Exchange Rate Policy

Part of the debate – in Westminster Hall at 4:30 pm on 14th January 2009.

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Photo of Christopher Chope Christopher Chope Conservative, Christchurch 4:30 pm, 14th January 2009

It is delightful to serve under your chairmanship, Mr. Weir, and to be able to raise the important subject of economic transparency, which is fundamental to public accountability. That is what one gets with flexible exchange rates, for which I am a great enthusiast, but I am not quite so sure whether the Government are as enthusiastic, particularly now that judgment is being passed on the British economy by the markets.

This debate would be better entitled, "The Pound in Your Pocket". What can people buy with the money that they earn? Can they afford a foreign holiday this year? What are their assets worth in the world marketplace? What is their pension or benefit cheque worth in the real world? Those are the questions that people have to face up to, and the answer to them is that, in 2008, according to Bank of England statistics, the pound in your pocket, Mr. Weir, in my pocket and in the Minister's pocket was devalued by 25p—by one quarter. The exact figure was 24.7 per cent. That was the decline in the sterling exchange rate index between 31 December 2007 and 31 December 2008. Those are incontrovertible facts.

The value of the pound coins in our pockets reflects the collective worth of our country in comparison with other countries. It takes into account the value of our raw materials, assets, natural resources and, obviously, debts and liabilities. The sterling exchange rate index is an accurate and unbiased barometer, or measure, of how UK plc is performing in comparison with other countries, and the unavoidable verdict is that our country has lost one quarter of its wealth in just one year.

The full implications for most consumers have yet to be realised. Retailers have been desperately destocking because of the recession, and although they are warning of substantially higher prices when they restock, those prices have not for the most part yet got through to the consumer. Nor has the impact of the 25 per cent. devaluation of the pound against the dollar come through in higher oil prices, because it is being disguised by the global fall in the price of oil, but those price increases will come. The Bank of England is already forecasting that inflation as a result of imports will increase significantly in the coming year.

The extent of devaluation in 2008 was greater than in 1992, when the United Kingdom was forced out of the exchange rate mechanism. It was greater even than in 1966, when the International Monetary Fund had to bail out the Labour Government. The last time that the UK lost one quarter of its wealth was after the second world war. The loss we suffered then was a price worth paying for defeating Hitler and preserving our freedom. We know why we lost 25 per cent. of our wealth then, but why did we do so again in 2008?

The Government have always been expert in taking credit for others' efforts, while finding scapegoats for their own failures, and so, true to form, the Prime Minister has been trying to blame our national economic humiliation on the international or global banking crisis that was triggered in the United States. Indeed, he did exactly that today during Prime Minister's questions when he spoke about the global financial crisis.

The Prime Minister's claims that the problems are all caused by some global financial crisis are manifestly absurd. If that were true, the pound would not have devalued by 25 per cent., particularly against the dollar. If the real crisis is in the US, why is our crisis much worse? The answer is that the Government mismanaged the economy in the period running up to 2008.

It is worth reminding ourselves of what the Prime Minister said when he was the shadow Chancellor of the Exchequer and was commenting on the last sterling crisis in 1992. Addressing the Labour party conference, he stated:

"Comrades, this is a government that blames the Germans, the French, the Danes, the ERM, the markets, even the Labour Party for the crisis when the Tory Party has no one else to blame but themselves. Let us be clear: the weakness of the currency is the result of the weakness of the economy which is in turn the inevitable result of the weakness of this government."

The Prime Minister's highly perceptive analysis in 1992 is equally applicable, if not more so, today.

The weakness of our currency is indeed the result of the weakness of the economy, and who is responsible for that? None other than the Prime Minister, who, before becoming Prime Minister, was Chancellor for the duration of the Labour Government, who have now been in office for almost 12 years. That is where the responsibility lies. Why is the Prime Minister not prepared to accept that and take the blame?

The Government have given the impression that they have no exchange rate responsibility, but paragraphs 7 and 8 of the May 1997 letter from the Chancellor to the Governor of the Bank of England emphasised:

"The Government will be responsible for determining the exchange rate regime", and that they can instruct the Bank to intervene in foreign exchange markets.

Interventions have been rare. The last one, which involved support of the euro, took place in September 2000, but one might also include the bizarre and ill-judged decision by the Chancellor to sell 60 per cent. of our gold reserves at the bottom of the market. The price was less than one third of what those same gold reserves would be worth now—again, a major error of judgment for which we have never had an apology from the Prime Minister.

In a fascinating exchange in the Treasury Committee on 10 December, the current Chancellor was asked whether he would be prepared to support sterling, if necessary. His answer was:

"No, the Bank of England's policy is to target inflation, not to target the currency."

