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  1. Politics
13 April 2012

The high cost of a strong pound

The Treasury's obsession with inflation is hurting the UK economy, argues a new Civitas report.

By New Statesman

A strong pound has only benefitted bankers and is preventing exporters from pricing their goods and services competitively on global markets, according to a new report from the think tank Civitas. 

In the report, entitled A Price That Matters, the entrepreneur and economist John Mills argues that this has led to Britain’s languid economic growth. He shows that policies that ignore exchange rates and international competitiveness and focus only on inflation have contributed to the decline of manufacturing, stagnant incomes for many, entrenched regional unemployment and rising inequality.

Mills, whose background has mainly been in manufacturing techniques such as injection moulding, fabrication, metal pressing and assembly, says that without intellectual property protection, such industries would be “highly vulnerable to lower cost-base competition – which is exactly what has happened in the UK”.

Rival countries that have undervalued their currencies have experienced growth in their economies. The result has been a loss of jobs and a widening balance of the payment deficit between the UK and the rest of the world.

Mills added that the exchange rate policy pursued for decades by the Treasury and the Bank of England, which views inflation of around 2 per cent per annum as its target, has made it much more expensive to run most manufacturing operations in Britain than in other parts of the world.

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Rather than targeting inflation alone, the government should also target international exchange rates and competitively devalue the pound relative to other world currencies, including the dollar and the euro, writes Mills. 

He estimates that a 10 to 15 per cent devaluation would be sufficient to close Britain’s trade deficit; a 20 to 25 per cent devaluation would return Britain to 4 per cent annual growth. 

Mills concludes with a warning that Britain will inevitably face a massive fall in the value of the pound in the future: “Getting the exchange rate down is a matter on which, in the end, we will have no choice. If we continue to run up huge debts which we cannot pay back, sooner or later we will run out of creditworthiness. There will then be a major currency crisis and the pound will crash. The choice we have is whether we get this done in an orderly manner while we still have time for this to be arranged, or whether we wait so long that we finish up with a disorderly rout.”

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