UK could face long-term pain despite short-term gain

Date: 02/03/2000

By Bruce Barnard

While British politicians lock horns over monetary union, euro-zone companies are flocking into the country, joining American and Japanese firms which are piling into every sector from computer chips to cable television.

Among recent high-profile arrivals are the world's largest manufacturer of mobile phones Nokia of Finland, which has chosen London as the European headquarters for its Internet venture-capital fund, and German chemical giant BASF, which is moving its headquarters from Ludwigshafen to the British capital.

The UK is not just attracting inward investment in cars and computers, but also increasingly in financial services, in spite of its non-euro status. But how long can it continue to outshine its continental rivals?

It boasts an unbeatable cocktail of advantages: a flexible labour market, a relatively cheap skilled-labour force, comparatively low taxes, Europe's most pro-business government and a friendly regulatory climate. Nevertheless, foreign investors, particularly the Japanese, are getting edgy about the UK's opt-out from the euro.

Two Japanese electronics groups - Fujitsu, which owns the British computer firm ICL, and NEC - have gone public over their worries about the UK remaining indefinitely outside the euro zone. Japanese construction equipment manufacturer Komatsu has gone further, warning it might switch investment from its British plant to a new factory in a euro-zone member country, probably Spain, because it is not sure about the UK's commitment to monetary union.

Most gripes, however, are less to do with the UK's euro stance and more with the strength of sterling, which has slashed manufacturers' margins on exports to the euro zone and threatens to price them out of some markets.

Japanese manufacturers might be tempted to shift production to the euro zone if their competitiveness continues to decline. Toyota's decision to build a brand new car plant in northern France underscored the competing attractions of the euro zone and its performance will be closely tracked by Japanese executives from Dusseldorf to Dundee.

While British politicians lock horns over monetary union, euro-zone companies are flocking into the country, joining American and Japanese firms which are piling into every sector from computer ships to cable television. The UK is not just attracting inward investment in cars and computers, but also increasingly in financial services, in spite of its non-euro status. But how long can it continue to outshine its continental rivals?