The Empire Strikes Back: UK Fights Financial Sunset : Britain: Despite European economic integration, America's longtime special relationship with London should not be abandoned.

By Joel Kotkin

July 22, 1990 12 AM PT

<i> Joel Kotkin, co-author of "Third Century: America's Resurgence in the Asian Era" (Ivy), is a fellow at the Pepperdine University School of Business and Management and at the Center for the New West. He recently returned from Britain</i>

By accusing Germany’s Chancellor Helmut Kohl of masterminding a German “racket” to take over Europe and then comparing him to Adolf Hitler, British Minister of Trade and Industry Nicholas Ridley--who resigned under fire last Saturday--neatly fits the stereotype of the narrow-minded, xenophobic Englishman. However appropriate to Ridley himself, this assessment trivializes the true nature of British concerns over the impending unification of Europe and its long-term meaning for North America.

Like most of their European counterparts, the bulk of British businessmen and the ruling Conservatives, including Ridley, strongly favor some form of European union, and a broader alliance with Eastern Europe and non-European Economic Community member states. Their problems focus not so much on the principle of integration but on the future relationship of Europe with the rest of the world.

“Most people in the British business class want a united Europe, but they want to keep the global market open,” said one London executive, who is close to leading Conservative circles. “The French and Germans have their first interest always in Europe. There’s a huge gap in the emphasis between us and them.”

Viewed from this perspective, the British, far from conforming to their insular image, actually stand, along with the Dutch, as the strongest advocates of a cosmopolitan and open Europe--closely tied to trading partners in North America, Asia and other regions of the world. This globalist view conflicts strongly with those on the Continent, where a united Europe means a challenge to the long-entrenched economic power of North America and of Japan and the Pacific Basin.

Americans and others around the world have been slow to focus on this latest permutation of Euronationalism and its potential threat to the U.S. position in the world. Already, Italy’s Foreign Minister Gianni De Michelis and French President Francois Mitterrand’s adviser, Jacques Attali, see in the rise of the “new Europe” a harbinger of U.S. decline in international science.

Having dismissed the supposedly declining United States, the Euronationalists primarily see the European Community as a means to resist further economic advances by the Asian-Pacific Countries. Attali, recently named director for the European Bank for Reconstruction and Development, envisions the new united Europe emerging along with Japan as one of the two “cores” of the advanced industrial world. France’s willingness to ally with its historic German enemy--a posture that Ridley compared to that of subservient “poodles”--stems from a deep-seeded fear of Japan. “They have an appetite for revenge, they have a desire to conquer the world,” claimed Edith Cresson, France’s Minister for European Affairs. “They buy the Rockefeller Center, things that are significant.”

To the British, such a vision of Europe threatens not only their long-standing ties to the United States but their basic economic interests. Although Britain, like other major European countries, now does a majority of its product trade on the Continent, its economy is far more dependent on investments, financial flows and technological links with non-European partners. In a European superstate cut off from the global economy, many fear Britain would become a second-rate power compared with France or Italy, not to mention Germany.

“Our links to the world are our last power base. If we didn’t have our connections with the Americans and others we’d become a minor state, a state on the fringe of Europe,” said Sue Birney, professor at the Canfield School of Management near London and an expert on the dynamics of the British economy. “It’s what we are . . . . It’s our history, it’s our skill.”

Nowhere is this more true than in London, the European financial capital that remains the core of Britain’s last claim to worldwide prominence. As a center for stocks, financial consulting, accounting and other services, the financial center dominates Europe, with a volume of outstanding loans three times those of France and almost six times those of its German rivals. Only Tokyo comes close as an international source of debt capital.

London’s pre-eminence is based not on the strength of the British or even European economy, but on its critical links to other critical money centers. Japanese, U.S. and other non-EC banks, for example, account for roughly two-thirds of the international loans made from London, while other EC countries account for a mere 15%.

The globalism of British financial circles, traditionally a critical pillar of the Conservative Party, also shows in their investment patterns. In contrast to those on the Continent who see a European resurgence set against a backdrop of a declining American and a growing Asian threat, British capitalists continue to hedge their bets, keeping their largest investments in regions outside of Europe.

Throughout the 1980s, British firms solidified their position as the pre-eminent investors in the United States, with 1988 flow levels running nearly twice the level for the entire European Community. British interests also remain closely tied to more far-flung regions such as Africa and Asia. In Hong Kong, the estimated book value of British-controlled holdings is estimated to be as high as $15 billion.

At the same time, Britain also began depending on non-EC investment. Last year, Britain attracted at least 38 U.S. projects, the most in Europe and more than twice the number for West Germany or France. They also received nearly half Japan’s roughly $12 billion direct investment in the European Community, more than six times that in Germany or France.

Particularly critical has been investment in Britain’s long-deteriorating industrial sector. Largely incapable of competing with West German and other continental powers in such fields as electronics and automobiles, Britain has turned to the United States and Japan for expertise and industrial investment.

In Scotland’s high-tech “Silicon Glen,” U.S. firms now account for roughly four-fifths of manufacturing. Similarly, British-made Japanese Hondas, Nissans and Toyotas--mostly from sparkling new plants--along with locally made Fords and Vauxhalls (General Motors) increasingly dominate British roads.

As in financial services, such linkages create British political attitudes in conflict with both their major continental counterparts and neo-mercantilist European bureaucrats in Brussels. Britain has been feuding bitterly, for example, with the European Commission’s plans to limit Japanese cars made in Britain with 80% European components as “imports.” That move could essentially throttle any resurgence in this once vibrant British industry because the cars would be counted within quotas for Japanese imports.

Given these realities, Britain is likely to emerge in the coming decade as the strongest advocate within Europe of a political economy friendly toward the United States, as well as the Pacific nations. Today, fashion calls for the United States to abandon its long-standing “special relationship” with Britain for the embrace of Germany and other continental European states. A more prudent course would be to remain close to Britain--a nation whose economic realities, as well as historical ties, make them our most reliable ally on a potentially hostile continent.