British business leaders worried about strength of sterling

Senior business people in Britain are warning that investment in manufacturing may collapse as productivity increases fail to keep pace with sterling's appreciation against the euro.

Mr Gordon Brown, Britain's chancellor of the exchequer, yesterday made a rare statement that the pound's strength against the European single currency "cannot be justified by any view of long-term economic fundamentals".

It coincided with a statement from euro zone finance ministers asserting that the single currency's level "does not reflect the strong economic fundamentals of the euro area".

The chancellor said he understood the "great difficulties" sterling's strength was causing, particularly for manufacturing, but ruled out a "short-term quick fix".

Mr Michael Portillo, treasury spokesman for the opposition Conservative party, said: "We have to get used to the idea that a strong currency is not a bad thing. It is a reflection of a strong economy."

Mr Martin Temple, director general of the Engineering Employers' Federation, said the UK was set to see a fall in domestic and inward investment over the next two years unless the euro strengthened.

"There are some people still struggling very hard to keep investment up. But that is not the norm. The anecdotal evidence is that many international companies are reviewing substantially their plans for investment in the UK," he said.

Some manufacturers have said companies could cope by improving productivity.

Mr Anthony Bamford, chairman of JCB, the construction equipment manufacturer, said sterling's strength "has a positive effect in that we have to look at every aspect of productivity and cost saving".

However, most executives have said that sterling's rise has been too rapid to be offset by any improvement in productivity.