Foreign Investment Hits Record in Britain

Foreign investment in Britain has risen to record levels despite the Labor government’s fence-sitting policy on joining the common European currency, according to new Department of Trade and Industry figures.

The report issued Wednesday by the department’s Invest in Britain Bureau would seem to contradict its own warnings and those of pro-euro Cabinet members that the country faces an economic meltdown unless the government makes it clear that Britain intends to adopt the euro soon.

Foreign investment reached $382 billion in the fiscal year ended in April, up from about $309 billion the previous year. The number of foreign investment projects rose 16%, and 52,783 jobs were created--a record increase of 17%.

Knowledge-driven industries, including computer software, telecommunications and e-business, account for the largest share of the new foreign investment, the government said.

Throughout the 1990s, Britain far outpaced the rest of Europe and Japan in attracting foreign investment, though it ranked well below the U.S. (According to Organization for Economic Cooperation and Development figures for 1998, Britain attracted more than twice the foreign investment of either France or Germany, though the U.S. still managed to outpace Britain by threefold.)

The Labor Party government is openly and bitterly divided over whether it should try to sell the idea of joining the euro to a skeptical British public ahead of next year’s general elections. The opposition Conservative Party is against adopting the euro any time soon.

The investment news provided a boost to the go-slow approach adopted by Chancellor of the Exchequer Gordon Brown, who along with Prime Minister Tony Blair wants to hold off on a decision on whether to join the euro until after the national vote. Brown held his ground at a U.S.-British conference on enterprise and technology Wednesday.

“In principle, we see benefits from the euro and have set five economic tests for membership that will be rigorously assessed early in the next Parliament and, if met, put to a referendum of the British people,” Brown said.

In recent days, pro-euro factions in the government have leaked two secret documents warning of the dangers for manufacturing industries and foreign investment if Britain doesn’t clarify its position.

One was a memo from Britain’s ambassador to Japan, Stephen Gomersall, saying that Britain’s waffling has led to a general perception in Japan that “further investment in the U.K. carries unnecessary risks.”

Companies in Japan “are beginning to see pound/euro uncertainty as a long-term disincentive to investment in Britain,” Gomersall wrote.

Another memo, by the chief of the Invest in Britain Bureau, Andrew Fraser, warned that manufacturing faces a “meltdown” unless the government states that joining the euro is inevitable.

“We can do better to avoid shooting ourselves in the foot,” he said in the memo to Trade and Industry Secretary Stephen Byers.

Both Byers and Gomersall’s boss, Foreign Secretary Robin Cook, are pressing Blair to take a more aggressive stand on the euro and were accused of allowing the memos to be leaked to draw attention away from the positive investment figures.

Economists said the strong level of investment reflects good business conditions in Britain and doesn’t necessarily contradict the dire warnings because many of those investment decisions would have been made three or four years ago, before it became clear that Britain would be a holdout against continental economic union.

Britain offers businesses relatively light regulation and taxation, a flexible and skilled labor force, access to financing and good communications and research and development facilities, said Douglas Godden, an economist with the Confederation of British Industries.

“There is also a good world economy, which is conducive to cross-border investment,” Godden said. “Investment has done well looking backward, but looking ahead there is concern. There is still a lot of uncertainty among investors about Britain. If Britain were in the euro, it is quite likely inward investment would be even higher.”

Conservatives warn that Britain would be forced to raise taxes to European levels and increase regulation if it joins the euro. It also fears losing control over macroeconomic policy.

Richard Branson, chairman of Virgin Group, joined the fray on the other side, urging the government in Wednesday’s Independent newspaper to “take the lead on the [euro] now.” The next election is the time to win the public over to the euro, he wrote.

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Euro vs. the Pound

The euro’s value has plunged since it was introduced Jan. 1, 1999, and the British pound also has weakened, though not as severely. Monthly closes and latest for the value of the euro and the value of the pound, both in U.S. dollars: