Britain prospers on edge of Europe

PUBLISHED : Thursday, 19 June, 2003, 12:00am
UPDATED : Thursday, 19 June, 2003, 12:00am

The British Consul-General is hosting a reception today to mark the occasion of Queen Elizabeth II's 77th birthday, which was officially celebrated in London on the first Saturday of this month.

The Queen was crowned in 1953 and has seen nine prime ministers come and go. Today, under the leadership of Tony Blair, she rules over a Britain that is experiencing one of the most buoyant economic periods since she came to the throne.

Despite remaining outside the eurozone, Britain will continue to outperform its European neighbours and attract more overseas investment than they do this year and next, analysts forecast.

The British government's delay in deciding whether to adopt the euro means Britain will continue to operate outside the single currency for at least several more years. More time is needed for its economy to converge with the eurozone and a national referendum will have to be held on whether to join.

However, economists believe this delay in joining will not adversely affect the British economy. They predict it will continue to expand faster than the eurozone's because it is more flexible, and Chancellor of the Exchequer Gordon Brown has greater financial freedom to boost growth.

ING Bank forecasts that Britain's gross domestic product will grow by 1.7 per cent this year, four times faster than that of the eurozone, which will edge up 0.4 per cent.

In 2004, GDP growth will pick up to 2.5 per cent in Britain and 1.4 per cent in the eurozone, ING estimates.

Mark Cliffe, chief economist at ING, said: 'The UK delay in joining the euro is unlikely to have a dramatic effect. The financial markets had expected that we would not go in soon. I do not expect a referendum in the current parliament, which is expected to run into 2005.

'Britain will continue to outperform the eurozone during the rest of this year and into next year, because Mr Brown has more room for manoeuvre with his fiscal policy. Also, Britain's economy is more flexible than the eurozone's.'

Unlike eurozone members, Britain is allowed to expand its budget deficit beyond 3 per cent, which allows more money to flow into the economy, an important impetus to growth during a downturn.

British workers can be hired and fired more easily than their Eurozone counterparts, and can be less costly to employ because employee-related taxes are lower in Britain.

Mr Cliffe said it was not clear what impact eurozone membership would have on Britain's economy. The government forecasts Britain's trade with the eurozone countries will increase by a wide band of between 5 per cent and 50 per cent over 30 years if it joins.

Deciding on when to adopt the currency would have repercussions for the economy, he said.

'If we had joined in 1999, it would have been a disaster, because the entry level of the pound would have been too high and interest rates would have been too low. We would have had a boom in the first couple of years of membership and then this would have led to a recession. We are now at just about the right level for euro entry,' he said.

However, some economists believe that joining the eurozone now might damage the British economy because several eurozone countries are teetering on the edge of recession, and, in the case of Germany, deflation.

'There is a dispute among economists about whether such short-term volatility would cause long-term harm,' he said.

Mr Cliffe said eurozone countries were frustrated by Britain's decision to delay a decision on membership, particularly those that wanted reform of the European Union's economic policies.

'The more liberal members of the eurozone will be disappointed because they had been hoping that, with its diplomatic clout, Britain would champion greater liberalisation in Europe,' he said.

'It is generally recognised across Europe that the UK is at the forefront of arguing for the Anglo-Saxon [liberal economic] model, but there is enormous internal opposition in some quarters because it is contrary to the continental European social democratic model.'

Despite its position on the eurozone sidelines, Britain is considered a model for economic reform in some European countries.

'Flexible employment is an area where some European nations are following the UK, though there is opposition. Not being a member of EMU [European Monetary Union] is not critical in putting this argument across,' Mr Cliffe said.

The eventual convergence of the British and eurozone economies was being helped by Mr Brown bringing his inflation policy into line with that of the European Central Bank, Mr Cliffe said.

From November, Britain will adopt the same style of inflation measurement and the same 2 per cent inflation target as the ECB.

An obstacle to membership is the dispute between Mr Brown and the ECB over the latter's insistence on eurozone countries keeping their budget deficits below 3 per cent.

Mr Brown wants these budget deficit rules relaxed before Britain joins the euro.

Figures from Ernst & Young published this month, show Britain remains the most popular country for overseas investors in Europe. According to the Ernst & Young European Investment Monitor, a fifth of inward investment into Europe came to Britain last year.

London retained its top ranking as the preferred regional destination for investment in Europe, securing 125 projects last year, a 33 per cent increase on 2001.

Barry Bright, director of the Ernst & Young location advisory team UK, said: 'The UK, and London in particular, still continue to punch well above their weight in inward investment terms in Europe. To continue to do so, its efforts must not be sidetracked by the euro.'