x Abu Dhabi, UAEWednesday 24 January 2018

History weighs in for the UK pound as euro beckons

Forty-three years ago Harold Wilson's Labour Government devalued the currency and then tried to deny it.

The pound's value continues to fall.
The pound's value continues to fall.

Forty-three years ago Harold Wilson's Labour Government devalued the currency and then tried to deny it. "It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued," he said. However, he insisted that devaluation would help the country break out of the "straitjacket" of boom-and-bust economics. The only alternative would have been to borrow from governments abroad, but "the only loans on offer were short term". It was all the fault, he said, of the Conservatives, from whom he had inherited a deficit of £800 million. The government had spent £200m trying to defend sterling, but now it would be worth 14 per cent less against other currencies. A quid would now buy you US$2.40, instead of $2.80.

It is hard to know where to start with this, but we should note that first, Mr Wilson was being "economical with the actualite", to borrow Alan Clark's colourful phrase. In other words Mr Wilson was lying. The pound in your purse might have looked the same, but the minute you took it out and started to buy anything, you would discover that it was less useful. The legendary City journalist Christopher Fildes used a Martini index to measure the purchasing power of the pound in the 1990s. Whenever it hit $2, he was off to New York to his favourite haunts.

Second, it is notable that a currency came under attack because its debt was thought to be out of control. What government in the world today wouldn't want to have a deficit of £800m? Britain's deficit is now a whopping 12.6 per cent of GDP according to the Organisation of Economic Co-operation and Development, the third worst in the developed world behind Greece and Iceland. Even after devaluation in 1967, the pound was still worth $2.40. Now the pound is down to $1.50 and sliding.

This week it came under renewed attack from speculators because of a poll that suggested the next election - widely touted to take place on May 6 - will result in a hung parliament. I find this rather staggering. Who in their right mind would vote for a man who has overseen the worst financial debacle Britain has seen since the invasion of Julius Caesar sent the price of wild boar soaring? Let's recall that Gordon Brown was the chancellor of the exchequer for nearly 10 years in Tony Blair's government. His catchword was "prudence". City boys, forced to listen to his monotonous budget speeches would place bets on how many times he would mention "prudence". It was one thing to talk of it, but another to exercise it. Of course, Mr Brown would like you to think that sterling's demise is the fault of the global economy and not his ham-fistedness. Willem Buiter, the chief economist of Citigroup, agrees with me. Writing in Tuesday's Financial Times, he put the boot in as savagely as a football thug: "There are good reasons for the weakness and volatility of sterling. Among industrial countries, Britain's economic fundamentals are uniquely awful - The fiscal weakness of the UK is largely government-inflicted, rather than a result of the financial crisis and global contraction. During the long boom preceding the crisis, fiscal policy was relentlessly pro-cyclical, with public spending rising steadily as a share of gross domestic product".

A member of Her Majesty's government tried to convince me a few weeks ago that the spending had resulted in greater services and better education, transport and health. Who believes that? The government also played the same tricks as the Greeks, using off-balance-sheet funding for items such as hospitals and bridges. Soon Britain will be borrowing from Goldman Sachs and then we'll know the game is really up.

Throughout his time in office, Mr Brown, together with Mr Blair, played a curious game of flirting with the prospects of joining the euro. There was considerable pressure brought to bear by the continentals prior to its launch on January 1 1999. Britain was naturally cautious. The previous Conservative government had suffered the ignominy of seeing sterling ejected from the euro's previous incarnation, the Exchange Rate Mechanism, which sought to align Europe's currencies. Soon afterwards, the then chancellor Norman Lamont was said to be "singing in his bath". Apparently chancellors get terribly happy about things like that. With a more competitive currency, Britain's fortunes revived. Labour won the election and the pound, rather than plummeting, began to rise.

To keep the Europeans at bay, Mr Brown cooked up a fine fudge worthy of a Brussels eurocrat. We will join the euro "when the time is right", he said. He came up with five criteria that needed to be met, including "economic harmonisation" and "sufficient flexibility". Of course, none of these can be met. Eleven years ago, when the euro was launched, it was a triumph of political will over economic common sense. Would the political benefits outweigh any economic disaster? As we watch the Greeks rioting, the Portuguese striking and listen to the Irish complaining, we can only conclude how quickly economic problems turn to political disaster.

As the pound continues to plummet, how tempting must it be for a British prime minister to consider joining the single currency as the euro and sterling reach parity? Lord Mandelson, for many years the Machiavelli of British politics, smiled sweetly last week while telling reporters: "Don't ask me when. It's not going to be soon, but we will do it [join the euro]." In one bound, Labour could undo Britain's sole advantage. If they were to make that an election pledge on May 6, that might solve the problem of a hung parliament and sterling's fortunes could recover.