The Chancellor was not willing to accept responsibility for his part in this, which is to deal with exchange rates. He said that the Bank of England will not deal with exchange rates. Of course it will not, because that would be outside the remit given to it by the Chancellor in 1997.

Have the Government accepted any responsibility for where the exchange rate is now? What is their policy? In a written answer on 21 April 2008, the Exchequer Secretary stated:

"By maintaining sound public finances and low inflation the Government contribute to exchange rate stability. This is consistent with their objective of a stable and competitive pound over the medium-term."—[Hansard, 21 April 2008; Vol. 474, c. 1674W.]

Unfortunately, despite my best endeavours—I asked the Library for help—I have been unable to get a definition of "medium term", but I am sure that the Minister can explain how the 25 per cent. devaluation in 2008 was consistent with a policy of stability in the medium term. I hope that in a moment of frankness he will say that, of course, it was not, but that would be an unusual admission for the Government to make.

The reality is that this Government's macro-economic policy is an utter shambles. The so-called golden rules have been dumped because they became an embarrassment, and all that has been put in their place is a policy of ever more state intervention, borrowing and waste. That will undermine our nation's economic prospects for years to come, probably for a generation. The Government's failure to deliver on their avowed policies, whether eliminating boom and bust or monitoring and maintaining a stable exchange rate, is causing untold hardship up and down the country.

This debate is timely, because I have received representations from a company in my constituency that is the largest importer of a type of sport-related promotional product. In less than a year, the cost of its imports have risen dramatically making it hard to deliver to UK customers on agreed contractual terms. The managing director told me that he did not insure against currency risk. On asking why not, he replied that he had accepted the Government's statements that the exchange rate would remain stable. He cannot be blamed for not realising that, far from remaining stable, the exchange rate would decline by 25 per cent. What message of apology does the Minister have for that individual, his company and the people who work for him?

With the Government's policy of exchange rate stability in ruins, where do we go from here? The policy of maintaining sound public finances has been abandoned in favour of ever-higher borrowing. I am sure the Minister will accept that that will lead to a further devaluation and a significant inflationary problem.

In November 2007, the Governor of the Bank of England claimed that anyone searching for a stable, trade-weighted exchange rate

"couldn't do better than look at sterling".

Were businesses wrong to rely on the Governor's words? Were foreign investors wrong to look to him as an expert on the matter?

In evidence to the Treasury Committee on 25 November 2008, the deputy governor of the Bank of England, Mr. Bean, said that the more than 20 per cent. depreciation in sterling

"is about the right sort of order of magnitude that is required."

He stated that the Bank of England had

"always recognised that at some stage the economy would need to rebalance away from domestic demand towards the external sector as part of the process of correcting an unsustainably large current account deficit."

He said that there was an unsustainably large current account deficit caused by the Government that needed correcting. That it has not been corrected, but rather exacerbated, is one reason why our currency has declined so much in value. How does that fit in with what the Governor said a year earlier about stability in the exchange rate? Does it not just demonstrate what a mess the Government are in on this area of policy?

Numerous articles have been written in recent months about the sterling crisis. I could quote a number of commentators. Does the Minister agree with Peter Spencer, the economic adviser to the Ernst and Young ITEM Club, which uses the Treasury's forecasting computer? On 11 December, he was quoted in the Financial Times as saying:

"The problem is the UK economy doesn't have a leg to stand on... It's very hard to know where the floor for sterling might be when there's nothing to support it."

I worked for Ernst and Young in 1992 during the last sterling crisis and the resulting humiliation of John Major's Government. I still have the original newspapers from that time. I remember how difficult it was as a former Minister and MP and a prospective Conservative parliamentary candidate to explain to colleagues what had been happening and whether there was a coherent Government policy. The judgment passed by the Ernst and Young ITEM Club is that this Government have made an absolute mess of their responsibilities and that their economic policy is in a complete mess. If we carry on like this, there will be a further devaluation of our currency.

This situation is due to gross mismanagement of our economy. Just between 2000 and 2007, Government expenditure rose by more than £100 billion in real terms after inflation. Nothing was put aside in the good times, and we are now in the bad times. I do not have time to quote the Prime Minister's comments in The Times on 17 September 1992, when he said that confidence would not simply return on request. That is what he is asking for now. Economic events are determining the outcome. I understand why many Government spin doctors would like to preserve their cover under the cloak of membership of the European single currency. The extent to which people are being betrayed by the Government would then be less apparent.

I hope that, in responding, the Minister will declare where we should go from here. I hope that he will accept responsibility for the 25 per cent. devaluation and give some hope to those who are watching and worrying about the value of the pound in their pocket.

Annotations

Douglas White
Posted on 15 Jan 2009 1:54 pm (Report this annotation)

An excellent presentation of the case.
Mr Chope should be a front bencher!.