UK: ECONOMIC TRUTHS - BRITAIN PULLING JOBS FROM EUROPE. - ECONOMIC TRUTHS - BRITAIN PULLING JOBS FROM EUROPE - The UK has been re-rated by the international investment community and is considered a better bet today than many rivals on the Continent.

by DAVID SMITH, economics editor of the Sunday Times.
Last Updated: 31 Aug 2010

ECONOMIC TRUTHS - BRITAIN PULLING JOBS FROM EUROPE - The UK has been re-rated by the international investment community and is considered a better bet today than many rivals on the Continent.

Opinions about the economy of the UK tend to ebb and flow, although both bad and good tend to hang on long after they have ceased to be relevant.

Thus, in the 1970s, Britain was seen as 'the sick man' of the industrialised world. It was over-unionised, with an inefficient public sector and a private sector that was not much better.

In the 1980s, we had the miracle years, although not everybody cottoned on. I recall Tory ministers being infuriated because, at a time when the Government was introducing red-blooded Thatcherite reforms, the Wall Street Journal insisted on referring to 'socialist' Britain.

As for the 1990s, it has been the decade when Britain rediscovered its inferiority complex, thanks to Black Wednesday in 1992 and a successful campaign by the Labour party, when in opposition and now in government, to expose Britain as a low-productivity country with living standards well below those of our nearest rivals.

The truth, I think, is somewhat different. While the 'sick man of Europe' tag in the 1970s was justified, the miracle of the 1980s was exaggerated. Most misplaced of all, however, is the label of failure in the 1990s.

The launch of the euro has been a trigger for fresh comparisons between Britain and its main European rivals. None, as yet, shows Britain in an unfavourable light. Take unemployment. The past five or six years have seen a decisive reduction in unemployment in the UK but the jobless total for the 11 Euroland countries has remained stubbornly high.

The stock response to this has been that Britain, in departing the European exchange rate mechanism in 1992, has been able to let rip, while the rest of Europe has stuck to highly responsible policies in preparation for the launch of the euro.

As a matter of simple fact, this charge does not stand up. The improvement in Britain's public finances from an admittedly dreadful position in the first half of the 1990s has been dramatic. Today, it has one of the healthiest budgetary and public debt positions in Europe, with a fiscal code in place to ensure that this is not frittered away. Others continue to struggle to get their deficits below the required 3% of GDP.

Nor is it true that Britain has been irresponsible on inflation. UK interest rates remain substantially higher than those in Europe, while the difference in inflation rates is much smaller. On a harmonised basis, the UK is about 1.5%, while the average for the Euro-11 is just under 1%.

Another thing the Euroland-UK comparison has thrown up is the way monetary policy decisions are taken. Compared with the European Central Bank (ECB), the Bank of England's monetary policy committee (MPC) is a model of openness and responsiveness. MPC minutes are published a fortnight after each meeting and decisions come under close scrutiny. ECB minutes are not published at all and Wim Duisenberg, its president, has been engaged in a battle with European politicians, notably Germany's now departed finance minister, Oskar Lafontaine, over monetary policy. Gordon Brown in Britain has adopted a hands-off strategy in respect of the Bank of England.

Where Britain scores particularly well is in the flexibility of its economy in general and of labour markets in particular. The euro was expected by some to lead to an immediate haemorrhage of jobs and investment from Britain. Instead, Sony has announced it will be closing down its remaining television factory in Germany in favour of South Wales. General Motors has announced a new research facility at Luton. Allianz has said it may relocate outside Germany, and Dana, the engineering firm, has bought a German factory from Thyssen and shipped its contents to Yorkshire. All these decisions have been justified on the grounds of high taxation and/or high social costs in Germany.

But what about Britain's lower productivity and thus lower living standards than most of the rest of Europe? I accept there is a labour productivity gap, although once adjusted for hours worked and the relatively large proportion of part-time workers in Britain, I suspect it is far smaller than the Treasury's claim of a 40% disadvantage relative to the US and 20% in respect of Germany and France. When it comes to total factory productivity, the gap is much smaller. Put simply, Britain makes a smaller amount of capital work harder, compensating for lower labour productivity.

Even accepting the productivity gap and a 20% Anglo-German gap, hourly labour costs in British factories (wage and non-wage) are about half what they are in Germany.

There is much we could be doing far better but, faced with a choice between Britain and Germany, as things stand, the UK represents a better investment bet. It appears that the markets agree. One factor underlying the strength of sterling has been that, even amid criticisms at home, Britain has been undergoing a positive re-rating among the international investment community.

And I am with them on this one.

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