Gordon Brown must reverse his disastrous economic policies

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The Independent Online

It was ironic that Gordon Brown should wade into the London Mayor debate, describing me as "anti-jobs and anti-business" - just as his economic policy is contributing to the destruction of the British car industry and risks causing the most severe crisis in manufacturing industry since the early years of Margaret Thatcher. As Chancellor of the Exchequer, Gordon is responsible for the single biggest "tax" on UK jobs and business today: the significantly over-valued exchange rate of the pound.

As the Chancellor was making his remarks last Friday, newspapers were reporting the Office for National Statistics' preliminary estimates for UK economic output for the first quarter of this year. These showed a decline in output in manufacturing and production industries. And the overall rate of economic growth, quarter on quarter, had halved to just 0.4 per cent.

The balance of payments figures tell the same story. The UK's total trade deficit in goods has more than doubled from £11.9bn in 1997 to £26.6bn last year. This deterioration is virtually entirely accounted for by the deterioration in the trade position of manufacturing industry. The deficit in manufactured goods almost tripled.

The underlying cause of this situation is quite clear. It is the over-valued exchange rate of the pound, which now stands at DM3.36. That is 20 per cent higher than at the time the pound was forced out of the European Exchange Rate Mechanism in 1992.

The consequences for industry are catastrophic. The Government has tried to depict the crisis at Rover as solely the result of duplicity by BMW management. However great a part that may have played, it cannot explain why Ford appears to be on the brink of ending car assembly at Essex's Dagenham plant, or why other companies such as Nissan and Peugeot are complaining more and more vocally that they face severe difficulties as a result of the rise of sterling.

The Chancellor's response at the annual conference of the British Chambers of Commerce at the beginning of April was to argue that companies should stop complaining about the pound and instead increase their own productivity. But as the Chambers' director-general, Chris Humphries, pointed out, manufacturing productivity improved by five per cent last year - one of the best performances in the world. But this creditable performance could not hope to compensate for last year's 11 per cent increase in manufacturers' costs, which was almost entirely a result of the exchange rate of the pound. All too often in these circumstances, as Mr Humphries put it, "the only cut left for many businesses is to cut the business completely."

I would add that the Government appears to be intent on passing up a unique opportunity to devote massive resources to increasing economic - and business - efficiency. That was the meaning of Mr Brown's announcement last week that the £22bn windfall from the mobile phone industry would be devoted to paying off a portion of the national debt rather than to productive investment.

Given the enormous competitive pressures bearing down on British industry, a wiser course would have been to use these funds to boost long-term infrastructural investment. A government programme to use a portion of this sum to carry through the modernisation of the London Underground, for example, would address what business identifies as the biggest single problem in the capital: the inefficiencies caused by the under-funding of the transport system.

Such direct spending would guarantee that the Government's windfall was transferred into the investment without which sustainable increases in productivity are a chimera. Instead of adopting this course, which would demonstrate a willingness by the Government to be a real partner in boosting productivity, the Chancellor appears intent on handing his windfall over to the bankers.

Meanwhile, it is simply not living in the real world to assume that individual companies in the most internationally traded sectors of the economy will be able to compensate for the soaring pound by cutting costs.

The current crisis in the car and other manufacturing industries is the inevitable result of this approach to the exchange rate. A plant like Ford Dagenham is one of the most productive in Europe. Its problems have nothing to do with lack of effort by the workforce - labour costs at Dagenham are much lower than in Germany. They are due to the fact that the pound is pricing British manufacturers out of their markets, and to employment laws that make it easier and cheaper to sack workers in Britain than elsewhere in Europe. As a result, London now faces a blow to its economy and jobs comparable to that facing the Midlands as a result of BMW's decision to pull out. If Dagenham were to close, 15 per cent of London's manufacturing jobs would disappear.

If these consequences of the over-valued pound are currently most visible in manufacturing industry, they are by no means restricted to that sector. A critical contribution to the economy of London - and the UK - is made by tourism, which is also highly sensitive to the exchange rate. The English Tourist Board has reported that over the last year three top London tourist attractions, the Natural History Museum, Madame Tussaud's and the Tower of London, had lost 500,000 visitors between them.

My difference with Mr Brown is clear and long standing. I believe that the policy of high interest rates and the resulting high exchange rate of the pound are the biggest problems facing all those sectors of the British economy that are subject to international competition.

If the Government wants to save the British car industry from destruction, it will have to combine immediate assistance to stop the closure of Rover and Dagenham with the medium-term goal of reducing the exchange rate of the pound. That requires lower interest rates and the rebalancing of fiscal policy to prevent them feeding into inflationary pressures. In the longer term, I believe that it means joining the euro.

Many employers, as well as trade unionists, would agree that to make those points is to be not anti-business but pro-business.