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Friday, 16 June, 2000, 13:45 GMT 14:45 UK
Corus counts sterling cost
Eddie George and Gordon Brown
The government and Bank of England are under fire about the strong pound
Europe's largest steelmaker Corus appears to be the latest manufacturing casualty of the strong pound.

Unions have been quick to blame the currency's strength for its decision to cut 1,430 jobs in the UK.

"No one can deny the jobs have been lost directly or indirectly because of the strong pound," John Edmonds, general secretary of the GMB said of this week's job losses.

One union estimate is that ten thousand jobs have already been lost to the strong pound. With the pound now weakening, when will the pain stop for UK industry?

Is the pound really to blame?

In some cases, blaming the strong pound is a kneejerk reaction for manufacturers and workers alike.

In the Corus case, the job losses had been long expected and can also be attributed to falling demand for steel and a long-expected restructuring in the wake of its merger with Dutch company Hoogoovens.

In fact, the pound has since fallen back from its recent highs, as the euro regains its allure to investors, helped by the recent European interest rate rise.
European central bank
The ECB rate rise helped the euro

Some say that Corus is looking for a quick fix and if it waited the weaker pound would soon feed through into better export returns.

But in Corus's case, there were other issues at stake. If it moves production from England to Poland, as has been rumoured, it stands to save on wage costs.

UK demand for engineering steels has dropped by 18% since 1995 and shows no signs of recovering. This has resulted in falling margins for Corus, particularly in the auto sector which accounts for 60% of demand for engineering-grade steel.

Some analysts do attribute the strength of sterling to the company's misfortunes. On Friday ING Barings lowered its earnings per share estimates for the company for this year. It believes that high exposure to sterling will continue to blight the company's results.

Hard days for steel industry

The job losses are the latest blow to a steel industry, which has seen its revenues hit by falling demand in key markets such as south east Asia, Russia and South America.

Corus is estimated to employ 35,000 people in the UK. This compares with the 150,000 people employed in the steel industry in 1979.

The sector has been dealt a series of blows.The oil crisis in 1973 meant that customers wanted materials that were cheaper and used less energy, such as plastic. Steel consumption fell, and the recession of 1979 dealt the sector another blow.

The sterling problem

Business has long argued that the combination of a weak euro and high UK interest rates, which have boosted sterling, has made their exports expensive and uncompetitive.
Joachim Milberg
BMW's Milberg blamed sterling strength for the Rover sale

Companies who have blamed the strong pound for their bad luck include BMW, who blamed it for its eventual sale of Rover, and Ford, who slashed jobs at Dagenham.

Nissan introduced efficiency savings at its Sunderland car plant because the high pound had eroded productivity gains.

Nissan UK managing director John Cushnaghan said the high value of sterling has placed an "unsupportable" burden on manufacturers.

TUC head John Monks has pleaded with the government to take action to lower the value of the pound.

"Many industries have modernised and their workforces have delivered higher productivity, but they can't live with a currency that is overvalued 30% against the euro," he told workers at Belfast's Harland and Woolf shipyard.

Pound to weaken?

These manufacturers clearly place the burden at the door of the Bank of England, whose job it is to control inflation by setting interest rates.

The Bank of Engand's monetary policy committee is unlikely to deviate from its course. Lowering interest rates to help exporters could prove to be a greater economic evil, it claims.

"Stability must be the watchword of policy and that's how we are going to set monetary policy," deputy governor of the Bank of England, Mervyn King, said. "That would just lead us down the road of high inflation again and in the end to the need for another recession to control inflation," he added.

It places the blame at the door of the European Central Bank, which has recently acted to boost the euro by raising interest rates. This lifted the currency off the lows seen earlier this year.

Whether the euro will sustain its recent gains is unclear.

Many investors have had their confidence in the euro struck by the mixed messages emanating from ECB members and ministers from the different member states.

Some argue that the problem cannot be solved while the UK remains outside the euro.

"The UK has the worst of all possible worlds as we are competing outside of a major currency bloc," he said.

"The greatest threat lies in the strength of sterling and the idea we can ignore the euro," he said.

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See also:

07 Dec 99 | Business
Steel: strength endures
24 Apr 00 | Business
Strong pound 'hits business'
04 Apr 00 | Business
George defends inflation policy
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