Friday 18 September 1992

DEVALUATION BEATS AN INTEREST RATE HIKE

Tribune leader, 18 September 1992

The president of the German Bundesbank, Helmut Schlesinger, might be insufficiently politically accountable; he certainly deserves to take a large measure of the blame for the recession now afflicting all of western Europe. If the Bundesbank, obsessive about the dangers of inflation, had not run such high interest rates in the past couple of years, life would undoubtedly have been easier for everyone.

But on one thing, he is undoubtedly right, unlike the elected politicians who control, or rather claim to control, Britain's monetary and fiscal policy. As Mr Schlesinger said in an interview published on Wednesday, sterling should have been devalued against the Deutschmark on Sunday, when the Italian lira devalued by 7 per cent, as part of a general realignment of currencies within the exchange rate mechanism of the European Monetary System. Instead, the British government decided pig-headedly to maintain the pound's parity with the Deutschmark, no matter what the cost to the economy.

After intervention in the currency markets to prop up sterling had failed, the government on Wednesday put up interest rates first by 2 percentage points – and then by another 3 percentage points after that had foiled to end the run on the pound. The government's hope is that these moves, which are guaranteed to make worse the already dire recession, will end the speculation against sterling. But it is apparent that the feeling on the currency markets is that the pound is overvalued. Devaluation of sterling, if it has not happened by the time you read this, is on the cards. If the French vote no to Maastricht on Sunday, it is a virtual certainty.

During what now seems to have been the inexorable drift towards devaluation, the Labour leadership has gone out of its way not to appear in favour of devaluing the pound – a position that has drawn heavy fire from within the party, particularly from the anti-Maastricht soft left, whose intellectual flag-bearer, Bryan Gould, has long been a proponent of devaluation.

That the argument has been had is no bad thing: for the first time in several years, Labour has had a free and frank political discussion in public, which is most refreshing. John Smith should resist the calls from Gerald Kaufman and others for the devaluationists to be gagged and "collective responsibility" to be enforced. Moreover, even if some arguments for devaluation are unconvincing, it is difficult to disagree with the case for devaluation if the choice is between devaluation and higher interest rates, as it has been this week.

But those who have attacked the leadership position of keeping quiet about devaluation are not tactically right. Having kept their remarks on the possibilities of devaluation to the bare minimum, Mr Smith and the Shadow Chancellor, Gordon Brown, are now in an optimal position to attack the Tories when devaluation actually comes. John Major and Norman Lamont, unable to say that they are doing only what the opposition recommended, look set to get a deserved political ducking.


More members good, no members bad

Labour is broke. It needs more money – and fast. Usually, in times of trouble, the party turns to the trade unions. But they are broke too. And there's no way that the party's direct-mail fundraising operation can bring in any more money than it already does.

In  the  circumstances,  it  is perhaps unsurprising that the party has decided the  only option   is   to increase membership subscriptions for a year for  ordinary members from the current  £15. An extra £3 a member would make a lot of difference to the party's finances.

The problem is that it's not quite as simple as that. Even with generous discounts for people who can't afford the full membership fee, if the proposed increase in subscription rates goes ahead, thousands of potential members will be deterred from joining and thousands of existing members will think twice about renewing.

Indeed, there is a danger that the numbers put off will be so large that the party will get no net financial benefit from putting up the subscription rates.

Given that Labour's membership is already at a post-war low, it seems utterly mad to take such a risk.

Of course, the reason that Labour's membership has declined is not simply that it has become too expensive to become or remain a member. But a far more sensible solution to Labour's financial crisis would be a dramatic cut in subscription rates and a vigorous national recruitment drive. Where Labour Party membership is concerned, more really is better.