THE MYSTERY of MG Rover is not that it has collapsed, but that it lasted so long. By the mid-1960s it was apparent that British productivity was not remotely competitive with car manufacturing in Japan, the United States or the rest of Western Europe. In 1968 Harold Wilson’s first government organised the creation of British Leyland; that did not save the car production side, but it did undermine the Leyland lorry business.

Nationalisation, which was an absurd non-solution, came under the second Wilson administration in 1975. In 1988 the business was sold to British Aerospace. It had previously been offered to Arnold Weinstock at GEC. He had a flair for saving his shareholders’ money by avoiding lunatic decisions, a flair which escaped his successors at GEC. He turned the suggestion down.

British Aerospace was the unlucky purchaser; it was glad to sell Rover to BMW in 1994. That was a bad decision for BMW, which paid £427 million in 2000 to get rid of Rover to the company mistakenly named Phoenix. Phoenix tried to sell it to the Chinese, who have indeed picked up some moderately interesting pieces. Eventually the prudent Chinese turned the offer down. The story is one of 40 years of decline, from a company which had once been the third largest car manufacturer in the world, to the ashes of a phoenix.

In some ways it is a characteristic British story of substituting financial engineering for real engineering. In the 1960s and 1970s, the decades when there were still some real opportunity, the trade unions and the militant workforce at Longbridge played a self-defeating role. The management was weak. Yet the final closure is a personal tragedy for some 25,000 workers at Rover and its suppliers, and for their families. There are no heroes, but there are victims.

This has been much the most significant event of the election campaign, though it may not have much influence on voters outside the West Midlands. It is significant because Rover was the most vulnerable ewe in the flock. Competitive conditions in the world automobile industry were always likely to kill off the weakest first. That is the law of natural selection.

According to The Economist the world’s production capacity of cars and light vehilces is 80 million units a year, but sales are only about 60 million. That means that up to a quarter of the global automobile industry is theoretically redundant.

Surplus capacity on this scale puts pressure on employment and prices. In the past fortnight the two largest US producers, General Motors and Ford, have issued profit warnings. General Motors is now a profitable finance company, with enormous health and pension liabilities, and an unprofitable automobile business attached.

Both General Motors and Ford have already had to scale down manufacturing in Britain; they may have to go further. Jaguar, which belongs to Ford, is suffering in the American market from the weakness of the dollar. The European business of General Motors centres on Opel in Germany, where there may be further downscaling. Fiat, the largest Italian producer, held an option to sell itself to General Motors; it has cost General Motors $1 billion to buy its way out of that obligation. Obviously Fiat is in trouble.

The Germans were the most successful European automobile manufacturers of the postwar period. German automobile companies are now increasingly outsourcing production to Eastern Europe or Asia, with a loss of German jobs. DaimlerChrysler, now a German-American company, is facing new problems in the Mercedes business, even including loss of the reliability that used to be a main selling advantage. Asia is the strong global competitor. At present, the lead company is Toyota of Japan, with excellent management and technology, and access to low-cost Asian production. The Chinese are still suppliers and assemblers. The current Chinese demonstrations against Japan must be worrying news for Japanese companies which have huge Chinese investments. Nevertheless, China produces components at prices about a third of the European level.

Asia has cost and market advantages which make surplus capacity more of a problem for North America and Europe. If the surplus capacity in the world as a whole is about a quarter, the surplus in North America and Europe must be much higher than that; it is certainly more than Western producers can afford to carry. In the next few months Europe, including Britain, may see a wave of closures in automobile production.

In its eight years in office, the Labour government has been remarkably successful in managing employment, largely to the benefit of the white-collar class. There have been plenty of new white-collar jobs, particularly in the public sector. In terms of employment, that is what new Labour has really meant. Yet a million jobs in manufacturing have been lost since 1997. The industrial regions of northern England, western Scotland and South Wales have been losing jobs, not creating them.

Britain is becoming a post-industrial society. In the next four years European disindustrialisation is likely to accelerate, particularly in higher-cost Western Europe. There are no answers in terms of protectionism, for Europe will be losing its global markets. At the same time, the price of oil and other commodities may continue to rise because of Asian and particularly Chinese demand. Europe faces higher prices for imports, lower demand for industrial exports, and rising industrial unemployment. Not good for the euro.

The economic situation at the next General Election will not be like this one. Labour has had a lucky succession of elections which played to its strengths. But the next Parliament will see a doubling of the pressures of Asian trade expansion on a less than competitive Europe. To these pressures Labour has no answer. Rover may prove the first splash of a great storm; Labour has no umbrella.

Join the Debate
Send your e-mails to debate@thetimes.co.uk

Times Recommends

• It’s the beginning of the affair
• Afghanistan: still a price worth paying
• Heroes of the downtrodden