OECD, include Austria at 3%, Belgium at 2.8%, Ireland at 1.2%, the Netherlands at 2.3%.

The OECD did not make a deficit-GDP estimate for Luxembourg.

[08] Germany confirms oil reserve sale is under consideration

German Economics Minister Guenter Rexrodt had said the government is considering the sale of just over a third of Germany's strategic oil reserves, which total around 54 million barrels and are valued by the government at some 1.4 billion Deutsche marks ($832.5 million). The sale would take place over the course of this year and next year and would be slated to raise around 1 billion marks.

Spreading the sale over the next 18 months wouldn't have a negative effect on the oil market, he said. Rexrodt said that the revenues from oil sales, coupled with those from further privatizations, would have a 'welcome side- effect' on Germany's budgetary gap.

The government will probably have to face additional expenditures of 20 billion marks this year because of record-high unemployment, as well as an expected shortfall of some 9.1 billion marks in federal tax revenue alone from estimates made last November.

The minister noted that the measures would allow the government to raise the projections for privatization proceeds in the 1997 budget to around 7 billion marks from the current 3.9 billion marks.

And this wouldn't include additional possible revenues of 10 billion marks this year and 15 billion marks in 1998 from the sale of further tranches of recently privatized Deutsche Telekom, Rexrodt said.

Rexrodt indicated that the telecoms monopoly will likely be sold off to Kreditanstalt fuer Wiederaufbau, a state-owned bank usually specializing in loans to small and medium-sized countries. The KfW would in this case act as a holding vehicle, floating the Telekom shares on the German stock exchange at a later date.

[09] UK inflation rises 0.2% to 2.6%

The all-items prices data, reported by the Office for National Statistics, was stronger than expected in financial markets where economists were expecting an inflation rate of 2.5%. The underlying rate was in line with expectations.

Traders said a slight upturn in gilts after the data was enough to lift index futures and the cash market, but trade so far has been very thin.

'There's not a lot going on, I think most people are more interested in the U.S. figures today than they are in what's going on in the U.K,' said one trader at a U.K. investment bank.

The ONS said the rise in all-items inflation last month was largely due to housing costs. House prices rose in May in contrast to a decline last year and this was compounded by last year's reduction in mortgage lending rates falling out of 12-month comparisson.

There was also a smaller upward effect from alcoholic drinks' prices. Small downward effects on the 12-month rate came from motoring costs and household goods' prices.

The ONS said that RPIY inflation, which excludes both mortgage interest payments and indirect taxes, was unchanged at 2% between April and May.

Goods-price inflation was unchanged at 1.7% between April and May while service-sector inflation was also unchanged at 3.3%.

[10] Tobacco settlement still on track, Attorney claims

''The deal is not there yet, but I think it would be a fair characterization to say that we are 90% of the way there,'' Dennis Vacco said. ''I am very optimistic.''

Vacco was speaking after a 1 1/2-hour telephone conference call with other attorneys general on the progress of the talks. A trial is scheduled for July 7 if a settlement is not reached.

Vacco said state officials discussed a way to divvy up money should a settlement be reached. Formulas for disbursement could be based on the number of smokers in a state, the number of Medicaid recipients, the amount of Medicaid expenditures or some combination of those factors.

New York would benefit the most if Medicaid expenditures were relied upon, since the state spends $23.5 billion every year on the program, the most in the nation.

Based on a settlement of $15 billion, New York would receive $1 billion under a Medicaid-expenditure formula, Vacco said. Some of those funds could be used for uninsured children in the states involved in the lawsuit, he said.

Negotiators put talks, which some hoped would lead to a settlement, on hold again after B.A.T. Industries's Brown & Williamson Tobacco objected to nicotine regulations by the federal Food and Drug Administration. Also still on the table was a demand by the industry for future protection against smokers' lawsuits, including a ban on punitive damages.

[11] Airbus accuses Boeing of trying to monopolize commercial aircraft market

The sparring session comes as European regulators are holding hearings in Brussels on the proposed merger between Boeing and McDonnell.

The long-standing rivalry between Airbus and Boeing has heated up recently as Boeing has made several aggressive moves. Just this week, the Seattle company signed its third 'sole-supplier' agreement with a major U.S. airline.

At the Aerospace & Commercial Aviation Conference sponsored by the Financial Times, where representatives of the two companies were pitted against each other, Adam Brown, the vice president of forecasting and strategic planning for the European plane-maker, said the world's two major manufacturers of commercial aircraft are so different 'they worship different gods.'

