Think tank Civitas has published research which argues that devaluing the pound by a third would allow UK manufacturers to pay their way in the world and shrink the trade deficit.
Civitas puts the trade deficit at the heart of Britain’s economic difficulties. Its new pamphlet, An Exchange Rate Target: Why we need one entrepreneur and economist John Mills demonstrates how a weaker pound would alleviate this problem by making exports more competitive.
He says the pound should be reduced to about $1.05, or €0.80. It is currently about $1.50 or €1.17 and insists such a move is feasible. “There are realistic alternative policies to those being pursued at present, and we very urgently need to adopt them,” he said following the launch of the new publication.
Mr Mills’ urgency springs off a series of poor GDP figures and the consistent shrinkage of the UK manufacturing sector over the past three quarters.
Mills insists that competitive exports need to grow in order to reverse this decline. The current account deficit is about £65 billion a year and there is a £100 billion deficit in manufactured goods. Mills says this is because the strong pound means it costs much more to make things in the UK than in many parts of the world.
“The only policy which will remedy these problems is to get the UK cost base down to a level which will make it possible for us to re-establish enough manufacturing capacity to enable us to compete in the world,” says Mills.
“To do this, some fairly simple calculations show that we need to get the pound down by about a third from where it is now – to around $1.05 or €0.80.
Mills denies that devaluation at the scale he suggests would create unnecessarily high inflation, reduce living standards or prompt other nations to retaliate with similar economic policies – all common arguments against devaluation.
“The fundamental reason for our economic problems is that we live in a country which has had steadily increasing difficulties in paying its way in the world. This manifests itself as a balance of payments deficit year after year,” sums up Mills.
