Devaluation is not itself the solution

Sep 30 2009 By Andrew Hebden, The Journal

WHEN Mervyn King told me last week that he believed the devaluation of the pound over recent months would have benefited North East firms looking to export their goods, he doubtless hadn’t anticipated the reverberations his remarks would send around global financial markets.

It says much for the low esteem in which sterling is now held by foreign-exchange markets that his comment – picked up by the financial press around the world – should prompt the pound to fall to a five-month low against the euro.

On the face of it, the Governor of the Bank of England was doing little more than stating a well-established fact, but such is the nervousness of the markets, analysts feared he was suggesting the UK economy would benefit from a further devaluation of sterling. And, after all, it’s not a well-established function of the governor’s role to go around talking down the pound.

There’s no doubt that devaluation will offer a helping hand to exporters competing with rivals based in lower cost economies, but the suggestion that this in itself offers Britain a route out of recession seems a little far-fetched. While it might provide – and indeed has provided – a short-term boost, it is not a sustainable long-term option for plotting away back to growth.

And, for what it’s worth, I don’t think the governor was for a minute suggesting devaluation had a significant role to play going forward. Instead, his support for The Journal/North East Chamber of Commerce Go Global campaign was focused on the opportunities export markets hold for innovative firms that are not competing on price.

It is hard to argue with the governor’s assertion that, coming out of recession, it is essential we see a rebalancing of the UK economy, away from its reliance on financial markets and consumer spending financed by debt, and back towards sectors such as high-end manufacturing.

It is here where the North East can play its part, building on the skills and assets which made it an industrial powerhouse in the past. And that is anything but a quick-fix solution.

Andrew Hebden is head of business at The Journal