Electricité de France’s difficult stock market debut 12 months ago is already a distant memory.

The government was criticised for pricing EDF’s initial public offering too high – in retrospect, it looks as if it was far too low. The shares of the French electricity giant, in which the state still holds 87.3 per cent, have since climbed 70 per cent. Its stock market capitalisation is now flirting with the €100bn mark, far more than its German rival Eon’s €67bn.

And judging from the enthusiastic recommendations of international brokerage firms, the shares are likely to keep rising.

The difficulties facing a Gaz de France-Suez marriage are good news for EDF, especially if they end up killing a deal that would have created a serious domestic competitor. The hope that regulated electricity tariffs will be lifted in France is more good news.

And as long as European energy prices keep rising, EDF will continue to benefit from its strong position in nuclear power.

The paradox is that the main beneficiary of this stock market success story – the government – can only watch the shares go up without taking profits to reinvest elsewhere as current legislation prevents it from reducing its stake.

Yet the centre-right government can also take comfort should it lose next year’s elections to the left. The Socialists have pledged, should they end up in power, to renationalise EDF and GdF if the gas utility fails to merge with Suez beforehand.

This risks being a pretty costly affair and might persuade them to reconsider.

To buy back the 12.7 per cent of EDF the government no longer owns would cost, at today’s prices, about €13bn. Renationalising GdF would cost another €6.5bn. And if the bull run continues, the ultimate price could be much higher.

Engine trouble

The French government could have saved itself a lot of trouble if it had stepped in more quickly to resolve the internal feud at Safran. The dispute has shaken the industrial group formed by the ill-conceived merger of the Snecma aero-engine manufacturer and the Safran communications and defence company.

The government is Safran’s largest shareholder. But rather than nipping the conflict in the bud, it has sat on the fence, distracted by other problems at Gaz de France and Suez and at Airbus builder EADS.

Unfortunately, the situation at Safran has not only deteriorated but has turned into a mirror image of the internal strife that has been undermining EADS.

Paris now says the infighting at Safran must stop and the company’s supervisory board will meet next week in what promises to be a showdown. The government wants to replace Mario Colaiacovo, the supervisory board chairman and a former Sagem executive. Mr Colaiacovo is prepared to go provided Jean-Paul Béchat, the chief executive and former Snecma boss, is also removed.

Mr Béchat is resisting but, at this stage, it would be the best thing for the company if its two feuding barons were replaced.

Meanwhile, General Electric, whose long and fruitful co-operation with Snecma in jet engine construction has been one of the aerospace industry’s great success stories, must be watching this corporate vaudeville with dismay.

Turkish delights

How important to investors is Turkey’s process of joining the European Union? It is conventional wisdom that the stimulus has been a significant prop for stock and bond prices and that foreign investors consider the EU process as important as Turkey’s relationship with the IMF.

This view needs updating. Last week Turkey’s chances of joining the EU took a step backwards. A dispute with some EU member states over Cyprus led to a recommendation that parts of Ankara’s membership negotiations be suspended, and this is sure to be endorsed at next week’s EU summit. Yet investors only shrugged.

If Cyprus were to wreck Turkey’s membership chances at some point next year, would it be fatal for the markets, too? Some believe that the impact, even if relatively severe, would also be short-lived, because the membership process is less influential in portfolio investment considerations than commonly thought.

The main benefit to Turkey of possible EU entry has been a sharp rise in inflows of foreign direct investment. The reforms the EU and the IMF have stimulated in the past four years have consolidated the Turkish economy’s integration with Europe. That has allowed foreign investors such as Dexia, Fortis, Citigroup, and BNP Paribas to cherry-pick in the banking industry - one sector that has benefited most from the economic turnaround.

Foreign investors say Turkey’s young population, emerging middle class, and a more open attitude to foreign direct investment will not change should the EU process peter out. Investment banks are also setting up operations in Istanbul at a heady rate. Buy signals like that should be far stronger than any sell signal from an EU hiccup.
vincent.boland@superonline.com

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