Letter: Don't blame the Germans: the fault lies with the British PM and his Chancellor

Sir: It is a mistake to blame either the Germans or the world situation for the currency debacle, which has possibly cost the taxpayer pounds 1bn in wasted intervention. The problem was that, at the old exchange rate, budgetary policy was hopelessly out of balance. The budget was in deficit but, given the state of the economy, it did not seem likely that the Government would be prepared to raise taxes. The difficulties were compounded by the suggestion that maintaining the exchange rate was simply a question of credibility and the belief that ministers could turn back the tide of economic reality.

Now that devaluation is happening, the Government must grasp the nettle of budgetary policy. A sharp reduction in the budget deficit is needed, and the new exchange rate should be chosen so that overall demand remains broadly unchanged (or is increased very slightly). This would put the economy on a sound footing without leading to any resumption of inflation. It would provide a sound basis for economic recovery.

Independence for the Bank of England should not be part of the package. That would only support the mistaken belief that monetary policy can be handled independently of budgetary policy.

Yours faithfully,

M. R. WEALE

Faculty of Economics and Politics

University of Cambridge

Cambridge

17 September