Tribune, 18 September 1992
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.