Mark Stein, manager of General Motors’ (GM) Vauxhall van plant in Luton, 29 miles north of London, starts presentations with an aerial photo of the site in 1965. It shows a vast complex of buildings that employed more than 35,000 workers. He points to a small red circle in the picture. That’s where GM’s current factory is. It employs 1,500.

Making stuff has dwindled from nearly 40 percent of Britain’s gross domestic product in the late 1950s to not much more than 10 percent now. What remains survives for a reason. GM’s Luton factory this year will produce 70,000 Vauxhall Vivaro vans and other vehicles, more than 60 percent for export. Manufacturing productivity grew 4.4 percent in the first quarter.

Prime Minister David Cameron has latched on to manufacturing as a cure for Britain’s economic hangover and its 7.9 percent jobless rate. “If you’re trying to make the economy grow long term on a sustainable basis, manufacturing is where we need to be,’’ says Vince Cable, U.K. Business Secretary. “One of the main growth sectors of the economy in recent years has been banking. For reasons that are blindingly obvious, that’s not going to be so important in future.’’

Starting a new Industrial Revolution will be hard. Government efforts to cut red tape produce plenty of their own. “If you were to write on a board how many agencies and support schemes there are, you would be amazed,” says Bill Parfitt, GM U.K.’s chairman.

Economists and some manufacturing executives also say that boosting manufacturing may be unwise. British manufacturing as a share of GDP is smaller than Germany’s 20 percent, yet it is similar to the U.S. and France, which have big service sectors. Britain may have reached an equilibrium between the two sectors. “I don’t think any economist believes that growth in the next five to 20 years will be driven by manufacturing,” says Jonathan Portes, director of the National Institute of Economic and Social Research.

British manufacturing lacks Germany’s advantages. Germany has long had industrial apprenticeships for young adults: Cable is trying to launch an apprenticeship program in Britain as well. In Germany, robust midsize companies supply big companies and export on their own. In contrast, consider the state of GM’s supply chain in Britain. Only 10 percent of the value of parts used at its main U.K. plant at Ellesmere Port are made domestically. The pound’s 25 percent drop since 2007 against a basket of currencies drives up the cost of imported parts even as it makes exports cheaper.

U.K. producers do excel at making goods where technology counts for more than the cost of labor, says Lee Hopley, chief economist at the Engineering Employers’ Federation. Revenue for Vitec, a high-tech maker of gear for the broadcast, military, and photographic markets, grew in the first half to $282 million from $250 million. “We do make some products in China,’’ says Chief Executive Officer Stephen Bird. “But my intention is that we will continue to manufacture in both the U.K. and Italy because we have great engineers.” A secret to survival is “not competing with cheap Chinese goods,” says Mark Henderson, CEO of MSE UK, which makes blood centrifuges.

Yet after a promising post-recession start, U.K. manufacturing shrank 0.5 percent in the quarter ended in June. The trade gap in June for goods was £8.9 billion ($14.5 billion). Business Secretary Cable says the weaker pound will help the U.K. gain share even in markets where growth is slow, and commercial diplomacy will sell more goods to developing countries. “The problem always has been that our export markets, particularly the euro zone and the U.S., are facing challenges of their own,” says Jonathan Loynes, chief European economist at Capital Economics in London. “The idea that we were going to get a helpfully timed export boom was always a bit optimistic.”

News Corp.’s Simon Greenberg, a member of an internal panel tasked with reviewing phone hacking at the News of the World and the company’s other U.K. newspapers, once oversaw a reporter at another publication arrested last week in a police probe.

Greenberg, 42, was the associate editor for sports at the Evening Standard until 2004 when Raoul Simons worked there as a soccer reporter. Simons, who is heard discussing phone hacking on a 2005 tape recording, was arrested by London police Sept. 7, a person familiar with the matter said. Simons moved to News Corp.’s Times in 2009.

While there is no implication Greenberg was involved in any wrongdoing, Simons’s arrest shows phone hacking may have spread beyond the News of the World and emphasises the difficulties associated with investigating it. The failure of News Corp.’s previous attempts to determine the extent of phone hacking puts a higher standard on the current investigation, said Martin Moore, director of the Media Standards Trust in London.

