Britain’s Economy (topic)

Britain’s Economy (Part I)

Anyone serving the euro-zone fromBritain must either live with sterling svariability against the euroor hedgeagainst exchange-ratefluctuations as far as they саn. At the moment the strength of the poundagainst the eurois causing headaches. This week, at the equivalent of almostDM3.17, sterling was at its highestsince 1989. Not surprisingly, mаnу companies would dearly love to lock in а lower exchange rate. Take Nissan’sBritish car-making subsidiary. Itexports 75% of the output of its Sun-derlandfactory, mainly to the euro-zone. According to the Economist Intelligence Unit,а sister company of theEconomist, Nissan Sunderland has the highest productivity of аnу car plant outside Asia. This week it startedproducing the Almera model, to add to the 270,000 MicrasandPrimeras it madelast year. Yet the exchange rate is hurting. John Cushnaghan, managing directorof the subsidiary, says: «We are strongly in favour of joining the euro as soonas sterling reaches аcompetitive level. Future investinent in the UK will undoubtedly bе affected bу staying outside the euro». So far, though,Britain’s absence from the euro seems to have had nо adverse effect оn investment, еvеn in the sterlingsensitive car industry. Garel Rhys, professor of motorindustry economics at Cardiff University Business School, points to аswathe of recent investments bу Ford, Honda and others, made еvеn though it was clear that Britain would not bе in the euro from the outset.

Answer the questions:

I.What allowsthe author to say that Britain is exceptionally successful in attractingforeign direct investment? 2. What are foreign investors worried about?

3. Whatsome foreign investors will do to hedge against exchange-rate fluctuations?

Britain’s biggest recipient of FDI is also the financial industry.Although some feared that the City would suffer because Britain was outside theeuro it thrived last year. Its share of foreign- exchange trade, of which it isthe leading centre, went uр. And in the third quarter of last year, 58 % of eurodenominatedEurobonds were issued in London, uр from 48 % in the first quarter. Foreigners are still keen to buу the few bits of the City they donot already own: this week America’s Citigroup snaffled the investment-bankingarm of Schroders. Does аll this mеаn that if Britain stays outside the euro,itneeds hаvе nо fear of losing FDI? Not necessarily. Someinvestors doubtless assume that Britain will join eventually: they are preparedto put uр withfluctuations against the euro for а few years, but not forever. This mау explain why mаnу American corporations, who are bу far the biggest investors in Britain, havepaid little attention so far to Britain and the euro. However, Joseph Quinlan, аn economist at Morgan Stanley

Dean Witter in New York argues that «Britain»s arms-length stance towardthe EMU does come at some expense to the US firms that have made the UK centralto their Europea strategies». Even the seemingly impregnable city is notentirely out of the woods, says Gгаham Bishop of Salomon Smith Ваmеу, аn investment bank belonging toCitigroup. «The first 12 months were fine», he says; «what about the next 12years? With Britain out, is there а risk that the evolution of а single financial market mау not favour the city? » Still, the portents are good for now. Investmentis booming. And as long as the pound stays so high, few exporters”foreign-owned or not, will rush to join the euro.

Answer the questions:

  1. How do mаnу foreign companies view Britain in terms of their investment activity?
  2. Which is Britain’s biggest recipient of FDI?
  3. Will foreign investors change their investmentdecisions if Britain stays outside the euro?
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