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Tuesday, February 18, 2003

UK Business Jitters Over Euro Delay

The recent results of an FT survey about inward investment intentions in the UK serves once more to underline just how complicated the euro decision really is. The effect of the euro on inward investment is one of the Treasury's five tests, but only one. The euro decision may have one look from the perspective of corporate decision making, and another from a general macro one. High on the list of corporate decision makers is the question of currency valuation (sterling is at present still relatively expensive in relation to the euro), currency fluctuation risk and transactions costs These are the strong plus points for the euro. On the negative side are the problems of losing control over monetary, fiscal and exchange rate policy. These, as we can see from the present German predicament, are not to be taken lightly. Then there is the famous vulnerability to asymmetric shocks problem. In the UK case this is especially relevant given the importance of financial services, and the dependence of this on the ability to attract external funds (read interest rate policy here). Clearly the Treasury and the BoE have to give priority to the general macro arguments, whilst company preferences tend reflect more specific and focused concerns. That is, after all, why we have governments.

Substantial sums of inward investment could be at risk if Britain delays joining the euro, according to the most comprehensive analysis yet of attitudes among large foreign investors. Sony, Bosch, Siemens, Caterpillar, Philips, Pechiney and PSA Peugeot Citroen are among those in a Financial Times survey of 40 foreign companies with manufacturing bases in the UK that warn they would be less likely to invest here if Britain decides against euro entry. The study offers a snapshot of how membership of the euro will affect inward investment, one of the five economic tests governing euro entry set by Gordon Brown, the chancellor. The Treasury is to publish its assessment by June. The companies that say future investments may depend on the UK's commitment to the single currency have combined sales of some £6bn a year from their UK operations, in which they employ 62,000 people. In the FT survey, 61 per cent of the 31 companies prepared to give their views said they were less likely to invest in the UK if it failed to decide whether to join the euro. The remaining 39 per cent said the single currency would make little difference. Nine companies declined to offer an opinion. Manufacturing has provided 40 per cent of all the new jobs created in Britain by inward investment over the past five years. The UK is still Europe's most-favoured location for inward investment of all kinds, although its share has been slipping.
Source: Financial Times

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