Pound under pressure

One month before a general election, the euro remains a non-issue in Westminster. Entrepreneurs doing business overseas would like to see it back on the political agenda, finds GrowthBusiness.

One month before a general election, the euro remains a non-issue in Westminster. Entrepreneurs doing business overseas would like to see it back on the political agenda, finds GrowthBusiness.

One month before a general election, the euro remains a non-issue in Westminster. Entrepreneurs doing business overseas would like to see it back on the political agenda, finds GrowthBusiness.

In 2003, a senior MP put the case for joining the euro to the House of Commons. The single currency, he argued, would bring lower transaction costs for businesses and consumers, diminish exchange rate volatility, increase cross-border trade and lower interest rates. ‘I have no doubt,’ he concluded, ‘first, about the potential benefits to Britain […] of joining; second, the potential risks of delaying the benefits of joining; and third, the advantages inside the euro area of greater influence over policy towards the euro and thus Europe.’

It’s hard to believe now, but that MP was our prime minister, Gordon Brown. Seven years later, the government’s official position on the euro is unchanged, but the sense of urgency has evaporated. Just weeks before a general election, the issue of whether or when the UK should join the euro plays no part in political debate.

For many growing businesses, this is both inexplicable and deeply frustrating. Hugh Facey, executive chairman of Queen’s Award-winning manufacturer Gripple, says, ‘I find it unbelievable that Britain isn’t in. How could we be so stupid?’

For Facey, the reason for the UK to join the euro is self-evident: the removal of currency risk from all dealings with the Eurozone, resulting in a vast boost to trade with the UK’s nearest neighbours. As an exporter that does almost half of its business in euros, Gripple has benefited from the weak pound over the past two years, but Facey would happily forego such benefits in return for the added ‘stability’ of dealing in euros.

‘As a businessman, I look at the long-term, not last week or next week. I’d much rather be in the euro whatever the rate is,’ he says.

Wayne Dance, MD of In-House Inspired Room Design, is an importer of kitchens from France, Italy and Germany. Unable to find manufacturers of equivalent quality in the UK, he has been forced to pass price increases on to his customers as the pound’s value has plummeted from €1.53 three years ago to €1.10 today.

‘If we were in the euro, there would be no exchange rate losses – therefore products would be less expensive, people would buy more and UK business would breathe more easily,’ he argues.

For Richard Glasson, CEO of fast-growing global marketing agency GyroHSR, taking the UK into the euro is the ‘one thing’ the government could do that would make a positive difference to the business.

‘I find it ironic that, for party political reasons, [joining the euro] has been taken off the agenda. I would be very pleased to see it come back on again,’ he says.

Back burner
Once an issue that inspired fervour on both sides, the single currency has lost out to a succession of other political debates – Iraq, climate change, the credit crisis – while in recent years, Westminster’s eurosceptics have tended to reserve their bile for the Lisbon Treaty. Meanwhile, the government’s response to questioning about the euro has been the constant invocation of Brown’s ‘five tests’, which allowed him to rule out membership of the single currency for the time being without appearing to oppose it in principle.

Though the five tests cast an aura of objectivity and technicality over the issue, some believe that they are something of a front. Ian Stewart, chief economist at professional services firm Deloitte, says, ‘I think it has always been the case that whether and when we joined the euro is a political decision. The economics can be played either way.’

For the UK to join the euro, argues Stewart, the Eurozone would have to appear an economically attractive and stable region. ‘There are two ways we would join: a complete failure in our domestic monetary arrangements, or a prolonged period in which the euro area was doing much better than the UK. Brown used to talk about his tests, but I must say that I’ve always thought these are the real tests you would need in order to politically get it through.’

Easy money
If Stewart is right then the pound’s fate may be partly decided by whether quantitative easing (QE) is judged to be a success or a failure. The pumping of some £200 billion into the UK economy would, of course, have been impossible if the country had been inside the Eurozone.

Colin Howe is president of the UK200 Group, an association of chartered accountants and lawyers. He says that inside the euro, ‘we would have been tied to what the Eurozone countries agreed to do, for better or worse. You can argue that if we were in the euro we might not have got into so big a mess. But not being part of it, we had more tools to get out.’

Another of these tools is the ability to set domestic interest rates. The fact that, under the euro, base rates would be determined by the European Central Bank is what makes membership of the single currency unpalatable for many.

