Saturday, 13 December 2008

Labour and sterling

What a ridiculous argument by James Bartholomew in the Daily Express today about Labour governments and the pound. He conveniently ignores that the last major devaluation, following the pound's ejection from the ERM, was under a Conservative government. Technically, the 1931 devaluation was under the National Government but who is splitting hairs? Why let the facts get in the way of a neat and partisan-laden account of the history of sterling?

The notion that the pound could have avoided devaluation throughout the twentieth century is preposterous given that Britain lost an empire, there were massive shifts in economic and political power, there were two costly and devastating world wars that Britain paid an enormous cost for, and a collective failure to maintain Britain's position as a manufacturing force.

So devaluations had to happen despite the desperate attempts of successive governments to avoid them. Unsurprisingly, despite trying to avoid a devaluation of sterling in 1947, it inevitably happened given a war ravaged economy and onerous debt repayments (thank you America.) The post-war economic model was unravelling by the end of the 1960s and would continue to do so until the IMF stepped in and monetarism was adopted in 1976.

There were 'devaluations' in the 1980s under Thatcher too but the reality is that they are not noticed when currency is free floating as opposed to when a currency is linked to gold, the dollar, or a basket of currencies as in the ERM. It makes for dramatic television when sterling is ejected from a pegged or managed exchange rate system as David Cameron discovered when he was stood behind Norman Lamont as the then Chancellor announced the pound's removal from the ERM in 1992. But it only happens under Labour Governments remember......

Where there were economic failures, and there were, by and large they were shared by both parties. The recent decline in sterling is completely to be expected given that our economy is exposed to the type of financial crisis that we are facing- a legacy of the economic structure of the last thirty years not just the last ten. Differential interest rates- lower in the UK than the euro-zone- and the movement of the euro towards reserve currency status further fuel the change in the exchange rate.

Interestingly, the movement of sterling did not commence at the time of the Chancellor's statement when the level of borrowing was announced- in fact sterling rose in value for a few days. It was certainly impacted, however, by the change in interest rates on December 4th as would be expected. That is not to argue against that reduction of interest rates; it just explains much of the recent movement of the currency. Public borrowing impacts the exchange rate if it is seen as inflationary. That is not the overriding concern with the UK economy currently.

James Bartholomew's argument that currency falls are because 'Labour Governments spend too much' comes nowhere near explaining the historical movements of sterling. Any cursory and non-tendentious reading of economic history shows that.


  1. For the last two years of Tony Blair being Prime Minister, it cost between 66p and 70p to buy 1 Euro. Gordon Brown's accession to the Premiership Summer 2007 heralded the start of the current decline in the value of Sterling. It currently costs 88p to buy 1 Euro. QED.

  2. I have QEDed that, following a period of relative stability, the decline of Sterling from 68p to 88p started the moment that Gordon got his hands on the levers of power. The Money Markets simply do not trust the British Economy under Labour with Brown in control.

  3. Gordon Brown became Prime Minister in June 2007. Sterling's fall began around September 2007. I think most observers would see the credit cruch and the collapse of Northern Rock as more instrinsically linked to sterling's fate than Gordon Brown becoming Prime Minister. Your argument just doesn't stack up at all I'm afraid.

  4. The credit crunch does certainly provide a very convenient rug under which Gordon can sweep the detritus caused by his profligate spending.

  5. There can be no question that the flight from sterling this time is in large part because of the massive increase in debt being fuelled by Brown's 'solution' to the impending recession. Had we been in significant balance of payments surplus beforehand (like a number of other major economies) this might have been plausible. But with debt being piled on debt, the impact on sterling was inevitable. The fact that the Bank of England has had to reduce base rates to encourage lending is exacerbating a fundamental economic problem in this country of too much debt.

  6. Out of interest, do you not think that the impact on sterling was not something that was understood and factored into the decision to respond in this way?

    The balance of payments is reflective of our economic structure but to say that fiscal stimulus should not be undertaken on that basis is too strong.

    The downside is also limited through coordinated action:

    The approach is deliberate.

  7. Deliberate but fatally flawed, and will be a burden on this country for a generation. Debt got us into this problem; more debt is not the solution. This is sham Keynesianism - Keynes never hypothesised this prognosis for a country already in severe debt. We will all suffer for Brown's foolish delusions. He is more interested in his own selfish future, than that of the rest of us combined. He will go down in history as an unparalleled economic incompetent.

  8. The collapse of the global financial system got us into this situation. I don't think you'll find many economists who would argue that it was borrowing (not public borrowing anyway.) There are legitimate criticisms but not the one that is being made.

    If we accept the premise that borrowing was too high- not a premise that particularly stands up when you consider than our national debt as a proportion of GDP has been historically and relatively low for the last decade- then all we can say is that it means that it has limited our ability to respond. How long we are in debt rather depends on when and how strongly the economy recovers.

  9. Toby Helm writing in The Observer today: "Sterling's decline to a value of less than a Euro, after commission charges, is seen by economists and opposition politicians as a pivotal 'psychological moment' - and evidence of declining faith in the British economy on global currency markets".

    The Bill Clinton maxim of "It's the Economy, Stupid!", would suggest that If Gordon wants to stand any chance of being re-elected he had better hold a General Election before voters twig that the cost of next year's holidays has just gone up 25%....