CBI set to tell Government that UK could enter euro at a higher level

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The Independent Online

The confederation of British Industry is set to tell the Government that the UK could enter the European single currency at a higher exchange rate than it has previously advocated.

The confederation of British Industry is set to tell the Government that the UK could enter the European single currency at a higher exchange rate than it has previously advocated.

The move will be an indication that manufacturers are coping far better with the strong pound than the CBI had expected.

Earlier this year the organisation said Britain could enter the euro at a rate of between 2.65 and 2.70 German marks - the equivalent of 73.9p to 72.4p against the euro - based on a survey of its members.

Economists now speculate the new rate proposed by the CBI could be closer to DM2.80. "We are going to have another look at it," said Kate Barker, chief economist at the CBI. "We are not going to run a similar survey but will hold discussions to take the temperature."

Since the launch of the euro on 1 January last year, the pound has risen by 22 per cent from DM2.78 to a peak of DM3.36. This has made it harder to sell into Europe, which is Britain's biggest trading partner with around 50 per cent of exports. But the CBI's revaluation of the acceptable level for euro entry would not mean industry is content with the current exchange rate, even though the pound fell yesterday to a seven-year low against the dollar and weakened slightly against the euro. Against the euro the pound fell to close in London at 61.48p, a four-week low and equivalent to DM3.19.

Recent figures have shown exporters holding up well in the face of the exchange rate. In June, exports to the European Union rose 5 per cent to a record £8.95bn, cutting the deficit to £131m - the smallest since March 1997.

Ms Barker said it appeared that exports have performed well. "It seems time to ask people. " She declined to comment on what rate the review might lead to, but said: "I would be surprised if it were a lower rate - DM2.50 for example."

She said that most industrialists wanted to see the pound fall at least below DM2.90, but stressed this would only be enough to alleviate the short-term pain.

Neil Parker, UK economist at Royal Bank of Scotland, said a sustainable rate would be DM2.75 to 2.80 although DM2.90 would be "pushing it a bit".

"Manufacturing industry has had to look at itself and make the leap from blaming the pound, which there is nothing it can do about, to working to minimise the impact of the pound on its core business," he said. But he insisted the issue was not the rate of entry but whether UK industry is strong enough to compete in a global market. "It is not all about the euro - look at the yen where sterling is not strong," he said.

He said the British economy must achieve the improvements in productivity seen in the United States. "I would bet a pound to a penny that if sterling fell [against the euro] at this juncture, the Bank would raise interest rates which would help exports but the domestic market would go to the dogs," he said.

Last week the CBI revised up its forecasts for economic growth this year and next. The key factor was a revision in this year's manufacturing output to 1.4 per cent from 0.5 per cent in May. This was on the back of an upgrade to its export growth forecast from 5.1 to 5.9 per cent.

Sterling yesterday, at one point, fell more than a cent to $1.4426, the lowest since March 1993, but recovered slightly to close in London at $1.4555.

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