Any investigation that News Corp.’s News International unit “does now or in the future has to be both transparent and rigorous and have high levels of accountability or else people are going to have a lot of trouble regarding it as credible,” Moore said. Media Standards Trust is a non-profit organization that focuses on transparency in the press and has made recommendations to Prime Minister David Cameron’s media inquiry.

News International and Greenberg declined to comment.

16th Arrest

Simons was the 16th person arrested in connection with the scandal this year, including Rebekah Brooks, the chief executive officer of the company’s U.K. publishing unit. Brooks and Les Hinton, who was running News Corp.’s Dow Jones & CO. unit in New York, were forced to resign after revelations that News of the World hacked into the phone of a murdered schoolgirl in 2002.

News Corp.’s management and standards committee, which Greenberg is on, was given the mandate to conduct internal inquiries. The company said in August that its primary objective has been providing information to police and other government investigations.

Greenberg was sports editor of the Evening Standard, overseeing as many as 35 editors and reporters, until he took a public relations position with the Chelsea Football Club in 2004. Greenberg was chief of staff for England’s unsuccessful bid to host the 2018 soccer World Cup. He joined News International in January as director of corporate affairs.

A recording of Simons speaking with a private investigator about how to hack into voicemails was made at least six months after Greenberg had left the paper, according to two people at the company who declined to be identified because the matter is confidential.

Simons Suspended

In the tape, Simons is heard in a recording being instructed by private detective Glenn Mulcaire about how to hack into a mobile phone, the person said. Mulcaire worked for the News of the World before being jailed in 2007 after pleading guilty to phone hacking related charges.

The police, who didn’t confirm the identity of the arrested 35-year-old man, said last week that he was detained and released on bail. The tape was made in 2005, at least six months after Greenberg left the Evening Standard, the people said.

By the time Greenberg was appointed to the management and standards committee, the News Corp. publication had suspended Simons following the release of the recording online, the people said.

Simons was deputy football editor at the Times when he was suspended last year, one of the people said. Simons is still employed by the newspaper and is on extended leave pending a review of his conduct, the person said.

The Times didn’t respond to requests to provide contact information for Simons.

Murdered Schoolgirl

News Corp.’s U.K. publishing unit shut down the News of the World tabloid in July after reports surfaced that reporters had hacked into the voicemail of murdered schoolgirl Milly Dowler. Clive Goodman, a former reporter at the tabloid, had been jailed along with Mulcaire in 2007 for admitting to listening to messages sent by the royal family.

In addition to Greenberg, the management and standards committee is comprised of attorney Anthony Grabiner, William Lewis, a former general manager at the company’s U.K. newspaper unit, and Jeff Palker, News Corp.’s general counsel for Europe and Asia.

Previous Probes

U.K. lawmakers last week criticized News Corp.’s previous probes into phone hacking at News of the World, which were touted by News Corp. Chairman Rupert Murdoch at hearings in July. The probes by two law firms later turned out to be a limited inquiry into Goodman’s wrongful termination case and another effort to coordinate police requests during their initial investigation.

Greenberg was praised by Sue Akers, who is heading the investigation by the police force, for cooperating with the probe in a July 12 meeting at the U.K. Parliament’s Home Affairs select committee.

News Corp. “is going to be very sensitive to any potential conflict of interest given the nature and the high stakes,” said Niri Shan, a media lawyer at Taylor Wessing LLP in London. “Having said that, the fact that they worked together so long ago may reassure them that a conflict does not actually arise.”

The arrest of Simons also potentially widens the scandal to other newspapers. The Evening Standard, sold in 2009 to Russian billionaire Alexander Lebedev, belonged to the Daily Mail and General Trust Plc when Simons worked there.

Daily Mail spokesman Oliver Lloyd didn’t return a two calls seeking comment.

Other Papers

Other newspapers have been implicated in a study by the Information Commissioner’s Office, a U.K. group tasked with monitoring data privacy and information rights, called “Operation Motorman.” The report, published in December 2006 found evidence that 305 journalists working for 32 newspapers and magazines bought illegally obtained information.

Cameron has appointed Lord Justice Brian Leveson to investigate the country’s media in the wake of the scandal. A seven-member panel has asked for responses from newspapers, including the Daily Mail, and will call witnesses from the media as it investigates the press, its ethics and the relationship with politicians and police.

