Smaller British manufacturers are feeling the pinch of the pound sterling's strength against the euro, according to a survey released this week by the Confederation of British Industry (CBI) and Pannell Kerr Forster. "There is a lot of talk that manufacturers are learning to live with the current strength of sterling, but the exchange rate against the euro is still a major problem for many companies," says Colin Perry, who chairs the CBI's council on small and medium-sized enterprises (SMEs). "Exports to Europe are only possible if profit margins are cut to the bone." The survey results come amid a continuing and divisive debate over whether the United Kingdom should join the so-called euro zone. The quarterly survey of 841 UK manufacturers found a rising level of confidence as well as stronger orders and output, but it also found that employment and prices are still falling. Employment in manufacturing has been declining for the last two years. All the same, 26% of manufacturers said they were more confident about the future than they were four months ago. The new survey's results were the most positive in three years. "I hope this is not just millennium euphoria that has led SME manufacturers to be positively optimistic about the future," says John Alexander, a partner at Pannell Kerr Forster. "All other trends are downward, or at best flat. Concerns about export prospects continue to dominate the sector. But at least the negative trends are becoming less negative, which is a statistician's way of saying that things are bottoming out."