HEADLINES ON the economy in the last month have been made by the divisions between Lawson and Margaret Thatcher over the exchange rate of the pound. But behind the immediate bust up lies much more substantial questions of the present state of the British economy and last October's stock market crash. JOHN ROSS reports.
THE real driving force of the divisions between Thatcher and Lawson which received so much publicity earlier this year deteriorating situation of the British balance Treasury DOVICHELS forecasts last Autumn projected balance of ›ayment: of £4 illion this year. But this i clearly going to be vastly exceeded. On the basis of the months of the MUSE HICC year £7-8 billion is much more likely.
Furthermore projec tions for much worse the deficits being projected by the forecasting institutes to £12 billion. For the first time since the oil boom started in the late 1970s the British economy is running into its familiar post war problem pressure on the balance of payments. It is Lawson's about the competivity of British industry which underlies his opposition to a revaluation in the pound.
Several factors are now coming together to produce this rapid deterioration in the balance of payments They are not incidental but built into the entire way the British has developed under Thatcher Reduced to its essentials 1979.
SICE been running a balance of trade surplus with North America, with the OPEC countries, and in oil which finances payments deficit manufacturing with Japan and the EEC.
Crucial shifts in world prices were already undermining this before the October crash decrease in the real price of oil. Britain was increasingly unable to compensate for a deficit manufactured goods with a surplus in oil.
But the events of the last two years, brought together in the October stockmarket crash sharply worsened that they have Studuon Nigel dramatically affected the relations between the three main economic centres — Japan, the United States, and the Prior to the October crash the pattern of trade between the main capitalist centres The United States has been in balance trade deficit both with Japan and with Western Europe - producing the well known US balance of trade deficit. Japan ran trade surpluses with both the United States and western burope Japan's trade surplus with Ine BEe in reoruary was $1.9 billion. Western Europe financed this deficit with Japan, and the East Asian Newly Industrialising a trade surplus withe surplus with United States - the EEC visible trade surplus with the United States in 1987 was $24.3 billion dollars This situation in the last eight years allowed Western Europe to limp along -although with a growth significantly less than either Japan or the United States the latter benefitting from huge loans from both Japan and Western Europe.
But Western Europe's situation was not particularly serious as long as it could finance deficit with Japan through a surplus with the United States.
The new fact in the situation, which sharply alters the economic situation of Western Europe, is the rapid devaluation of the dollar since 1985 which accelerated sharply after the crash. This has given the possibility for the United States to begin to rapidly close its balance of deficit with months of this year show the US balance of payments deficit with Europe down to $4.6bn compared to $8.5bn in the same period last year The US deficit with Japan in contrast, has decreased much less rapidly, series the Fact that the US $19.3bn $17.5bn. can compete much more easily with the stagnant West European economies that it can with Japan.
Loses The consequences of this are already beginning A series of British and European com panies, starting with British Aerospace, have started to result of being undercut by report major loses as a US exports made dramatically more attractive by the devalued dollar.
The squeeze on Western Europe is made worse by the fact that the US trade offensive will not lead to a of Japanese pressure. On the contrary Japanese exports to the United States are cut by dollar devaluation Japan is increasing export offensive against Europe. In Fobe sall by 140 pre February Japanese cent while exports to the EEC rose by 22 per cent.
Western Europe is now coming under a squeeze from two directions - the familiar Japan and now, added to saucers this, a squeeze from the United States To complicate the situation still Turne for Lawson, there will not be an equal sharing of this burden within Western e Europe.
Within the strongest economy, West Germany, will unload the burden onto the weaker ones - including Britain.
This is already occurr ing. With the cut exports to the US, due to the dollar devaluation, West Germany's export offensive inside the EEC is being stepped up. During the fourth quarter ol 1987, German exports to the Us fell by 5 per cent, while these Western Sent est creased by 9 per cent. German exports to the rest of the European Community rose by 6 per cent in real terms last year.
In this competition West Germany is able to use not only the inherent power of its economy but also the mechanisms of the EEC Monetary System (EMS) D Europear reinforce its positior The real value of the D-Mar against the currencies of its chief trading partners has fallen significantly over the past year. West German exporers have gained toughly cent petitiveness since February 1987 against its major West European rivals.
Squeezed
The Single European 1992, Will make this situa- coming into force in tion worse and West Germany more dominant.
While Western Europe as a whole will be soucozeu from two directions - from Japan and from the United States — Britain will also be squeezed inside the EEC b West Germany. This is wh Lawson has become preoccupied with the exchange rate of the pound against the deutsche mark.
In the immediate battle inside the cabinet Lawson has won out the first serious defeat on policy the government Thatcher has suffered since she was elected. Lawson won due to the massive backing he was given from the CBI and virtually the entire financial press.
Economically capitalist framework, there doubt that Lawson was right. The decade when balance payments could De KeD afloat on a sea of oil is now past. The surplus on Britain's oil trade has halved, from 68 billion to f4 billion, in the last eighteen months.
But politically Thatcher understood perfectly accurately the risks involved If the balance of payments deficit now has to be plugg ed by a significant rise in manufactured exports and that is now the only option open - that means a significant HICCASI manufacturing output SAHE with that will un doubtedly come renewed pressure or wages and at least better conditions for trade union militancy. Indeed the firs symptoms both beginning to appear.
Under Lawson's