Blasé Britain may throw it all away

Small-company fund managers are a funny breed. With many thousands of potential firms to invest in, they must have both the ability to think laterally and a rocket scientist's attention to detail. They are the market's pot-holers, forever seeking hidden values.

Small-company fund managers are a funny breed. With many thousands of potential firms to invest in, they must have both the ability to think laterally and a rocket scientist's attention to detail. They are the market's pot-holers, forever seeking hidden values.

I shared a platform with one on Tuesday in Milan. I steered the conversation from who manufactured the magnetic conference badges to trader small-talk: "So, where are you buying ?" She fixed me with a glint in her eye. "You'll never guess. The sick man of Europe: Germany."

How dislocating it can be working in the financial markets. It takes years for historic shifts in relative economic fortunes to enter the public consciousness. The "real world" has just discarded the view of Germany as the engine of the European economy at the very moment my laterally thinking small-company manager is seeing improvement.

Of course, Germany's current economic figures are unimpressive. With stalled GDP growth and around four million unemployed, there is plenty of gloom. But beneath the surface there is much to encourage shareholders.

In the last three to five years the German corporate world has experienced a revolution. Some of the more bizarre paternalistic practices have been dropped. Until recently, some companies not only paid for their managers' children's school fees, but even their school clothes. Such practices have been swept away.

The government has also played its part. Changes in the restrictive nature of the German labour market have been combined with improved tax concessions to industry and a reduced level of taxation overall. All in all, Germany is giving far-sighted investors the general impression of having got its act together.

The same cannot be said for Britain. In a mirror image of Germany, our economic statis- tics are superb. We are growing faster than any of the other OECD economies, we have just about the lowest unemployment rate in Europe, and the average UK citizen has an income higher than his German counterpart. Only now is this being widely understood.

But in stock markets you make your money from perceptive analysis of the future, not the present. The relative strength of the UK economy is the result of hard work done in previous years to raise our international competitiveness. This was achieved by removing restrictions in the labour market, lowering tax levels, and improving investors' confidence.

In Labour's first term, it built with success on that Thatcherite financial legacy, and gave it a human face. Will it now throw this all away?

Gordon Brown's opening (and closing) of the debate on health service funding has left economists guessing. But if we choose European levels of expenditure but dismiss their mixed funding systems, we will all be paying much higher taxes. Think of 5p on income tax.

At the same time, the Chancellor's byzantine business tax schemes cause more confusion than they offer relief; and regulations on business in the labour market have undoubtedly increased. As for overseas investor confidence in Britain, the closet nationalisation of Railtrack has set UK plc back years.

Last month, league tables of international competitiveness saw Britain falling several places. It was sniffily dismissed by a Government spokesperson: "League tables come and go."

As we packed up after our speeches, I asked my small-firm guru the flipside question: "So where are you selling ?" "The country where the economy is strongest and the politicians the most complacent. Now where do you think that is?"