Paying for isolation

The UK's lead in European investment is slipping

By BBC business reporter Rodney Smith

Europe's economy is slowing fast.

Official forecasts of German growth have fallen from 2% to just 0.7%. It will take the rest of the European Union with it.

The shining light in the gloom is the curious case of the semi-detached member, Britain.

While most of the eurozone expects to grow at German speed or less, forecasts for Britain remain stubbornly high.

The Ernst and Young ITEM club, the independent British forecaster that uses the Treasury's own model of the economy, calculates that the UK economy will grow by 2.2% this year.

Investment boom

A key component of Britain's economic growth through the 1990s was the marked increase in foreign direct investment that followed the economy liberalisation of successive governments.

The euro can be more political than economic

Investment incentives, less restrictive labour laws than elsewhere in Europe and straightforward hard selling of Britain by government ministers, all contributed to Britain attracting 28% of the inward investment that came to Europe in its peak year, 1998.

This share has been declining ever since.

Another Ernst and Young study, by the International Location Services Advisory Team, shows that while Britain still attracts the lion's share of foreign investment into Europe, the actual amount had slipped to just 21% in the first six months of this year.

The overall flow has slowed with the cooling off that followed the bursting of first the dot-com and then the telco bubbles; just 197 projects in the first six months of the year versus 254 in the first half of 1998.

Ernst and Young reports a perception among its clients that legislation in Britain is now going in the wrong direction to attract foreign business.

Euro study

Coincidentally and provocatively, a study by the trade law duo of Professor Brian Hindley and Martin Howe QC looks at the cost to Britain of leaving the European Union.

The most salient feature of their analysis is the discovery that the cost in terms of lost foreign investment may be over-emphasised.

The absolute value of foreign direct investment is diluted, they say, by the amount of subsidy for building a plant in out of the way Gwent or the Grampians.

So they conclude that on balance there would be a risk of lost investment. But this could be combated with, say, less restrictive economic regulation than in the European Union.

Politics count

But then it is not an entirely economic matter.

As former EU commissioner Padraig Flynn said to me when the Maastricht debate was raging and I queried the economics of the euro: "It's got nothing to do with economics. The euro will be a political decision."

And Britain hasn't even joined that yet.