Car makers’ success does not validate EMU

Using car manufacturers’ investment plans as an argument in favour of joining the euro is a mistake, says Rod Turner

There has been considerable speculation about the investment in-tentions of car makers in the UK. A number of the leading producers, including Nissan and Rover, have suffered a squeeze on margins caused by the weakness of the euro relative to the pound – and they have made their concerns clear.

But others have announced new investment plans. Honda is among five car companies deciding to invest in Britain in the past year – with plans to double its production over the next three years. Vauxhall and Peugeot announced new investment plans in May and Ford plans to invest $3bn over the next five years.

Despite pressure on margins, UK car output is currently at its highest for 20 years and export orders in the engineering sector as a whole are at a three-year high.

But what is surprising is that these often conflicting signals about the profitability of the motor industry should be interpreted as relevant to the debate about whether or not Britain should join the euro.

The car market is facing up to severe pressures. This is principally because global capacity is 80 million units while demand is only 50 million units.

In such a competitive market place, the management drivers are competitiveness, cost and market share – not the politics of the euro. Car manufacturers do not take investment decisions based on short-term exchange rates. They base their investment decisions on long-term factors such as the availability of skilled labour and levels of regulation and tax.

What works against them now might well work for them in a couple of years’ time. Indeed, although the pound is relatively strong against the euro, it is at a 14-year low against the dollar and has weakened against the Yen.

Some car companies have indicated that they would like to join the euro. Their convictions may be genuine but there is no unanimity among manufacturers on this issue.

There may also be otherfactors behind the publicpronouncements. For example, Nissan is currently negotiating for a UK development grant.

Clearly, the suggestion that it might put new investment in France might be a way of gaining negotiating leverage over the UK government.

Much has also been made of the fact that Toyota and others are trying to get some of their suppliers to invoice in euros.

But what many fail to understand is that there is a huge difference between using the euro as a trading currency and adopting the euro as our own domestic currency. Many businesses have used the dollar for decades, but that does not mean we should abolish the pound and apply to join the Federal Reserve Board.

The fact that companies can successfully exploit the euro without accepting the baggage that goes with full economic and monetary union actually takes away the arguments for replacing the pound. If car companies find it convenient to trade in euros they already have the option.

There is no need to take the irreversible decision to lock into the euro. Indeed, many aspects of EMU such as tax harmonisation and higher regulation would undermine many of the advantages we have.

And we would also be locked into the one-size-fits-all interest rate which would rarely be right for us. Ireland is already suffering higher inflation and instability as a result of having the wrong monetary policy.

Rod Turner is managing director of Whale Tankers, and a former finance director of Land Rover