News Corp.’s own investigations, started after Goodman pled guilty to hacking in 2006, failed to indicate widespread hacking at the News of the World. The law firm Harbottle & Lewis LLP and the company’s legal manager Tom Crone looked through 2,500 e- mails from employees Goodman had identified as being involved with the voicemail scheme and said they found no evidence that reporters were getting information illegally.

Law firm BCL Burton Copeland, which worked for News International when the scandal erupted in 2006 and 2007, said its role was limited to providing documents to the police and wasn’t asked to carry out an investigation into phone hacking.

Bloomberg LP, the parent of Bloomberg News, competes with units of News Corp. in providing financial news and information.

Greece’s departure from the monetary union would be legally difficult and financially ruinous

“The euro area is a community that shares the same destiny” —ECB chief Jean-Claude Trichet Chris Ratcliffe/Bloomberg; Trichet quote: Aachener Zeitung, May 27, 2011

By Carol Matlack and Jeff Black
This Week

September 19, 2011
America Isn't Working
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“Everything must be done to keep the euro zone together.” That was Chancellor Angela Merkel speaking on German radio on Sept. 13 as she denied reports that Germany was preparing for Greece’s exit from the monetary union.

That the leader of Europe’s biggest economy must dampen speculation of a breakup shows the rising unease about the common currency. Two years ago most politicians and investors believed firmly that the euro area was indivisible. As the finances of Greece, Portugal, Ireland, Spain, and Italy have fallen into crisis, that has changed. It’s still unlikely that any member state will bolt or be banished. Greek Prime Minister George Papandreou, for one, vows to keep Greece in the euro zone. Still, a growing number of policymakers and analysts are talking seriously about an exit.

In Greece, the issue is enmeshed with a possible default on its sovereign debt. Yields on credit default swaps on its short-term debt are at 98 percent, a sign that investors consider default inevitable. “If the Greeks don’t make it despite all of their efforts, you can’t rule out” their leaving the currency union, Horst Seehofer, chairman of Germany’s CSU party, a coalition partner of Merkel’s ruling CDU, said on Sept. 11.

Any country that dropped out of the euro would regain control over its monetary policy. Its central bank could set interest rates and would not be controlled by the European Central Bank in Frankfurt. It could reinstate and devalue its own currency, making exports more competitive. An exit would probably lead to sovereign debt restructuring or default, since the country couldn’t repay all its euro-denominated debt with a cheaper currency. Economists reckon that a reintroduced Greek drachma, for example, would be worth only half as much as a euro. Yet Greece seems likely to default anyway, so what’s the difference?

In reality, leaving could be a lot messier. The treaties that created the euro provide no opt-out mechanism. Legally, an exit would require a unanimous vote by euro member states to change the treaties, says Peter Becker, a researcher at the German Institute for International and Security Affairs. Expelling a country against its will is effectively impossible. A voluntary exit could be negotiated, but could take months.

What spooks Merkel and other leaders is that a Greek exit could unleash a chain reaction of departures from the euro by other weaker members. Also, an inside-the-euro default by Greece would be less complicated and costly than a default outside the zone, because the ECB and other European bodies could help reach a deal with creditors.

Quitting the euro looks even scarier for the Greeks. Their economy would shrink by at least 40 percent after an exit, predicts Stephane Deo, chief European economist at UBS (UBS). The banks and stock market would collapse, government and businesses would be frozen out of global credit markets, and corporate balance sheets and individual savings would be reset in a devalued currency. Devaluation wouldn’t help exports much, Deo wrote in a Sept. 6 note: Other countries would likely raise tariffs to protect, say, Spanish olive oil against cheaper Greek oil. Social turmoil would probably increase. “Greece is going to go decades back” if it leaves the euro, says Vassilis Korkidis, president of the National Confederation of Hellenic Commerce, “This is going to be a disaster.”

Greece spent many decades under foreign rule or domestic dictatorship, including a junta that imprisoned Papandreou’s father and exiled his family. The political class sees membership in the European Union and euro as a sign of how far Greece has come, and as a guarantee against slipping back. With Turkey growing powerful, Greece doesn’t want to be cut loose from its economic and political moorings. Moreover, Greece experienced devaluation and inflation in the 1980s that “not only failed to improve competitiveness but also eroded the value of people’s savings,” says Miranda Xafa, a senior investment strategist at Geneva-based IJ Partners and ex-board member for Greece at the International Monetary Fund.

