The two articles you carried in your May 1997 issue, on ‘Labour and a single currency’ by Helen Thompson and ‘EMU and the Labour government’ by Sam Aaronovitch and John Grahl, make equally depressing reading. The first sees no clear way through the political difficulties which the new Labour government will face on Europe, while the second takes a scarcely more optimistic view of our economic prospects.

Is there really no way of tackling these problems which is both economically viable and politically realistic? Perhaps not, within the policy frameworks within which both articles assume we are constrained. But jump outside them, and the position may be far more manageable than is often realised.

Sam Aaronovitch and John Grahl start from the position that "given the fragility of Britain’s trading position and the weak reputation of sterling, it would be extremely dangerous, even if it were possible, to permit a free or "unmanaged" float of the exchange rate: a substantial fall in sterling could, at any time, precipitate a vicious cycle of domestic inflation and sterling depreciation." But where is the evidence that any of this is true?

The UK balance of payments position may well be about to deteriorate sharply, as the pound climbs higher and higher, but current ONS figures show that the UK’s trade deficit is only about 1% of GDP. Despite almost universal belief to the contrary, there is no systematic evidence that downward exchange rate movements cause inflation, or - for that matter - that upward movements reduce it. Why, then, should a planned reduction in the exchange rate, which both our manufacturing industries and all our exporters of goods and services desperately need, push us into a vicious downward spiral?

This is exactly what almost every pundit in the country said would happen after we left the ERM in September 1992. The opposite occurred, and there is no reason to believe it would not do so again. Nor is there any systematic evidence that the British economy is intrinsically more prone to inflation than others, as Helen Thompson suggests. Governments of all political persuasions have given the battle against inflation very high priority, evidently with widespread support. The problem is that the ways in which they have tried to do it - largely by deflationary policies - have resulted in making price rises higher than they needed to be. Deflation deprives the economy of productivity growth to soak up wage increases, while higher interest rates are themselves directly inflationary.

On running an independent monetary policy, Sam Aaronovitch and John Grahl say "We insist that Britain does not and cannot enjoy such substantive independence." But why not? If we wanted to run a macro economic policy geared to manufacturing revival, recapturing the home and export markets, promoting much higher levels of investment and employment, there is nothing to stop us using monetary policy to do it. We would need to increase substantially the money supply, to operate the economy with much lower interest rates, and to bring the exchange rate down a long way, but a determined government could do all these things. Neither our membership of the EU nor any other of our international obligations would stand in the way of our implementing such a policy.

Some fairly simple calculations show that if this policy was pursued, the British economy could be made to grow at 5% or more for year after year. Unemployment would fall to well under one million, and could probably be sustained at 0.5m or less, with reasonably competent management. There would be an inflationary price to pay, but not a very large one. With big productivity increases to mop up wage and salary pressures, inflation would be likely to fluctuate round a figure of about 4% per annum, much as it did in the 1950s and 1960s throughout the OECD countries, and for similar reasons.

With much higher growth rates leading to greatly increased tax revenues, and much lower unemployment reducing government outlays, the fiscal balance would vastly improve, opening up scope for real increases in government expenditure, not least on desperately needed public investment. It is hard to believe that achievements like this would not garner domestic electoral dividends. They would also open the way to dealing with many of our problems with our EU partners which otherwise appear to be so intractable.

Far the most effective way of improving Britain’s power and influence within the EU is to enable our economy to grow much faster. If the UK economy was expanding at 5% or more per annum, while the rest of the EU continued to grow at about 2%, not only would our economic weight in the EU increase exponentially, but the example we provided would also be a powerful factor in our favour. This would give us more freedom of manoeuvre for supporting initiatives at the European level which seemed to us to be sensible and workable, while opting out of those which did not have these characteristics.

Tests of this kind would be particularly applicable to the Single Currency. Despite all the weaknesses of the EMU project, there still seems to be more than a 50% probability that it will come into being on 1st January 1999. The chances of it being a long lasting success, however, or even surviving until 2002 when the national currencies of the constituent states are due to be phased out, look much lower. On the contrary, it seems much more likely that low growth, rising unemployment and fiscal problems will break the spirit of hard hit member states, causing at least some of them to withdraw. The cost in every direction while this process occurs will be appallingly high.

