Sterling's slippery slope

Telegraph View: the benign devaluation threatens to become a rout

 

Telegraph View:
Published: 8:39PM GMT 02 Mar 2010

The 25 per cent fall in the value of the pound over the past couple of years has amounted to a bigger depreciation than in any single post-war sterling crisis. Most see this as a healthy correction of an over-valued currency, which has given us a more competitive exchange rate just when we needed it.
This benign devaluation now threatens, however, to turn into a rout. For this week's fall in the pound has been prompted not by worries over Britain's prospects, but by doubts about the economic credibility of the Government. The Tories' diminishing poll lead has raised the spectre of a hung parliament, and of chaos and gridlock in government at the worst possible time. The markets have taken fright: as Kenneth Clarke, the shadow business secretary, observed yesterday, it has only been the prospect of a Conservative victory, and the arrival of a government prepared to tackle the fiscal crisis head on, that has held down interest rates and sustained sterling in recent months. The possibility that this may not happen has alarmed foreign investors, for it is uncertainty that spooks the markets.

 

Given that we have nine weeks before polling day, there is plenty of scope for more damage. The Tories must take some of the blame. The markets have spotted what we have already highlighted: a worrying uncertainty in the Conservative message. But there is a heavier responsibility on the Government. Reports that the Prime Minister is trying to push the Chancellor into a pre-election giveaway are troubling. They reinforce the impression that Labour is not serious about tackling the deficit and that has added to the market jitters. Alistair Darling has an obligation to ignore his next-door neighbour and put country before party, by ensuring a credible deficit reduction plan is at the heart of his Budget.