The pound, Europe and the future
Last June we first argued at length why Britain should float the pound. Then, after the Government had done so, we criticised Mr Heath's and Mr Barber's declared policy ultimately to return to fixed exchange rates; and we argued for a permanent float. It is now necessary to return to the subject again, partly because of renewed pressure on the Government, especially from President Pompidou, whose Foreign Minister, M. Schumann, is in London this week to argue the French case, to fulfil its intention of abandoning the float; partly because of evidence that, if fixed parities are restored, they will be restored at an unrealistic level, and will cause another sterling crisis; and partly because the longer doubt is allowed to hang over the issue the more likely it is that the October summit of European powers — if it takes place — will degenerate into acrimony and the more likely it is, too, that Britain will enter the Common Market at the end of the year with an undecided or disastrous exchange policy.
While the June decision to float showed commendable courage on the part of the Prime Minister and the Chancellor, and a commendable refusal to follow the futile example of their predecessors in sacrificing general economic policy to the maintenance of an unrealistic exchange rate, nonetheless the uncertainty, ambiguity and confusion of Government utterances on exchange policy encourages doubt about both the intelligence and the capacity of ministers in this field. To take but one example, it appears that the Chancellor still believes that the $2.48 to the pound Smithsonian parity was — and could still be — a realistic one, even though it was the existence of that parity which attracted the speculation that triggered off the last sterling crisis. It is time to knock on the head once and for all the notion, trumpeted by successive Prime Ministers and successive Chancellors, that speculators have any independent influence on currency crises. No doubt they may be unpleasant and unpatriotic people, but they are in business to make money, and they cannot make money by speculating against a currency being exchanged at its true, that is, at its market, value. Only When a Government persists in maintaining, for whatever illogical or unfathomable reason, its currency at a rate which the market knows to be false, and which businessmen know will have to be changed, can the speculators attack. Mr Heath notes the mote in the speculating eye; and ignores the beam in his own.
But the most important pressure to return to an exchange rate of the Smithsonian order comes from France. President Pompidou has been insisting for some time that the float was an unEuropean act, and he has made his displeasure, at the persistence of the British Government in refusing to undo the consequences of that act, plain. He has threatened, in a fairly unambiguous way, to call off the European summit if Britain cannot guarantee a return to fixed rates before entry into the EEC; and he has threatened, rather more ambiguously, to do something nasty to us around the end of the year if we still have not yielded to his Wishes. There are two reasons for this French insistence that we abandon a policy which saved this country from the deflationary hell which always followed previous currency crises — the President wants Britain to enter the EEC in an unfavourable competitive position, with an over-valued pound, and he trusts that Mr Heath's anxious dedication to entry will enable him to achieve that end; and he also knows perfectly well that the monstrous Common Agricultural Policy from which France derives so much benefit cannot survive for long unless the currencies of the participating powers are rigidly fixed in relation to one another. There is nothing in Mr Heath's character, or in his record, to suggest that he will yield to such clearly self-interested bullying; but that fanatic and inexplicable determination which has already caused him to' sacrifice so much for the Common Market, combined with the lack of intellectual clarity and the total absence of common sense in his thinking about exchange rates, which has characterised his statements on the subject since last June, encourages fears that he may yield, at least to the extent of fixing an exchange rate somewhere between the Smithsonian $2.48 and the real value of the pound, which is about $2.40.
It is true, of course, that the pound has been closing regularly at about $2.44. But that is because the Bank of England has been buying sterling to keep the rate up: in other words, the pound is not now really floating at all, and the speculators do not move in only because it is still believed that, if they did, the genuine float would be resumed. To this illogical and uncertain situation we must now add another ingredient — the dawning realisation of the difficulty a return to fixed parities will face because of contractual obligations entered into by the Wilson Government under the 1968 Basle agreement, when a number of other countries got together to bail the pound out of difficulty. It was agreed at Basle that, if the pound fell below $2.38, Britain would recompense the countries party to the arrangement for any exchange losses which they suffered. Now, at Washington last December, while the pound was upvalued, a system of wider parity bands was also established, which enabled a certain amount of movement to take place without formal devaluation, and without resorting to a float. Under this system of wider bands a newly fixed exchange rate of, say, $2.40 would allow enough movement for the pound to go below $2.38, and land Britain with a bill for the damage. But if the pound's exchange rate is fixed at a safe point — $2.4348 would be the lowest valuation which, with the movement allowed within the bands, would prevent sterling from going below $2.38 — it will be unrealistic in market terms, and will get us into precisely the kind of trouble the French want. The only way out of these multiple difficulties is to let sterling find its own true level. Since that true level is $2.40 there need be no immediate fear of another fall: and if eventually there is such a fall, then we must simply pay the bill, which will be a small return for the help extended to us. in 1968.
