THE ECONOMY
A particularly uncomfortable moment for ripeness
JOCK BRUCE-GARDYNE
0 ne of the shocks that await the returning traveller is to find that the world has gone on much the same as ever in his absence. He assumes that, deprived of his benign supervision, it will be half way to hell in a handcart. It is rather provoking to Come back and find that, instead, the dollar is still practising levitation in spite of central bank instructions to the contrary; that assorted bus and train crews are still practising beastliness on the London com- muting public, that the stock market is still behaving as if we had already landed after Our great credit trip, that our Prime Minis- ter is still displaying her endearing unpre- dictability, by deciding that the London cabbies' beloved 'Spanish custom' of 'the knowledge' — by which new entrants to their trade are told to keep their distance — is indeed so beloved that the cabbies deserve an 11 per cent fare 'increase to reward them for maintaining it; and that she and M. Delors of the European Com- mission are still exchanging barrack-room abuse. Oh, yes, and that the indispensable Ted Heath is still terrorising her critics on the Tory benches into silence with the virulence of his own endearments sho- wered upon her. Most frustrating. Yet wait a bit. Some- thing has changed in my absence, has it not? Something rather remarkable. The Bank of England has taken sides in the argument between the Chancellor and the Prime Minister over the 'ripeness' of our long flirtation with the deutschmark cur- rency club. And it has taken the Prime Minister's side. Governors have been shot for less. I hope Robin Leigh-Pemberton has followed my example, and gone off abroad on holiday. Let me hasten to acknowledge that the Bank, as such, has done no such thing. You will search last week's quarterly Bank bulletin for a definition of the Old Lady's considered opinion on the EMS in vain. What seems to have happened is that, at the traditional press conference to mark the publication of the bulletin, one of the teenage scribblers suggested to the piesid- Mg executive director, that the bulletin implied that with our inflation rate so far out of line with those of our continental neighbours, and our trade deficit matched, proportionately, only by that of the Amer- !ca. ris, joining the EMS would be more likely to hinder than to help the Chancel- lor's current efforts to restore us to an even keel. And that the said executive director agreed. Not only that. He added the observation that this was 'a particularly uncomfortable moment' for us to take the plunge.
I still think this is a remarkable occurr- ence. For only a week before, Mr Lawson had told the readers of Le Monde that 'the joining of the EMS, I am certain, could reinforce the stability of the pound and the struggle against inflation'. I find it hard to believe that an executive director of the Bank would talk to the press like this unless he was seeking to warn the Bank's political overlord that, in the words of the old song, `tain't necessarily so'.
And high time too. For the increasingly strident debate between those who share the PM's view that joining the Euro- currency club would be the thin end of the wedge pointed at the sovereignty of Parlia- ment, and those who seek to scare us all to death with visions of twilight isolation, is getting out of hand. There are all sorts of convincing arguments for getting in or staying out. But 'reinforcing . . . the strug- gle against inflation' is hardly one of them. Has the Chancellor really forgotten al- ready that it was his attempt to cock a snook across the garden wall at No. 10 by pursuing a close relationship with the German mark in 1987 which led directly to the relaxation of our monetary policy, and hence to our present troubles with infla- tion?
Of course I know that things are diffe- rent nowadays. That our purpose — well, Mr Lawson's purpose, at any rate — is to hold the pound up in order to keep the squeeze on UK company wage negotiators, whereas in 1987 the Treasury, for reasons best known to itself, was bent on prevent- ing the pound's foreign value from appre- ciating. And of course I take the point that joining the exchange-rate mechanism might convince Mr Jordan and his electri- cians that excessive greed in this year's `wage round' would cost them all their jobs, whereas Mr Lawson's talk about high interest rates for ever leaves them cold.
And pigs might fly. The delusion that British wage negotiatiors will heed precept rather than experience is at least as old as this Government. Back in 1979 the Finan- cial Secretary, Nigel Lawson, convinced the Chancellor, Geoffrey Howe, that doubling the VAT rate would do no harm to the ensuing 'wage round' because the unions would have read his medium-term financial strategy and accepted that the game was up. We all know what happened then.
There is, though, another reason why the distinguished bank director must be right, and Mr Lawson wrong. And that is that it is by no means obvious that the exchange-rate mechanism would in prac- tice act as an automatic booster for the pound if we were to sign on now.
For consider. The current strength of the dollar is surely not quite as incomprehensi- ble as it is made to sound. The world has come to realise that the chairman of the US Fed, Alan Greenspan's use of interest rates to curb American domestic inflation press- ures, regardless of the fact that his country has been consistently undershooting his monetary targets for many months now, has begun to put a real squeeze on the US economy. It has also come to realise that Chancellor Kohl and Mr Takeshita (or whoever eventually succeeds him) have enough political trouble on their hands without pushing up their interest rates. So the dollar is indeed the smart place to be, and the yen and the deutschmark are the smart places not to be.
That being so, the mark is surely more likely to fall in international value in the months ahead than to rise. If we tied the marital knot, then sterling would be bound to do likewise. So long as we don't, we will be free to track the dollar instead, thereby maintaining relatively tight money until it has done the trick.
To which Messrs Heath, Plumb, Hesel- tine, Uncle Tom Cobleigh and all would say, 'Can we really be that blinkered? The currency club is not just a short-term contrivance, to help Nigel Lawson out of a little local difficulty. It is Europe's future. If we keep dithering over "ripeness" we shall find ourselves forgotten, and de- servedly so.
Maybe. But I still think that the Bank is right. The future will wait. Wage and prices pressures here at home will not.
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