Toyota EMU warning hits Tory election drive

TOYOTA'S warning on the risks of Britain opting out of Europe's single currency has struck a raw nerve and hit prime minister, Mr John Major's drive to highlight the country's economic success before elections due by May.

The Japanese carmaker's comment that it might stop investing in Britain if the country spurned the currency union overshadowed a ceremony highlighting the huge flow of foreign money into British manufacturing in the past IS years.

In Wednesday's turf cutting ceremony, Mr Major grabbed a spade to mark construction of a £1.7 billion electronics plant in Wales by South Korean group LG.

But economists said Toyota's warning should be taken seriously and signalled growing nervousness by investors in Britain over the country's often sour relations with Europe.

"If Britain stays outside European economic and monetary union (EMU) the fear is that integration in Europe will lead to the erection of other barriers to trade for UK based companies," said Mr Nigel Pain, research fellow at the National Institute for Economic and Social Research (NIESR).

Economists said a Britain outside monetary union could be left out of discussion on new economic pacts or industry deals, or changes in common labour standards.

Investors, who have fallen over themselves to pump money into Britain in the past 15 years, are starting to have doubts about its relations with Europe if it decides - as seems likely - to stay outside a single European currency.

"If monetary union goes ahead and succeeds, countries in it will want to co ordinate their economic policies even more closely and the UK's influence in Europe will be much less," said Mr James Barty, senior economist at Deutsche Morgan Grenfell.

Inward investment has given the British economy a huge boost and accounts for almost a fifth of manufacturing employment, a third of manufacturing investment and nearly 40 per cent of exports.

Britain's stock of inward investment is now more than £150 billion, up from just £44 billion in 1985. It has transformed British manufacturing, which as ravaged by labour unrest in the 1970s and recession in the 1980s which cut capacity 20 per cent.

But economists reckon investment will not change much despite the EMU worries, at least in the short term.

"Britain's labour costs, labour market flexibility, and access to markets remain extremely attractive to international businesses and will continue to attract investment," said Mr Sudhir Junankar, economist at the Confederation of British Industry.

"It would n& be advisable to over react to one or two companies voicing concerns over our potential non participation in EMU," he added.

But there is a long term concern for business which may become much more acute in coming years if Britain distances itself further from EMU.