Industry must be prepared for life outside the euro

'We don't have to take the pull-out threat from foreign firms seriously'
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The Independent Online

A few months ago I wrote here that the only safe assumption about sterling for British business was that it would remain strong for a long time. I said long-term fundamentals would favour the UK vis-à-vis the European economies and, while the currency might dip temporarily, no business could run on that assumption.

A few months ago I wrote here that the only safe assumption about sterling for British business was that it would remain strong for a long time. I said long-term fundamentals would favour the UK vis-à-vis the European economies and, while the currency might dip temporarily, no business could run on that assumption.

Now that view may or may not prove right in the long run but since then the general view has shifted the right way; few people expect a sudden reversal of sterling's strength. So here is another hostage to fortune. Wise businesses should assume that sterling will never join the eurozone.

Never? Well, to say never may be pushing things a bit. But if you take into account the British hostility to most things European, the enduring weakness of the euro and the internal economic strains already evident within the eurozone, joining is such a long way away that it should not enter any company's practical planning. Instead, business should plan on the assumption that Britain remains out and make things work on that basis.

What in practice might that mean? Every business is different so it is impossible to craft an individual check-list, but here are half-a-dozen consequences of remaining out.

Consequence one is that sterling will continue to behave as an informal member of the dollar bloc. We will lose the prospect of absolute stability with the eurozone, but retain an element of stability with the US dollar. (Were we to join the eurozone, one of the costs might be greater instability against the dollar.) This will be useful for businesses where imported raw materials are a large cost, because most commodities are priced in dollars.

A second consequence is associated. At the margin, our economy will remain more aligned with North America and the rest of the English-speaking world, rather than with continental Europe. Currency ties will reinforce the language ties themselves strengthened by the new communications technologies. In that sense, the UK is more likely to benefit from the "new economy" as an "out" than as an "in".

But the third consequence, if our new economy benefits, is our old economy will suffer. I don't think we need to take too seriously the reported threats by foreign firms that they are going to pull out. When you see what has actually been said it is generally couched in much more circumspect language than the headlines suggests.

Nor is there a serious threat to inward investment. If you look at what companies do, rather than what they say, so far there has been no evident damage from remaining outside the eurozone. But if Britain is never going to join, it would be naïve to assume that there will be no damage to old economy companies, domestic as well as foreign-owned.

If sterling is going to remain a strong currency - and we have to assume that- companies that have relied on the relatively low-cost base of operating in the UK will suffer. We may get more inward investment from new economy companies but we will get less from old economy ones.

That leads to consequence four: staying out will hasten the structural shift already taking place in the UK, out of manufacturing and into services. One of the astounding features of the UK economy over the past five years is the scale of investment in technology and telecommunications. A study by Francesco Daveri at the University of Parma shows such investment in the UK as a proportion of GDP is higher than even the US and is far ahead of the eurozone.

Figures can be wrong, but this would square with the surge in internet and mobile phone use, which seems to be happening here at least as quickly as anywhere in Europe, with the partial exception of Scandinavia.

Is it good that we should be pushed harder and faster towards the new economy and away from the old? There are two answers, both with merit. One is that we have little choice about the speed we are moving because the commercial pressures for change are so enormous that we cannot do much to slow them. The other is that the division between old and new is so blurred that a better way of describing what is happening is that all companies might be pushed faster into adopting new techniques - for example, using electronic procurement to cut costs - than they would otherwise have been.

That leads to conclusion number five: that if companies do accept that Britain will never join the eurozone, they will have to think hard about the nature of competitiveness in the world.

In a way, joining the eurozone would be an easy option. Assuming the rate would be a reasonably competitive one, companies here would have several years to exploit the cost and regulatory advantage the UK has over most continental European countries.

But if the UK is never going to join, that period of comfort will not occur. So they will have to reform faster. That means going back to the basic question: what can we as a country, do better than other countries? In the medium-term, this pressure is an advantage, just as the strong mark was an advantage to German engineering firms, forcing them to add value by lifting their quality of product and service. But in the short-term, rapid change is painful, as anyone who has tried to run a business knows.

And conclusion number six? It is that the wave of transplant factories established here during the 1980s and 1990s will be seen as a finite period in UK commercial history: something that cushioned the collapse of UK domestic manufacturing, but something that could not be sustained as a long-term policy.

New investment will continue, but it will be chasing the real comparative advantages of the UK, in particular the creative skills and the inherent entrepreneurialism, rather than what has been relatively cheap labour. If that is right, there will have to be a big rethink of our policy towards inward investment. But that, surely, has already started and will continue whichever party is in power.