The collapse of sterling by 30% has little to do with trade imbalances, but is the result of capital outflows. New Labour is not just unwilling to stop what is happening, it is unable to do so because they do not have the foreign reserves to anchor sterling in their famous global environment. They are lucky that hedge funds are short of liquidity or making a killing on sterling (again) would have become a favourite pass time.
English manufacturing is not benefiting in the slightest from this, as there is no spare capacity. The balance of payments ought to benefit from devaluation if Marshall-Lerner conditions apply, but it is doubtful whether import and export elasticities of demand and supply are high enough (cf Economics 101) .
What devaluation on this scale and in these circumstances will do is vamp-up inflation, with a lag, possibly towards double digits.
Euro parity is neither a necessary nor sufficient condition for entry to euro salvation. Until recently relative exchange rate stability could have been used for making a case for reducing the two year qualifying period of membership of ERM 2. But now sterling will have to demonstrate its ability to stay within a 15% band of a basic exchange rate, to be negotiated with the European monetary authorities. The theoretical possibility of printing money, but friendless, may be preferred, though the forcible removal of choice out of blatant weakness is hardly an objective or achievement of competent government.
2009 will be the year of the inflationary throughput of 2008's devaluation.
Happy New Year!
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