Exchange Rate Target: Why We Need One


By John Mills
August 2013
Civitas
Distributed By
ISBN: 9781906837525                         
32 pages
$8.50 Paper original


It is increasingly recognised that the over-valued pound is holding back the competitiveness of British exporters. Financial Times columnist Martin Wolf has said that a weaker pound is 'welcome' while Roger Bootle has written in the Daily Telegraph that 'our best hope lies with a competitive pound.' However, the devaluation of sterling by 20 per cent since 2008 has barely impacted exports, which have increased by only two per cent. The problem is partly one of uncertainty. As Martin Weale of the Bank of England points out, businesses 'are reluctant to devote substantial resources' to increasing exports because 'they are concerned that the competitive advantage gained by the United Kingdom after 2008 might not last'. In An Exchange Rate Target: Why we need one, economist and successful entrepreneur John Mills argues that the UK government should set a competitive exchange rate target and take active measures to achieve it. He proposes a target exchange rate for sterling which is one third lower than the recent $1.60 average - about $1.05. Crucially, businesses should feel confident that the government is committed to this exchange rate target for the long term. Only then will they have the policy certainty they need to invest and allow the UK to reap the benefits of a weaker pound. Mills also cogently argues that many of the pressing social and economic problems the country faces cannot be solved without a devaluation.

Currently the UK has a gargantuan GBP100bn annual trade deficit in goods with the rest of the world. Purchasing power is lost in the UK economy as what we sell to the world is less than what we buy. As a result, there is sub-optimal demand, which creates structural unemployment, and our inability to pay our way in the world leads to a ballooning of government and private debt. High unemployment encourages dependence on the welfare state and indebtedness imperils our economic future. Furthermore, the strong pound has led to manufacturing job losses in the former industrial heartlands of the UK, perpetuating inequality. Without a competitive exchange rate, John Mills emphatically states, Britain has no chance of reversing long-running economic decline and prospering in the hyper-competitive world of the twenty-first century.

 

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