The Great Debate UK
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There it goes again. Sterling has been dropping sharply this year against the U.S. dollar and especially the euro, as Britain turns to a tried and trusted remedy for its economic problems: devaluation. Even with its slight uptick on Wednesday, sterling is down more than 6 percent against the euro since the beginning of 2013 and has slid 10 percent over the past six months.
This is not something the British government is boasting about, especially at a time when there’s concern over -- and sometimes a high-level condemnation of -- countries such as Japan that allegedly seek to manipulate their currencies. But it’s also not something the British government or the Bank of England is trying to hide – or stop.
The big question is: Does devaluation still work? It’s an old tool aimed at restoring competitiveness that has been used countless times by Britain in the past. In the 1960s and 1970s, the Labour government devalued sterling sharply against the dollar (and gold). And over the past 60 years the pound has lost more than 80 percent of its value against the German currency – first the mark and now the euro. In that time, the two countries’ economic fortunes have fluctuated, with Germany showing very robust growth in the postwar years and Britain performing relatively better from the early 1990s, when it crashed out of Europe’s system (at the time) of semi-fixed exchange rates, just as Germany was struggling to digest the economic impact of reunification.
Devaluation hasn’t always helped: In 1976, Britain famously had to go to the International Monetary Fund to ask for a loan to end a damaging run on sterling. It can also be a risky strategy if inflation gets out of control, which is why Germany, for one, is so skeptical about devaluation as a policy tool. But there’s a new concern surfacing: Can it even work? In the era after the financial crisis of 2007-08, there is mounting evidence that devaluation may not be able to help kick-start a stalled economy as readily as it may once have done.
from The Great Debate:
Higher taxes? Lower public spending? Devaluation? Inflation? Investment in green growth?
European governments are pointing in very different directions as they debate an exit strategy from the global financial crisis. Despite European Union efforts to coordinate economic policy, there are clear signs that the main European economies will charge off in disarray towards separate exits.
-Morten Hansen is head of the economics department at the Stockholm School of Economics in Riga. The opinions expressed are his own.-
Latvia, with its 18 percent year-on-year economic decline, ruthless budget cuts to meet the demands stated by the IMF-EU bailout package and recurring rumours of devaluation, may be the most written about country in the world right now, at least on a per capita basis.