So if no one wants an exit, how could it happen? Willem Buiter, chief economist for Citigroup (C) in London, offers a scenario in a Sept. 13 report: As Greece resists EU, ECB, and IMF demands for more austerity, the exasperated troika cuts off funding. Greek banks can no longer post Greek debt as collateral for loans from various EU agencies. With no funding available from the euro area, writes Buiter, “Greece could blunder into exiting.”

The default feared by investors would then occur. European banks—which according to the Bank for International Settlements hold a total of $128.8 billion in Greek debt, including $42.9 billion in public debt—would take a hit. Investors would push up the cost of government borrowing in Ireland, Portugal, Spain, and Italy, and funding for those countries’ banks would dry up, predicts Nick Kounis, head of macro research at ABN Amro Bank. “You’d wonder,” he says, “if the euro zone would fall apart.”

The Swiss central bank said it’s ready to take “further measures” if needed to stem gains in the franc against the euro as it left its benchmark interest rate at zero to ward off the threat of a recession.

The Swiss National Bank, led by Philipp Hildebrand, kept its three-month Libor target rate at zero after unexpectedly lowering the benchmark from 0.25 percent last month. That’s in line with the forecasts of all 21 economists in a Bloomberg News survey. The Zurich-based central bank also reiterated it will defend its currency ceiling with the “utmost determination” and forecast economic growth to come to a halt in the second half with consumer prices falling in 2012.

The SNB imposed ceiling of 1.20 against the euro on Sept. 6 and pledged to purchase foreign currencies in “unlimited quantities” to protect the economy. The franc’s ascent to a record last month has hurt some of the country’s largest companies including foodmaker Nestle SA and sparked an economic slowdown in the second quarter.

“They are very, very pessimistic,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “Forecasting deflation for next year seems far-fetched to me. It might merely serve as a justification for introducing a cap.”

The Swiss currency, which is considered a haven in times of turmoil, reached a record of 1.0075 against the euro on Aug. 9 on investor concern that European governments may be unable to contain the region’s debt crisis. The franc has remained above 1.20 versus the single currency since the SNB imposed the cap, and was little changed at 1.2079 at 11:05 a.m. in Zurich today.

‘Acute Threat’

“With these measures, the SNB is taking a stand against the acute threat to the Swiss economy and the risk of deflationary development that spring from massive overvaluation of the Swiss franc,” the central bank said. “If the economic outlook and deflation risks so require, the SNB will take further measures,” it said without elaborating.

With the franc’s ascent hurting exports, the economy may expand between 1.5 percent and 2 percent this year, the SNB said. It had previously forecast economic growth of about 2 percent. Inflation may average 0.4 percent in 2011, down from a previous forecast of 0.9 percent, it said. In 2012, consumer prices may drop 0.3 percent before rising 0.5 percent in 2013.

‘Downside Risks’

The SNB, which aims to keep inflation below 2 percent, forecast annual consumer-price growth to reach 1 percent in the second quarter of 2014. In June, it had estimated inflation at 2.6 percent in the first quarter of that year.

“In the foreseeable future, there is no risk of inflation in Switzerland,” the central bank said. “There are, however downside risks for price stability, should the Swiss franc not weaken further.”

With exports accounting for about half of gross domestic product, the Swiss economy may fail to gather strength after expanding 0.4 percent in the second quarter. That’s the weakest since a 2009 recession. The KOF economic indicator dropped to the lowest in almost two years last month and manufacturing growth weakened. Investor confidence also slumped in August.

“The SNB expects growth to come to a halt in the second half of the year,” it said in the statement. “Without the stabilizing effect of the minimum exchange rate, there would be a substantial threat of recession.”

SNB Rates

Nestle, the world’s largest foodmaker, said on Sept. 1 it will seek to offset the franc’s impact through productivity gains. Holcim AG, the world’s second-biggest cement maker, said on Aug. 18 that currency effects shaved 203 million francs ($231 million) off operating profit in the second quarter and Swiss chemicals maker Clariant AG cut its full-year earnings targets on Sept. 5 partly on a stronger currency.

