The Business World: Tony's euro stance allows business a chance

Sterling behaves as though it was linked to the US dollar ... because the UK economy behaves just like the US economy, rather than the Continental ones

UNCERTAINTY ABOUT the future of sterling has been ended. After the Euro-elections and the subsequent shift of stance on the euro by the Prime Minister the working assumption for any business in Britain should now be that entry will not happen within the five-year planning horizon of most businesses. What, in practical terms, will this mean for UK business?

First and most obviously we can assume that UK monetary policy will continue to be set with the needs of the British economy in mind.

We were always assured this would happen, but there were nagging doubts there might be pressure to try to cut the value of the pound against the European currencies by converging UK interest rates to European levels.

So if the economy starts again to expand strongly we can expect rates to rise to trim the growth; if the economy falls off sharply next year (perhaps following economic disruption associated with the millennium bug) then we can expect rate cuts to maintain demand. Second, we can also assume, I think, that sterling will continue to behave as though it were linked to the dollar.

If you looked at the way the currency has performed since it was cut free from the ERM in 1992, you would assume that policy has been to peg it instead to the dollar. Every time the pound has moved outside the $1.50 to $1.65 band it has swiftly come back into it. Now this is not policy at all, but more the result of the fact that the UK economy behaves like the US economy rather than the Continental ones, but until it starts to behave differently we should assume that the "dollar peg" will remain.

If this is right, what happens to our economy will be closely tied to what happens to the US one. If the latter hits the limits of capacity and slows suddenly, we can expect to face similar difficulties. Whether the scale of any downturn in the US will be matched here is another matter: the boom here has been less marked, the current account is still more or less in surplus, stock market values are less extreme, and we (unlike the US) have already had a pause in growth last winter. My guess would also be that when and if the US economy turns down, the UK one will also do so, but to a less extreme extent.

How might that effect our trade relations with Europe?

We do not know how the euro will perform in the next five years. It is easy to sympathise with the current view of the European Central Bank that the euro is undervalued against the dollar, and hence against sterling. But the under valuation (a) may not be very large and (b) may be sustained for a long time, a decade or more, if the main continental European economies do not improve their performance.

The key here is the largest of the euro-zone economies, Germany. In theory, a cheap currency ought to stimulate the big European economies: a cheap German mark has been the usual way the German economy revived, on the back of a rise in exports. But with a single currency for the whole zone, the cheap euro now helps Germany exports only to areas outside the euro- zone. So the currency affects about 11 per cent of its GDP, instead of nearly 30 per cent. A cheap euro helps, but not as much as a cheap mark would have done.

Still, there will be some growth in continental Europe this year and next. Currencies overshoot their "correct" values, so the euro will recover and the dollar will decline. British business should therefore not assume the pound will stay strong for ever against the euro; the prudent assumption is that it will stay reasonably strong for some time yet.

Will inward investment in Britain suffer because of continued exclusion from the euro-zone? It would be surprising if there were not some hesitation, particularly since some foreign businesses will assume sterling may never be abandoned for the euro.

But if the UK economy continues to show strong demand and if UK plants remain profitable on the back of this, then it would be surprising if there was a serious slump in inward investment. That would be a powerful argument in favour of membership. On the other hand, expect the euro-zone to continue to experience teething troubles as a result of the difficulty finding an interest rate which fits all: some economies will continue to overheat (Ireland, Spain, and the Netherlands) and others will continue to suffer (Germany and Italy). So exporters to the continent should know their markets will experience bumps in demand as different countries adjust by other means than monetary policy.

Will exclusion from the euro-zone for the time being have other effects on the UK? I suspect it will reinforce a trend already evident for Britain to focus on markets tied by language and culture rather than physical proximity.

We will increase exports and imports from the US, Canada, Australia and probably Scandinavia (which also appears to be tied more closely to the US than to the Continent). These products will tend to be in new areas such as software - weightless products - if they are products at all, for much of the growth in exporting will be in the service industries. Britain is already the world's second largest exporter of services, after the US.

So is the end of uncertainty about the euro (or at least the postponement of uncertainty) good or bad news for the British business community?

For the large companies it may appear to be bad news. Many large companies, particularly European-owned ones, like to operate without much exchange risk.

Small businesses, on the other hand, will welcome the freedom that independent monetary policy gives the UK authorities, particularly if that freedom is matched by similar flexibility on tax and regulation.

In terms of employment, keeping an independent currency is almost certainly positive, for it is these small businesses that are net creators of jobs. Large ones, under constant pressure to slim their workforces, are net destroyers.

So good news or bad news? That depends in which corner of the commercial forest you find yourself, but the ending of the uncertainty surely deserves a modest cheer.

Suggested Topics
Life and Style
A teenager boy wakes up.
life
Life and Style
tech
Arts and Entertainment
Critics say Kipling showed loathing for India's primitive villagers in The Jungle Book
filmChristopher Walken, Bill Murray, Scarlett Johanssen Idris Elba, Andy Serkis, Benedict Cumberbatch, Cate Blanchett and Christian Bale
Life and Style
food + drink
PROMOTED VIDEO
Life and Style
Playing to win: for Tanith Carey, pictured with Lily, right, and Clio, even simple games had to have an educational purpose
lifeTanith Carey explains what made her take her foot off the gas
Arts and Entertainment
A still from Duncan Campbell's hour-long film 'It for Others'
Turner Prize 2014
News
i100
Arts and Entertainment
Tony Hadley in a scene from ‘Soul Boys Of The Western World’
musicSpandau Ballet are back together - on stage and screen
Arts and Entertainment
From left to right: Ed Stoppard as Brian Epstein, Sheridan Smith as Cilla Black and Elliott Cowan as George Martin in 'Cilla'
tvCilla review: A poignant ending to mini-series
News
i100
Life and Style
Bearing up: Sebastian Flyte with his teddy Aloysius in Brideshead Revisited
lifePhilippa Perry explains why a third of students take a bear to uni
Arts and Entertainment
Sir Alan Sugar appearing in a shot from Apprentice which was used in a Cassette Boy mashup
artsA judge will rule if pieces are funny enough to be classed as parodies
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

SQL Developer (Stored Procedures) - Hertfordshire/Middlesex

£300 - £330 per day: Ashdown Group: SQL Developer (Stored Procedures) Watford...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style