If those gods had names, Brown said, Boeing's would be named 'monopoly' and Airbus' would be called 'competition.'

Brown went on to say the United States is an 'unashamedly mercantilistic company.' At times, he said, it seems the whole thrust of the U.S. is to insulate its civil aircraft industry from competition.

Brown's comments followed a very complimentary speech by Bruce Dennis, Boeing's vice president - marketing, in which he said the two companies shared considerable common ground.

'We both seek to serve the airline industry in ways that make our customers profitable. We're both strong advocates of industry safety issues. We both work energetically to promote the cause of public travel.'

However, when given an opportunity to respond to Brown's accusations, Dennis said Airbus at times seems to talk out of two sides of its mouth saying 'We have the best product, we can do it all' and then 'My god, if we don't do something now we'll go out of business.'

[12] Boeing is considering a stretch version of its 747 jumbo is considering a stretch version of its 747 jumbo

Boeing spokeswoman Susan Davis said the proposed new models are only in the concept stage, but the manufacturer hopes to be able to begin delivering the new planes by the end of 2001.

In January Boeing shelved plans for two even larger derivatives of the jumbo jet, including one that would carry about 550 passengers, up from the current 420 seats in a typical Boeing 747 configured for international travel.

Boeing said at the time that the estimated $7 billion cost of developing the new models was not justified by the limited market potential.

Davis said the new proposals would be far cheaper to develop and allow Boeing to capture at least part of the market for passenger jets bigger than today's 747, the largest model in the air.

She said that Boeing representatives have been talking to airlines about the potential new 747 models for 'a month or two' but that it was too early to estimate potential market size.

The proposed 747-400X stretch version would add about 23 feet to the fuselage of the 232-foot-long current version, enabling airlines to put in about 70 additional seats. The range of the jet would be reduced to about 7, 000 nautical miles from 7,300.

Boeing also is talking to engine manufacturers about a new version of the 747-400 that would carry more fuel and have more thrust, allowing it to travel up to 7,800 nautical miles.

'The systems would be totally the same' as the current 747, Davis said.

While the planes would have stronger wing and body structures than the current version, they would not require an all-new wing, which would have been the most expensive component of the previously discussed derivatives.

Boeing's stock fell 87.5 cents to $56.625 on the New York Stock Exchange.

[13] Corporate and Economic Briefs

The European Commission said on it was investigating a series of companies, including ADM over allegations of price-fixing in the amino acids market. It said it was currently raiding the offices of companies in Germany and Britain in connection with the probe.

The convergence criteria for economic and monetary union should be strictly fulfilled to ensure the credibility of the future European Central Bank, a senior Bank of Finland official said.

The European Commission said on it had cleared the proposed buy by Swiss chemicals company Clariant of Hoechst's speciality chemicals unit Virteon.

[14] World News Briefs

The Angolan government and the former rebel movement UNITA have signed a deal granting the latter two diamond concessions in the country's central and southern provinces, a government mining official said.

Five guerrillas - three from Afghanistan and two from Pakistan - were killed in shootouts with Indian troops along the border dividing Kashmir between India and Pakistan, Indian army officials said. A civilian was killed in the cross-fire, said the officials, who could not be named under army briefing rules. No Indian soldiers were reported dead. India has repeatedly accused Islamic countries in the region, particularly Pakistan, of arming and training Muslims in India's Jammu-Kashmir state who are fighting for independence. Pakistan says it provides only diplomatic support.

Fighting died down in Congo's capital Brazzaville as a ceasefire appeared to be holding after a week of fierce clashes between forces loyal to the president and a former Marxist military ruler. Only occasional shots could be heard in the city centre wrecked by the fighting between President Pascal Lissouba's troops and the Cobra militia of Denis Sassou Nguesso before Wednesday's ceasefire.

British Moslems hailed what was described as a 'miracle message' from God written inside a tomato. When schoolgirl Shaista Javed, 14, sliced the tomato in half, she found the message spelled out in Arabic by its veins, British newspapers reported. On one side she read 'There is only one God', while the other said 'Mohammed is the messenger'. Shaista, a Moslem, believes she has witnessed a miracle. 'God made me buy that tomato,' the Daily Mail quoted her as saying. 'These words are a message from God.'

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