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Structural imbalances

Inside Politics – The Policy Exchange newsletter (London), 4 April 2008

Two pieces of news in today’s seemingly crazy world of economics: on April 1, Deutsche Bank and UBS reported write-offs of more than £12bn. They were not April Fool’s Day jokes, but shocks we have had to get used to since last summer. The second story is a few days older: Tata announced that it was going to take over Jaguar and Land Rover, a move welcomed by unions as it gave them job guarantees.

What do these stories have in common? Nothing much, at first sight. Here we have the world of high finance in which billions are made and lost in a financial rollercoaster ride. On the other side there is old-fashioned manufacturing.

But these two apparently unrelated stories are an indication of some potential troubles for UK plc. Over the past two decades, Britain has almost exclusively focused its business model on services, mainly in the financial sector. Manufacturing seemed to be a thing of the past, riddled with productivity and quality problems.

So Britain set out to concentrate on what was loosely labelled “the creative economy”, a description for everything from consulting, banking and accounting to the media, culture and sports. As London become the most successful hub of this post-modern economy, it became fashionable to look across the Channel with a certain smugness.

But the current crisis in the global financial system reveals the risks of this strategy. No other European country is likely to be hit as hard by the crisis as Britain because unlike our European neighbours there is no sector which could make up for a temporary slow-down in the financial world. One of the last remaining outlets is now dependent on life support from India.

To be sure, the creation of a world class service sector is something that Britain can be proud of. But, blinded by its success, it was a mistake to let the country deindustrialise to a point where it does not have much else to offer to the world.

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