SNB policy makers unexpectedly cut borrowing costs last month and boosted liquidity to money markets to help weaken the franc. Hildebrand said on Sept. 6 that while costs of the currency ceiling may be “very high,” doing nothing “would almost certainly inflict tremendous long-term damage” to the economy.

“The SNB will do whatever it costs to fulfil its commitment,” said Julien Manceaux, an economist at ING Group in Brussels in an e-mailed note. “It becomes very unlikely to see any rate hike in Switzerland any time soon.”

The central bank last introduced a currency cap in 1978 to stem gains versus the Deutsche mark.

Singapore Airlines Ltd., the world’s second-largest carrier by market value, said it may order Airbus SAS’s A350-1000 wide-body jet as the European planemaker plans improvements in range and payload.

The airline is also awaiting details of enhancements to Boeing Co.’s competing 777-300ER before deciding which model to purchase, Chief Executive Officer Goh Choon Phong said yesterday in a briefing at Airbus’s headquarters in Toulouse, France. He declined to discuss how many planes the carrier may buy.

Airbus in June said it would delay the introduction of the A350-1000 so it could make changes including the use of improved Rolls-Royce Holdings Plc Trent XWB engines. Singapore Air has 20 of the smaller -900 variants on order and also signed a deal for eight 777-300ERs in August to tap demand for long-haul travel.

Goh also said the carrier was concerned about a potential economic slowdown and the possibility of tighter credit after Moody’s Investors Service Inc. downgraded Credit Agricole SA and Societe Generale SA, France’s second- and third-largest banks.

“The most strategic concern is how the economy is going to go,” he said. “The recent downgrade of banks in France is a concern: the impact, if any, on the liquidity of banks, and whether there’s a contagious effect on the rest of the economy.”

A380 Handover

Goh was in Toulouse as Singapore Air took delivery of its 13th double-decker A380. The carrier will get another next month and expects to have received all 19 of the planes it has ordered by mid-2014.

The Asia airline is reducing the number of seats on later A380s in the fleet to carry more business-class passengers. The first 11 planes had 471 seats, while the final eight will have 409. That includes an all-business class top floor fitted with 86 seats. The carrier also has options for six more superjumbos.

Airbus is due to begin deliveries of the A350-900, the most popular of the A350’s three versions, around the end of 2013. Singapore Airlines will be the second carrier to receive an A350 after Qatar Airways Ltd., Goh said.

Changes to the A350-1000 variant include work on the landing gear and the outer part of the wing, Airbus said. The improved performance will allow the aircraft to service routes such as Shanghai to Boston. The planemaker has also delayed the smallest version of the A350, the -800, to focus on developing the -900 variant and revamping its single-aisle A320.

Dreamliner Crossover

Boeing’s plans to upgrade the 777 include the adaptation of technology used on the new 787 Dreamliner, Marc Birtel, a spokesman, said by e-mail. He didn’t elaborate and said Boeing doesn’t comment on discussions with customers.

According to a report yesterday on the Flight Global website, conceptual studies at Boeing for the 777 upgrade show a massive new carbon fiber wing, 99,500lb thrust engine and other improvements including a 787-style interior.

Newer 777s could get a carbon-fiber wing measuring as much as 234 feet (71.3 meters), 21 feet more than the current all- metal version and 10 feet wider than Boeing’s latest 747-8, Flight Global said. The plane might also offer 15 percent more economy seating than on the existing aircraft.

Hedging Policy

Goh also said that Singapore Airlines, which closed up 3 percent today and has a value of S$13.4 billion ($11 billion), is particularly concerned about the volatility of fuel prices.

“Fuel prices are 40 percent of our costs,” he said. “It’s huge, and to a large extent it’s outside our control. Hedging is only really delaying the impact.”

Singapore Air currently has hedging contracts to cover about 30 percent of fuel purchases for the remainder of the year through next March, the CEO said, a figure that’s below the proportion generally hedged at the bigger European carriers.

The airline’s board has mandated that management generally hedge between 30 percent and 60 percent of fuel costs, depending on what’s driving prices, he said, adding that increases since late last year have been spurred by geopolitical events in the Middle East and Africa, not necessarily economic fundamentals.

“In times when we feel there’s market risk, we’ll tune it to the lower end of the band,” Goh said. “In more normal times, we tweak it back upward.”