In the UK we have real difficulty in facing up to having, arguably, the most overvalued currency in the world. We need to get our exchange rate down or we'll never secure sustainable long-term growth. But how does a government make this happen?
First, there would have to be a major reversal in policy objectives. The authorities would need to make it clear that a much lower pound was not only what they wanted to see, but what they were determined to achieve. The Bank of England would have to sell sterling and buy foreign currencies. More quantitative easing would be needed, supplemented by lending directly by the Bank of England to organisations capable of paying the money back from income flows, such as local authorities and housing associations. This would enable them to finance house building. The government would need deliberately to increase its spending in relation to its revenues to widen the foreign payments deficit temporarily to assist in making the currency fall.
In addition, the nationalised banks would need to be instructed to lend more money to businesses, accepting the risk that there might be more bad loans. Inward investment - allowing the shares in UK companies to be sold to foreign buyers - should be discouraged instead of being welcomed, because, apart from any other considerations, the huge capital inflows involved drive up the exchange rate. If the credit rating agencies threaten downgrades, they should be ignored. If interest rate rises are threatened, they should be counteracted by the Bank of England printing more money, instead of it having to be borrowed from the markets.
All of this is technically feasible but there are three major obstacles in the way. First, the attitude of the countries against whom we were devaluing. Secondly, concerns about whether it would in practice be possible to get the pound down, and finally, entrenched views on economic policy within the UK and most other western countries about the relevance of the exchange rate in relation to other much more conventional economic policy objectives.
Countries, such as China in the East, and others elsewhere, may object to losing some of their competitiveness to us but, on mature reflection, they may realise that they have little to lose and much to gain from countries such as the UK being in better financial and economic shape. It is not in anyone's interest for there to be a massive debt crisis in the West, undermining the prosperity of the world economy generally and the prospects for everyone's exports in particular. Nor has it been in the long-term interest of countries such as China to run large balance of payments surpluses, especially if the foreign exchange thus generated is lent to countries which are never likely to be able to pay it back.
It might be argued on more general grounds that it would be unfair for Britain to bring the value of the pound down because other countries, especially those in the West, would be adversely affected. There is, however, no reason why they should be. If our export prices were lower and our output more competitive, all the countries to which we export would benefit from better value for money on the goods they buy from us. When we could be severely criticised would be if we were to run a balance of payments surplus, which would have to be matched by extra deficits elsewhere, but it would make no sense for us to allow this to happen. In fact the real international culprits are countries such as China, Germany, Switzerland, Taiwan and Japan which have consistently run balance of payments surpluses year after year, thus forcing deficit countries into penury. We should not do this and there is no reason why we should contemplate doing so.
Provided we do not go down this road, there is no reason why it would be unreasonable for us to have enough manufacturing and export generating capacity to pay our way in the world. We urgently need to get to this position and if no international consensus is forthcoming there would still be nothing to stop the UK taking the unilateral actions necessary to get the exchange rate down. It would clearly be better to achieve some measure of acceptance of the reasons why we needed to do what had to be done, but in the last analysis, this would not be essential.
Would it, however, actually be possible to get the value of the pound down by perhaps 30 per cent from where it is now, even assuming that all the policies for doing so outlined above were put into effect? There is certainly plenty evidence from our recent economic history that allowing the pound to become too strong is feasible. Few people now deny that this was the position particularly in the early 1980s as monetarism drove up the exchange rate to completely unsustainable levels, or during the ERM period running up to 1992, or during the 2000s as the parity of the pound rose to $2.00. The issue is whether, if the policies which caused these over-valuations were reversed, they would get the pound down as successfully as doing everything possible to keep the pound up kept it too strong during the periods of acute over-valuation.
Clearly, controlling the exchange rate is more difficult with a floating currency than when exchange rates are fixed, especially against the background of the huge sums being traded across the exchanges every day. Historical evidence, however, indicates that devaluations can be achieved if the governments concerned are determined enough to make sure they happen. The impact of the Plaza Accord in 1985 achieved a huge weakening of the US dollar, with its value falling against all other currencies by almost 45 per cent between 1984 and 1987. Our own recent experience as the value of sterling fell from $2.00 in 2007 to about $1.60 in 2009 is surely also instructive. Japan has got the external value of the yen down by over 30% during the last year or so by doing very much what we now need to do in the UK.
I make no apologies for advocating both a change in UK economic policy and an active management of our exchange rate as well as our fiscal and monetary policies. History shows us that to continue on our present course will end not in a long-term boom but in a catastrophic bust. If our leaders could find the strength and resolve to put short-termism aside and develop policies for the long term, we could all look forward to a stable and prosperous future.