A Weaker Pound For a Stronger Economy
- The key to recovery is to devalue sterling
- Long-standing trade deficit is the root of Britain’s problems
- The pound must fall by a third if UK exporters are to compete
The pound should be devalued by about a third to unleash British manufacturing and allow the UK to once again pay its way in the world, a pamphlet published by the independent think tank Civitas argues.
The strength of sterling is a key factor behind Britain’s huge trade deficit which is in turn the root cause of most of the difficulties currently besetting the economy.
In An Exchange Rate Target: Why we need one, entrepreneur and economist John Mills demonstrates how a weaker pound would alleviate Britain’s problems by making exports much more competitive.
He says the pound should be reduced to about $1.05, or €0.80. It is currently about $1.50 or €1.17.
The urgency of his proposal is demonstrated by the latest GDP figures, which showed that Britain’s meagre growth in the last quarter was down to the services sector. Manufacturing, by contrast, has continued to decline, shrinking in three of the past four quarters.
Maintaining a strong pound over many years has sucked demand out of the economy because we buy more goods from abroad than vice versa. This causes high long-term unemployment and welfare dependency while driving up public and private debt as we have to borrow to finance our over-consumption.
But Mr Mills insists: “There are realistic alternative policies to those being pursued at present, and we very urgently need to adopt them.”
The current account deficit is about £65 billion a year. The last trade surplus was in 1982. The only way to reverse that trade deficit, Mr Mills says, is to sell more goods to the rest of the world.
There is a £100 billion deficit in manufactured goods because the strong pound means it costs much more to make almost anything here than in many parts of the world.
“The only policy which will remedy these problems is to get the UK cost base down to a level which will make it possible for us to re-establish enough manufacturing capacity to enable us to compete in the world,” he says.
“To do this, some fairly simple calculations show that we need to get the pound down by about a third from where it is now – to around $1.05 or €0.80.
“The UK balance of payments would be in much better shape following a devaluation although it would take two or three years for the full benefit to come through, because export volumes take longer to respond to price changes than imports.”
Mr Mills acknowledges the move would be a wrenching change for policymakers but tackles common misconceptions about the idea head on, insisting:
- It would not create more inflation than would occur anyway
- It would not reduce living standards
- It is very unlikely other countries would retaliate
He says getting the exchange rate right is a more important goal than inflation-targeting. “There are no solutions to our current problems other than increasing our competitiveness and paying our way in the world,” he writes.
Allowing the economy to operate at full capacity would help get the UK back into growth, tackle unemployment by creating jobs, reduce the welfare bill and help reduce inequalities in wealth, Mr Mills says.
“The fundamental reason for our economic problems is that we live in a country which has had steadily increasing difficulties in paying its way in the world. This manifests itself as a balance of payments deficit year after year,” he says.
In the foreword, Civitas director David Green backs the view that the pound should be allowed to fall in value.
“The value of the pound should fall. Demand for the pound has been kept artificially high because we have been selling off our businesses and high-end residential properties to overseas owners and selling government bonds to non-UK residents,” he says.
“This extra demand for our currency has tipped the balance against our manufacturers, despite the massive and sustained improvements in productivity they have achieved in recent years.
“Our long-standing trade deficit means that we are fully entitled to adopt policies that push down the value of the pound until we have a trade balance.”
“The pound has benefited from a weaker exchange rate since 2008, but it has not led to a large increase in exports because manufacturers have been reluctant to invest in new capacity for fear that the pound will strengthen before they recover their costs.
“To give exporters the confidence to build new capacity, the Government should declare that it intends to try to keep the pound within a specified range. Even if market pressures make the target difficult to achieve, the very fact that the Government is attempting to maintain stability will reassure investors.”
John Mills is chairman of John Mills Ltd, an import-export and distribution company, vice-chairman of the Economic Research Council and secretary of the Labour Economic Policy Group.
A PDF of An Exchange Rate Target: Why we need one can be accessed below. Hard copies are available on request.