Noel Josephides is MD of tour operator Sunvil Holidays, which needs to buy €10 million every year in order to pay suppliers in Portugal, Italy and Greece. ‘Would it be better to do business in euros? For me, very much so. For the economy as a whole, never,’ he says. ‘I feel that flexibility in a currency enables it to ride out economic storms. I don’t particularly agree with QE, but I still believe that the fact we’ve had flexibility has enabled and will enable the UK to grow faster than the Eurozone.’

While some cite Greece as a country that has benefited from the stability of the euro throughout the recent turmoil in its domestic economy, Josephides begs to differ. ‘In the old days, when Greece had the drachma, they’d put prices up and the currency would devalue. So [British holidaymakers] had in effect a constant price decrease for years. It was the biggest strength Greece had, and now they’ve lost that advantage.’

Looking back
No-one can say for sure what the consequences would be if the UK joined the euro. But how would Britain have fared without the pound over the past decade?

According to Ian Stewart of Deloitte, the rates set by the European Central Bank have been significantly lower than those decreed by the Bank of England’s Monetary Policy Committee (MPC), averaging 2.9 and 4.2 per cent respectively over the past ten years. The period has also seen the euro strengthen against other major currencies, such as the dollar, while the pound has been comparatively weak.

‘It’s reasonable to assume that, had we been in the euro, the combination of stronger exchange rates and lower interest rates would have exacerbated the imbalance in the UK economy, with stronger house prices and weaker export performance,’ Stewart says. In other words, being in the euro would have made the credit boom bigger and the credit crunch more painful.

But how much power does the MPC really wield? Howe of the UK200 Group points out that, of late, rate setting has been close to being an empty gesture. From a business or consumer perspective, the cost of borrowing bears little relation to the deliberations of Bank of England governor Mervyn King and his colleagues.

‘When the recession started to bite, we saw a large difference between the interbank rates and those set by the MPC, which remain pretty artificial,’ he says. ‘Interest rates are set by the market, not the MPC, and the market is global.’

The real decision-makers on UK interest rates, Howe suggests, are the purchasers of the government bonds that support our ballooning deficit. In the face of globalisation, the risk for Britain is that we cling on to the illusion of autonomy at the risk of becoming increasingly isolated.

‘We are so dependent on Europe and other countries for trade,’ says Howe. ‘If we could afford to plough our own furrow, then we could use our interest rates and currency as a form of protectionism, rather as China is doing. But is the economy strong enough to support that independent view?’

Cheaper borrowing
Economists may differ on the finer points of monetary union, but for businesses such as Gripple, the question is clear-cut.

‘If we’d joined the euro, we’d have had lower interest rates for the past ten years,’ says Hugh Facey. ‘We’ve paid all that extra for no benefit.’

For Facey, opposition to the euro is more about a little England mindset than any genuine concern about monetary independence. ‘People are myopic in Britain. We have this great thing about the British pound, and it’s worth nothing.’

Dance of In-House agrees. ‘I hear about our heritage and losing the queen’s head on our currency. I’m sure most of our businesses would gladly swap the queen’s head for money in their business bank account.’

Businesses’ concerns about staying in the pound range from the worry of losing out on sales to the administrative and monetary cost of dealing with exchange rate volatility without the support that large corporates can draw on.

Despite his political concerns about the euro, Noel Josephides admits that his business has suffered from volatility in the pound/euro exchange rate over each of the past two years. Although he covers 70 to 80 per cent of each year’s euro requirement in advance, a swing of as little as 10 per cent can create serious problems, wiping out the thin profit margin that is normal in such a competitive industry.

David-Joseph Brown, CEO of software company VE Interactive, sums it up. ‘The current situation is unworkable and the UK is losing out. Selling into the EU means that our pricing is under scrutiny. I think the pound stops EU businesses wanting to trade with British companies. It is also impossible to plan our growth into the EU since we are exposed to currency volatility.’

Facey chimes in, ‘We should have joined when it started. Tony Blair had a fantastic mandate – we could have joined as easy as anything and had a strong currency. Instead, we’ve been tossed around in the wind.’

One thing is clear: although politicians may have lost interest in euro membership, businesses haven’t. And they’re a constituency that no party can afford to ignore.

Nick Britton

Nick Britton

Nick was the Managing Editor for growthbusiness.co.uk when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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