The trouble is that there is no evidence that the British Government sees things that way. Mr Heath and his colleagues are trying desperately to pick their way around several shoals, most of them of their own political imagining. They want to please the Europeans, avoid another collapse of sterling, get the competitive market rates right, keep an expansionist policy at home in existence, and avoid getting into difficulties as a long term result of the Basle agreement, all at the same time. They also want, as a matter of principle, to return to a fixed rate of exchange for the pound. Some of these objectives are simply incompatible with others; and, as So often when this sort of thing happens, one fears for the national interest. Above all Mr Heath is determined to enter the EEC at the end of the year. Fears have been expressed that, if Britain does not behave herself over sterling parities, M. Pompidou will do his worst, and prevent entry even at this late date. Ultimately agreeable though that might be to British interests, it is in fact a highly unlikely eventuality. All the odds are that Britain will go into Europe on schedule at the end of the year: the question that must be asked is, with what sort of international economic and monetary policy will we begin our membership of the Communities? It must surely by now be clear that we will come under tremendous economic pressures through having to face the cold blast of highly organised and integrated industrial competition. It will take every iota of luck, skill, good management and courage if we are to survive at all; and we will certainly not survive economically if, at the same time as we are trying to find our feet in a new and hostile environment, we are also repeating the terrible folly of past occasions on which we struggled, at the expense of wealth and prospects, to maintain the lie that the pound was worth what the Government said it was, and not what traders were willing to pay for it.
But we must also look at the matter from the European point Of view. In spite of the dangers and difficulties we will face inside Europe, Britain is still a substantial and industrially powerful competitor for any of our new European partners to have to face, especially if we face them in the highly competitive position which a pound floating while other European countries had their currencies fixed would enable us to take up. The end result would have to be either a complete re-arrangement of the European currency system — perhaps along the lines favoured by much German opinion, with a common European currency floating against the rest of the World — or a generalised European float. If we are sensible of our interests at the time of entry, and adhere to the policy of a genuinely floating pound, then we will soon have to face in an acute form the question of whether or not we are prepared seriously to embark on the creation of a single European monetary unit. The creation of such a urfit is one of the dearest ambitions of the supranationalists, but hitherto the intensely complitated network of national interests which exists in Europe has prevented the project from getting off the ground.
It is our conviction that it is not in Britain's interest to support any scheme for European Monetary Union. We say that in full awareness of the fact that such a Union is the next peak Mr Heath intends to scale after he has brought Britain inside the Common Market. Nor is this simply an objection to supranationalism, an attempt to arrest the progress of European unity even after Britain has become a member of the Common Market. We do believe that, for the foreseeable future, the EEC will be an association of independent powers; independent, not to the same degree that they have been in the past or are even now, but still independent to a degree. As such each government will be principally responsible •to its own electorate, and not to any conglomerate. But the key word is ' responsible ' : each government must still give an account of its stewardship to its own people, and must not be able to plead, in exten‘Vtion of any failure to safeguard their interests and desires, the existence of obligations towards some higher source of,atIthority over which the people have no control. But the creation of a common currency will create precisely such an obligation, towards precisely such a higher source of authority; and that authority wduld have to be the bureaucracy at Brussels, which would administer the new currency system.
Nor need we necesarily be alone in our advocacy of a policy of floating all currencies. Nobody knows quite how the political situation is going to develop in Germany over the next year. There, the resignation of Dr Schiller from Herr Brandt's Government, delayed the introduction of those liberal economic and monetary policies of which he is such an ardent and gifted advocate. But he was forced to resign because his colleagues feared to go before the German electorate with a new economic policy which would include a plan for restricting the money supply. The Christian Democrats are not so unaware of the real interests of the German economy; and, even if Herr Brandt is returned to office next November, events and circumstances will force him towards Dr Schiller's dosition. It is true that Dr Schiller is not one of the champions .1f floating currencies; but he was the most sympathetic of ,ontinental Finance Ministers to British policy last June. It is hard to predict exactly what will happen, but with Germany likely to find herself in a highly complicated situation, from part of the difficulties inherent in which she can rescue herself by floating the Deutschmark; with Italy terrified about the stability of the lira, which her Common Market allies have forced her to overvalue; and with Britain seeing quickly the advantages of a floating pound in handling the complexities and dangers of her new economic situation, it is more than likely that, by the end of next year, all the major European Powers, except France, will have abandoned the Sisyphean idea of trying to fix currency rates immutably, without being able or willing to undertake the creation of a common currency unit which they can float against the rest of the world. The danger of German policy developing in this direction is one of the reasons why M. Schumann is going on to Bonn after his visit to London.
All this is very much in Britain's interest. The Common Agricultural Policy, support for which will impose one of the heaviest of all the immediate burdens we will have to carry from the beginning of next year was merely the price paid by the rest of the Common Market countries to get France into the structure in the first place; and it was never very much to the liking of anybody except the French. With British entry there will be a new impetus for its destruction and replacement by some more logical organisation of agricultural financing for, while the Germans have got fairly used to supporting French fanners, Britain. 'in a much weaker economic position, and having to submit •to a yoke both unfamiliar and irritating, is more likely to be energetic about throwing it off. But we must also accept the fact that sometime between now and the end of 1973 there will be a major European political crisis, in which we shall have to fight hard for our interests, against multifarious pressure.
One way or another this country is about to enter ar, uncharted political jungle. The next few years, and the next year and a half in particular, will be the most vital for our future since the war. Whatever we do at home, whether our industrial and taxation policies are wise or foolish: whether our social and fiscal policies make sense or not, will have less effect on our prospects than what we do in the field of foreign economic policy. And the first and most vital decision we have to take is to clean up the float of the pound by abandoning the present covert subsidisation of the rate; and, thereafter, to stick to that float through thick and thin. On this everything else depends; from this everything else follows.