Years of overvalued sterling and undervalued euros together with a systematic escalation of red tape and stealth taxes on industry have made Britain an unattractive place to make anything.
We have a balance of trade and payments deficit and getting worse rapidly to being totally unsustainable. There seems to have been a conspiracy to ignore the implications.
These factors and excessive interest rates have increased the demand for sterling holding up against the euro. We have reached a stage where there is little UK manufacturing capacity left.
The demand for sterling is likely to fall as investment in the UK is showing signs of falling. We have interest rates which are, by world standards, higher than our competitors, making investment in the UK more expensive than elsewhere.
Taxes on industry are higher than anywhere in Europe. The prices of goods sold in Britain are excessive as we have so little domestic production to compete with imports, permitting foreign goods to be sold in Britain at well above world prices.
If we are to enter the euro, which is the clearest possible agenda for Labour, four factors apply. The present level of sterling against the euro is unsustainable and manufac-turing cannot be competitive unless sterling against the euro falls by 25 per cent.
After a long period of insane overvaluation, a period of undervaluation will be necessary to attract manufac-turing facilities back to Britain, which will involve a long, slow rebuilding process. The real issues are more complicated still but that problem is a start.
The problem is aggra-vated by the fact that interest rates will have to be the same as the much lower level that is the case in the eurozone.
A fall in sterling, which seems inevitable because of the massive balance of payments crisis and a likely fall in demand for sterling will drive up prices as imported goods rocket in price. The Bank of England will then have to raise interest rates as a means of trying to achieve the impossible, which is to bring inflation down by raising interest rates.
This will set off another wave of bankruptcies, unemployment, negative equity, loss of homes, increased Government financial deficit to pay for social security costs of the unemployed, increased taxes and Government borrowing to pay for the cost of the inevitable recession and cost of servicing the (increased)national debt and even more closures of vulnerable industries already marginalised by overvalued sterling.
A vicious spiral of economic implosion will be inevitable.
Our financial services industry is at best precarious in its international position as most of it is now controlled from abroad and a major fall in sterling will damage it.
We may have lower taxes on income than in the rest of Europe as a percentage of income. However, what matters is take-home pay, what it buys and the services which the Government provides. We may have low taxes but we have a low level of social infrastructure provision and other benefits which higher taxes in Europe have brought, assisting the overall efficiency of European industry which has enhanced their productivity levels.
There is no easy way out of these problems but if we do suffer another ruinous bout of increased interest rates as a misguided and totally destructive reaction to the inevitable inflation which is likely to be a precursor of joining the euro at the lower exchange rate which is bound to accompany our membership, then we will end for ever any chance of achieving a living standard which is comparable with the European standard.
Membership of the euro, however, will inevitably mean that the massive sacrifice made by Britain to privately fund as opposed to state-fund pensions will have been in vain, as Euro tax har-monisation will ensure we end up paying for foreign state pensions out of our taxes.
There is no way ahead at all unless we can somehow raise our output of homegrown goods and cut our dependence on imported goods. Clearly, there are implications in all this as what I see as a rather gloomy economic overview for the UK economy in the way that we have to advise our clients over mortgages. Do we advise five-year fixed rates rather than discounts on SVRs?
Where should we advise clients to invest their Isa money and indeed Pep transfers now that there are no geographical restrictions? How might all this affect corporate bonds?
Which will be likely to be better, buying a lousy annuity or risking drawdown? If drawdown, is it better to be invested outside the UK?
Are gilts and fixed-interest investments a buy as interest rates within the euro are likely to be lower? If inflation will follow devaluation and entry into the euro, are equities a better hedge against inflation?
Should we invest in manufacturing industry again if one can find some-thing to invest in, with the expectation that joining the euro will make manufac-turing in the UK profitable? Should we take a view that global thematic investment is the way forward, accepting that there are very few UK companies now that are really internationally com-petitive and world class?
Troy French & Partners,