French and German ministers are expected to confront the Chancellor over sterling's weakness at the opening dinner for the Group of Seven finance summit in Rome tonight. They will ask him to consider direct action to increase the value of the pound, which has suffered its worst devaluation since at least the final breakdown of the Bretton Woods agreement in the early 1970s.
What's that use of the word "worst" there? "Best" would be more appropriate, no? The economy has suffered a shock and prices must therefore change. That they change to the new, correct, level is not a bad thing, but a good thing. And an exchange rate is only that, a price.
The pound has weakened by about a quarter over the past year as it has become increasingly apparent that the UK faces a worse recession than most other developed nations, and that the Bank's Monetary Policy Committee will be forced to slash interest rates as a result.
OK, if this is true, then the pound should indeed change in value in response. This is the very point of having a market in anything at all, so as to discover prices.
In particular, companies in Europe have complained that the pound's recent devaluation has left their exporters suffering, as businesses are switching to cheaper British goods.
Well, quite, that's rather the point. That's why we're happy that we have an independent currency so that the value can indeed change: and thus the symptom of the problem, a falling exchange rate, becomes the solution to the problem.
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