Performance of the Economy

Table 3: Distribution of British overseas investment (end of 1993)


While the regions in Table 3 are not exactly comparable with those in Tables 1 and 2, it is easily seen that when the United Kingdom is taken out of the ICI figures, the fraction of ICI’s overseas investment taken by the EU in the period 1989-1996 is for the most part around 13-16%, while the Americas and the ROW are around 85%[4]. Comparing Table 3 with these figures, it is clear that the ICI view of the world is not greatly different from the average of all British overseas investors. What some corporate businessmen do is complain about exchange rates whatever their values. For some the pound is too high (it reduces export competivity) for others it is too low (it increases the price of imported raw materials). What these businessmen actually want is certainty, or stability as they refer to it. Who doesn’t? But events, and commonsense, show that stability with one currency or group of currencies means instability with others, and businessmen can no more opt out of this reality than any other section of mankind can. Nonetheless, there is a long history of corporate attempts to beat reality by setting up price fixing cartels. The Single Currency project is in fact the grand-daddy of all price fixing cartels, in which the prices of 11 nations’ currencies are to be fixed for all time in relation to each other. Doubtless in their attempts to manufacture certainty, some corporate businessmen feel a natural affinity for such a project. Nothing in business can remain in the same relation for very long: the evolution of technology sees to that. Corporate businessmen are paid their salaries to take decisions in the light of uncertainty. In particular, they should use the good years of favourable exchange rates as in 1992-95 to develop new products in order to provide for the inevitable lean years of less favourable exchange rates as now. If they can’t manage this, they should make way for those who can.

What has happened to Exchange Rates over the last 7 years

Since abolishing the pound sterling would in effect mean fixing our exchange rate against the German mark for all time, it is instructive to consider (Table 4) the evolution of a representative sample of exchange rates over the last seven years before, during and after Britain’s membership of the Exchange Rate Mechanism (ERM), the first stage of Economic and Monetary Union and in effect a prototype Single Currency.

Country Average of daily rates in each yearRef 4
  1990 1991 1992 1993 1994 1997(estimate 1994) Actual at 3/9/97
USA 1.78 1.76 1.75 1.50 1.54 1.58 1.58
Germany 2.87 2.93 2.74 2.48 2.49 2.25 2.87
Japan 257 237 223 167 156 164 192
Portugal 252 254 237 241 254 235 291
Italy 2127 2189 2161 2360 2485 2525 2812

Table 4: Evolution of exchange rates 1990-1997

Clearly, since Britain disconnected itself from the ERM, its exchange rate with the dollar has been much more stable than with the D-mark (in the ERM) or the lira (outside the ERM) or with the escudo (sometimes in, and sometimes out). Given the pattern of our overseas investments shown in Table 3 above and given the fact that oil and most of our hi-tech exports (jet engines, turbo-generators, pharmaceuticals, computers) are priced in US dollars even for Commonwealth and ROW sales, it is clear that left to itself, the international money market would naturally connect the pound to the dollar fairly closely. Interestingly, the OECD estimateRef 4 (in 1994) of exchange rates in 1997 in Table 4, shows that it got the $/£ rate dead on, whereas it has made a huge error with the DM/£ rate and a considerable error with the other rates cited in Table 4. Even when the pound was in the ERM between 1990 and 1992, it was actually more stable with the dollar than with the D-mark despite all the intricate Central Bank manipulation. All this should tell you once again that the market is a better judge of reality than the calculations of a relatively tiny group of bankers and economists.

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