Michael Heseltine: Mr Brown did not tell us the whole truth

So, Gordon Brown has finally had to admit it – he was hopelessly optimistic about Britain's ability to avoid the consequences of the global downturn. So far, at least, he may have avoided the dreaded "boom and bust", but like all the previous discoverers of the economists' philosopher's stone, he was yesterday forced to admit that the magic has stopped working.

Britain's experience of the global downturn has been similar, as Nicholas Kaldor might have said, to dragging a brick across a table with a piece of elastic. Nothing happened for ages, and now we have been hit in the face.

For months now, commentators, particularly those who have invested their credibility in the anti-euro cause, have been crowing at the difficulties being faced by Continental economies. The official anti-euro "no" campaign even went so far as to compare the current German government with the politically bankrupt regimes of the Weimar era – a ludicrous, if not offensive, proposition. But what looked like a clever piece of campaign spin, playing as it does on the near-primeval Teutonophobia in these islands, now seems little more than hubris.

Germany has some fundamental structural problems, not least those associated with the long-term reconstruction of the East, but it may not be too long before the fundamental strengths of the German economy are reasserted.

Our pain might only just be starting, and the Chancellor's announcement of additional borrowing means that we'll be paying for it for some time to come.

Mr Brown has blamed a slump in world trade for his present difficulties. But that is not the whole truth. For it seems that Germany, France and much of the rest of the eurozone can avoid the full impact of slowing trade.

Last year, Britain's trade with the rest of the world fell by 0.1 per cent, while that of France and Germany grew by 2.1 per cent and 4.6 per cent respectively. And since the launch of the euro, German trade with the rest of the EU as a share of national income has risen by 18 per cent, while Britain's has stagnated. Breaking down the currency barriers and reducing transaction costs obviously works.

In Britain we have also used inward investment to drive up productivity. As Secretary of State for Trade and Industry, I made it my business to secure that investment. The policy worked. Our car industry was saved by foreign investment. We regularly topped Europe's inward-investment league tables, because of our access to European markets as well as our flexible labour market, and that was reflected in the fundamental improvement in our economic position.

It was our accession to the EEC 30 years ago and the growth of trade through the single market – completed two decades later – that brought an inward-investment boom and a decisive end to our decline from workshop of the world in the 19th century to sick man of Europe in the 1970s. But our lack of follow-through to the euro has now caused that boom to end. Inward investors are not sentimental. They invest in places where trade is growing and where markets are accessible. And right now that place is not Britain.

The anti-Europeans often say the euro is irrelevant because much of the investment in Britain is from the US. But why do they think Americans invest here? Because of a UK market of 60 million, or a European market of 300 million? It's what the Americans call a no-brainer.

To be sure, everywhere has been suffering from the aftershocks of 11 September. But despite all the pain, France and Germany have actually increased their share of Europe's inward investment, while Britain is facing what can only be termed a slump of cataclysmic proportions.

We have seen our share of Europe's inward investment fall from the 29 per cent averaged over the 20 years before 1999's birth of the euro to an average of 16 per cent since. And that is only the start. The UN predicts a fall to 5 per cent this year. How loud do the bosses of major international companies have to shout to get a hearing here? This week, Ford's Nick Scheele warned that "producing in a sterling-based economy and exporting to a nation that deals in euros is the equivalent of paying a tax of 25 per cent."

So far Number 10 has encouraged us all to have trust in the "superb" Chancellor and his "sensible management of the economy". Granted, he has been effective, but he has also been lucky. And, as yesterday showed, the luck is running out.

Maybe now, though, it is time he was also brave and told us we have to join the euro. The polls may be against this – for now – but the economic reality is increasingly clear. It's time to get a move on, Gordon.

The writer was Deputy Prime Minister from 1995 to 1997