Paul Anderson examines
Labour's differences on exchange rate policy
“The impossibly high exchange rate is pushing up interest
rates and turning Britain into a rust-bucket economy," declared John
Edmonds, general secretary of the GMB general union, at the TUC congress in
Blackpool last week. "Most people in industry know that the pound is
overvalued against the Deutschmark. Realignment is now inevitable."
At the time, Edmonds was careful not to call explicitly for
a unilateral devaluation of sterling, although it was clear that he thought
that such a devaluation would be better than inaction. By Sunday, however,
after the devaluation of the Italian lira, he came out explicitly in favour of
similar treatment of the pound, describing the British failure to devalue at
the same time as the Italians as a "missed opportunity".
What is most remarkable about this intervention is that
Edmonds is not the usual sort of Labour devaluationist. He is a long-standing
enthusiast for European economic and monetary union (the GMB tabled the
pro-Maastricht motion at the TUC) and a firm believer in British membership of
the exchange rate mechanism of the European Monetary System. In recent years,
Labour proponents of devaluation have typically been Euro-sceptics, opponents
of ERM membership (or at very least unenthusiastic about it) and believers in a
national-Keynseaian approach to economic management.
Probably the most consistent and coherent spokesmen for
this point of view have been Peter Shore, the veteran anti-EC Right-winger, and
Bryan Gould, now Labour's spokesman on national heritage. Both of them start
from a belief that sterling has been consistently over-valued for years. Gould
made devaluation one of the cornerstones of his unsuccessful campaign for the
Labour leadership and deputy lead-leadership earlier this year. “If we continue
to defend an overvalued currency we will continue to crucify manufacturing industry,"
he told Tribune in May.
Gould has moved away from advocating unilateral devaluation
of sterling: he now favours devaluation as part of a general realignment of
currencies within the ERM. But his position is still tied up with opposition
to the process of European monetary union laid out in the Maastricht treaty. His
assault last weekend on "governments which persist in defending an
overvalued pound" followed a swingeing attack on the deflationary
implications of Maastricht. The same hostility to Maastricht characterises the
other prominent Labour politicians who have spoken out in favour of devaluation
in the past week: John Prescott, David Blunkett and Peter Hain.
It is, of course, unsurprising that the question of
devaluation has been linked with that of Maastricht. The ERM semi-fixed
exchange rate system is envisaged by Maastricht as a stage in the process that
ends in a single European currency and a European central bank. Even if the
thesis that sterling has historically been overvalued is wrong (and it is
notoriously difficult to prove either way), there is no doubt that the pound's
value in the ERM has been sustained in recent months only by government
intervention in the money markets and by high interest rates, which are holding
back the recovery of the British economy.
But what Edmonds's intervention indicates is that there is
a growing belief even among Labour supporters of the ERM and the Maastricht
treaty that the government's policy of maintaining sterling's value is having
a disastrous effect on the British economy and that it is not enough for Labour
to respond by changing the subject or by arguing that the Deutschmark should
be revalued upwards against the other ERM currencies.
On the Edmonds view, the problem is not with the ERM,
semi-fixed exchange rates or economic and monetary union in principle but with the
attempt to maintain ERM parities despite Germany's decision to put up interest
rates to dampen inflation in the wake of German unification. As a result, all
the other ERM member countries, and all those with currencies “shadowing” the
Deutschmark or the European Currency Unit, were forced to put up their own
interest rates in order to maintain their currencies' value against the
Deutschmark. The Bundesbank eased the pressure on interest rates everywhere
except Britain with its minuscule cut in interest rates on Monday, but the
Deutschmark remains undervalued against most of the other European currencies.
Although the simplest solution would be simply for the
Germans to revalue the Deutschmark upwards against the other ERM currencies,
the argument goes, the unwillingness of the Germans and French to sanction any
such course means that Britain should devalue sterling just as the Italians
devalued the lira on Sunday.
This position would have been anathema to the Labour
leadership before the election, partly for tactical reasons - devaluation
means price increases on all imported goods, which would be difficult if not
impossible to sell to voters, and the very prospect of a pro-devaluation party
coming to power would create turmoil on the currency markets – but partly
because of scepticism among Labour's advisers about the usefulness of
devaluation as a tool of policy.
Devaluation, the sceptics argued, is not a means of cutting
interest rates. It works (insofar as it does) by cutting real wages and could
easily set off an uncontrollable spiral of wage and price inflation. Worse, in
Britain it would not work very well. Domestic British manufacturing was in
such a dire state that British companies would not be able to meet the potential
demand at home or abroad for competitively priced British-made goods. The
priority for Britain was not devaluation but an effective strategy for overcoming
the structural weaknesses of its economy: crumbling infrastructure, poor education
and training and so on.
It is in this light that the reluctance of the Labour
leadership in the past week to endorse devaluation must be seen. As Shadow
Chancellor and trade and industry spokesman before the election, John Smith and
Gordon Brown were wedded to an approach to economic policy that eschewed
devaluation; today, as Labour leader and Shadow Chancellor, they remain
extremely cautious.
Smith responded to last week's calls for devaluation by
saying that he was "not in favour of a devaluation of sterling because
that would not assist in reducing interest rates", although he added that
the EC should "not rule out a revaluation of the Deutschmark".
His remarks were echoed by Brown, who announced that
"Labour is not the party of devaluation", emphasising the centrality
to Labour's approach of "an emergency employment programme",
concentrated particularly on housing and public works, and "concerted
Europe-wide action" to bring down interest rates and end the recession.
Brown reacted to the devaluation of the lira and subsequent Bundesbank decision
to cut interest rates by calling for the British Government to emulate not the
Italians but the Germans.
Instead, after massive intervention by the Bank of England
failed to stem speculation against sterling, the government put up interest
rates by a total of 5 per cent on Wednesday. But sterling remains under
pressure and many now believe that devaluation is inevitable, particularly if
the French vote no to Maastricht on Sunday. It would not take the most apocalyptic
scenario now doing the rounds, complete collapse of the ERM following a
French no, for Labour's arguments over the past fortnight to be entirely
irrelevant within a few days.
