Letter: The strong pound

BRITAIN'S exporters cannot compete on cheap labour. Today's export market is for capital-intensive products backed by heavy research and thoughtful design. To hold our own, we need as much capital as our competitors. Just as the high pound and high interest rates of the early Eighties wiped out the cash-flow of exporters and turned our traditional trade surplus in manufacturing into huge deficit, so it will today.

The Labour governments of the Sixties and Seventies turned huge payments deficits into surpluses by encouraging investment in manufacturing. It is open to the present government to do the same. It can be done the hard way by using fiscal policy instead of interest rates alone to regulate the economy. This would reduce interest rates and bring the pound down to a competitive level. Or it could do it in the easier way by negotiating with our European partners a more competitive rate for the pound in the Exchange Rate Mechanism (which we did not do in 1989).

Failing one or other of these, after the creation of a single currency for Europe, a trading area larger than the USA, interest rates will have to go up even higher to prevent a steady flow from pound to euro and in due course, even that will not stem the flow and there will be yet another sterling crisis, and an undervalued pound, setting us off again on the dreary wage/price spiral.

And by that time it will be too late for the government to recover before the next election.

Sir FRED CATHERWOOD

Cambridge