Devalue or Else - a new OurKingdom debate on the British currency

Image from Roj, Flickr

Few areas of economic policy receive less discussion in Britain than the exchange rate. It is simply part of our natural economic landscape and largely unworthy of mention. But beneath this familiar picture of unalterable economic realities is a more complex and politically charged question: who are the winners and losers of the strong pound, and does the UK, overall, benefit? Today, OurKingdom launches a year long debate, Devalue or Else, to examine these issues.

For the City, those in the business of overseas acquisition, importers, holiday makers, the benefits are very different to those experienced by UK manufacturers and blue collar workers. Indeed, given current economic difficulties it may be argued that the most serious loser from the pound’s strength is the British economy itself, whose balance of trade has sharply deteriorated over the last 10 years. By failing to “pay our way” in the world - running a large trade deficit - the shortfall must be financed through debt (private and public borrowing), the sale of assets or the depletion of reserves. Britain last ran a trade surplus in 1983.

Many prominent voices have long maintained this is no cause for concern. If the UK is running current account deficits then, so the wisdom goes, it is necessarily running consistent surpluses on its capital account: money coming in via asset sales and loans (consider, for instance, the scale of British firms sold to overseas buyers). By the same logic, an individual spending more than they earn is no problem; their overspending must be matched by inflows of loans and the sale of their belongings. In the short term this may be unremarkable, but over three decades its efficacy as a long term economic model seems highly questionable. As Elliott & Atkinson note in Going South: 

“In other words, overseas savers and businesses are lending us the money with which to fund a lifestyle we are not earning. It would be interesting to try that line of argument with a bank manager: your overdraft does not matter, indeed it does not really exist, because a matching amount of money has flowed into your account in the form of other people's savings mediated through the bank.”

Struggling to compete in a global market place, the high cost base of British manufacturing has seen the “workshop of the world” transform into a service exporter but a far larger importer of goods. On balance, the UK operates a long standing trade deficit, including a £100bn a year deficit on goods.

De-industrialisation has had significant consequences, transforming the exchange rate from a matter of dry concern to economists only into a politically charged arena of social and economic tensions. Seen in this light, the strong pound has helped entrench significant inequalities not only between the middle and working class but between north and south. British manufacturing was substantially located towards the north and its decline has removed critical centres of economic and political counterweights to the dominance of London and the south east. In social cost, vast swathes of the country have never recovered from this process and the effects of long term unemployment – particularly when geographically concentrated – are highly damaging. Underneath the economic theory of relatively pain free and quick ‘reskilling’, the reality has been very different as many of those whose sectors have become redundant have not managed to rebuild careers in more competitive industries. This begs the broader question of the nation state in a globalised world: what happens to the citizens left behind?

In his recent pamphlet, A Price That Matters, published by Civitas, John Mills makes the case for a substantial devaluation of sterling. Import prices would rise, export prices would fall, employment would rise and the economy should begin to move back towards equilibrium on its balance of trade and possibly achieve a surplus.

“Actually, it would be surprisingly easy to avoid all the austerity which now appears to be in prospect for the foreseeable future. This is because there is a compellingly simple and powerful explanation for the complex of problems that Britain—and most of the West—now faces… Our fundamental problem is that the exchange rate policy which we have pursued for decades has made it much more expensive to run most manufacturing operations here than in other parts of the world... As most foreign trade is in manufactured goods, we cannot pay our way in the world.” (Mills, A Price That Matters) 

George Osborne addressed similar concerns in his 2011 call for a British manufacturing revival, a “march of the makers”:

“We want the words ‘Made in Britain,’ ‘Created in Britain,’ Designed in Britain,’ ‘Invented in Britain’ to drive our nation forward… That is how we will create jobs and support families.” (Telegraph, 2011) 

Devaluation, however, does not feature prominently in Osborne’s plans for achieving this. Indeed, what the Coalition plan does entail is not entirely clear; the only certainty is that it’s failing. For Mills, however, significant further devaluation could make far greater strides towards reviving British manufacturing than is offered by either Osborne’s supply side attacks on labour rights or his troubled fiscal policy. With soaring exports ushered in by a weaker pound, Britain’s trade balance would diminish and even reverse, regional inequalities would shrink and the nation would once more be a manufacturing centre of the world. Or would it?

Devaluation is a contentious area. Would other economies engage in retaliatory devaluations, negating the effects of our own? Would the UK suffer from high levels of imported inflation and a plunge in living standards? Would devaluation alone be sufficient or would a much broader programme of active industrial policy be required? The pound has taken a substantial devaluation since the financial crisis began in 2008, around 25%, and yet we have seen little sign of the promised turnaround in the trade deficit. Could surging exports and reduced labour purchasing power even exacerbate domestic inequalities?

Over the next twelve months OurKingdom will be exploring these issues in a new series, Devalue or Else. The series is supported by John Mills, the author of the 2012 Civitas pamphlet, A Price That Matters, and a new book, Exchange Rate Alignments, released November 21st by Palgrave Macmillan. Opening the debate today we have reproduced A Price That Matters, with thanks to Civitas. In response, we have a reply by Robert Skidelsky, peer and co-author of the recently released How Much Is Enough? Next week the debate continues with John Mills addressing the arguments Skidelsky raises.

Britain faces an uncertain economic future armed with a lopsided economy and a substantial trade deficit. Is devaluation a plausible route out of the abyss, ‘the march of the makers’? In Devalue or Else, we hope to find out.