Whether the UK should join the euro is fast replacing religion and politics as the issue most likely to polarise opinion and provoke debate.
I firmly believe that adopting the currency would bring benefits both to my company and to many other businesses in the UK. Furthermore the broader population stands to gain, be it through wider career prospects or just lower priced products.
Glynwed has adopted a new strategy in response to the cyclical UK economy and the large variations in exchange rate. We have disinvested entirely from a number of UK-based industries, concentrating on just two business areas, plastic pipe systems and food service equipment.
Our reinvestment has been almost wholly outside the UK, where we are unaffected by the pressures of strong sterling. We have built up the world’s largest plastics pipe systems business and, on a smaller scale, the UK’s largest food service equipment business. There is no doubt that our financial performance is much better than it would have been if we had not moved our investment out of the UK.
Boost to investment
Adopting the euro would encourage greater investment and gains in efficiency. With the European market accounting for over half of the UK’s exports, it is essential that we do not miss out on these opportunities.
Membership of the single currency would provide a boost to investment. Much has been made of the UK’s prominent position in Europe as a destination for foreign direct investment. There can be little doubt that were the UK to be seen as permanently detached from euroland with a constantly fluctuating exchange rate, many foreign companies would start to reconsider their investments.
It is not just inward investment that will be eroded while the UK remains outside the euro. The impact of sterling’s recent fluctuations and sustained overvaluation has affected domestic manufacturing investment.
If the UK effectively had a much larger domestic market with no exchange rate uncertainty, it would spur investment as firms adapted to take full advantage of new opportunities. It has been estimated that countries using the same currency inter-trade up to three times as much as would be expected of countries using different currencies. Finance for investment would also become more readily available as the euroland capital market evolves into one of the largest and deepest in the world.
Euroland interest rates are currently lower than those in the UK and as the European Central Bank gains credibility it is hard to believe that monetary union will not deliver stable, low interest rates over the longer term.
Reduced transaction costs are often stressed as a key advantage for joining EMU. Firms dealing with their euroland counterparts would benefit, as they would no longer have to pay commission to convert currency and cover hedging costs. But this is not the major source of efficiency gains that membership of the euro would generate for the UK. Greater price transparency would reduce costs and generate new business for UK companies. Benchmarking against companies in mainland Europe would become easier and would not have to be repeated constantly with every exchange rate fluctuation.
Finally, decisions that will affect us are increasingly being taken at the European level. It is vital that we are seen as an active participant in Europe, able to engage constructively and to influence those decisions in Britain’s best interests. European standards affect every manufacturer and we should maximise our contribution to their preparation.
Timing will be crucial. The wide fluctuations in exchange rate have led to periods of under- and over-valuation of sterling, and while the optimum rate is a matter for discussion there is little doubt that the current rate is too high. It is the consequence of deflationary policies in the UK coinciding with reflationary ones in the eurozone. When these policies have taken effect they will be modified and rates will come into a more sustainable relationship. It will be necessary to join at an exchange rate that is acceptable to all members of the currency.
Glynwed would then be able to plan reliably within the euro, and much of the argument that led us to switch investment out of the UK would no longer apply.
Competitive companies have nothing to fear from membership of the euro area, and a great deal to gain.
Nick Bouchers is director of group planning at Glynwed International
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