Britain, with its opt out, is therefore well placed to stay clear of these developments, and will very probably do so. If we could combine absence from the deflationary coils of the Single Currency with a Hong Kong like growth rate, achieved by turning monetary policies to our advantage, it is then also hard to see why we should suffer from the political problems set out by Helen Thompson.

Why should we bother about being in a second tier status, if one develops, if our economic performance is vastly superior to that of Member States with the misfortune to be caught up in all the obligations of being in the first tier? If we engineer conditions which produce rapid economic growth, there simply will not be a problem about attracting investment. In any case, what is so attractive about having most of our manufacturing industries owned by people in other countries? Foreign investment is certainly better than no investment, but it inevitably entails heavy remittances abroad if it is successful, and may involve a second grade status for UK plants. Home grown investment has a great deal to be said for it.

There are also likely to be fewer problems, involving difficult and divisive political choices, once an expansionist policy is adopted and gets under way. The City, or at least some of its representatives, may object, but their opposition can easily be shrugged off. Threats to sell sterling are empty if it is government policy to get the exchange rate down. The financial community has a marked distaste for low interest rates, but why should a Labour government pander to this predilection? A Labour government should do the best it can for all sectors of the economy, but it owes the City no special favours or obligations. The bias of the financial and banking community in Britain in favour of restrictive monetary policies and high interest rates, while ignoring the impact that these have on manufacturing, has been much of the problem in Britain for two centuries. A clear view of the need to face down these attitudes is the beginning of economic wisdom. It ought not to be impossible to pull the vast majority of the Labour Party at every level behind such a change.

No doubt it will not be as easy as it might be, because the status and respect with which manufacturing and trading are held in Britain has fallen so low. As part of a reassessment of our economic policies, this badly needs to change. Manufactured exports still account for 60% of our total sales abroad. Far the biggest scope for economic growth and productivity increases lies in manufacturing, particularly in the internationally tradable sector, which also includes some of the service sector. Unless, as a nation, we are willing to attract a far higher proportion of our most able people into these parts of our economy, by raising rewards at every level relative to other sectors, we will never compete in the world, and never succeed in keeping up with the world average growth rate. This too, however, is not an insoluble problem. An expansionist, competitive exchange rate policy would greatly increase the profitability of British manufacturing, which for decades has been at a dismally low level, barely half that of the rest of the economy. Manufacturing would then be able to attract and pay for the talent it so badly needs.

There are, therefore, ways of overcoming both the economic and political problems in our relationships with the rest of Europe, and doing so in a way which has no "beggar my neighbour" element to it, leaving Britain with a wide range of choices as to the domestic and international policies we might wish to pursue. What are the chances of the new Labour government taking its courage in its hands and taking the steps needed to get us to where we need to be?

Some components are already there. We have the monetary union stage three opt out. There is at least a recognition, reflected in the Budget red book, of how poorly traditional economic policies have performed in Britain, with the implication that change is needed. There is deep anxiety over the social impact of high levels of unemployment, particularly among young people. There is, however, very little recognition of the fundamental reasons why Britain’s growth rate has been so low for so long, and a heavy emphasis on supply side policies, which will never work on their own to restore Britain’s fortunes, in the absence of large scale changes in macro economic policy.

It is here that the new government’s policies look desperately vulnerable. The current very high value of the pound, combined with a consumer boom, is bound to lead to a deteriorating trade balance, just as it did at the end of the 1980s. If the economy then has to be reined in, as it was under Lawson, the same results will ensue - cuts in government expenditure, rising taxes, a falling growth rate and increasing unemployment. This is the high road to all the internal political difficulties which bedevilled the last Labour government. It will also leave us subject to pressure from developments in the EU, as economic and political weakness forces us to accept decisions which are not in our interest. This will add external to internal divisions, and make it more difficult to avoid damaging splits involving not just the Labour Party but the whole country over our relations with the EU.

The critical lesson to learn from all of this is that the first priority is to get the country’s economic policies right. If this is done successfully, the most pressing political problems may not melt away, but they will become infinitely more manageable. If the wrong economic policies are chosen, however, the worst of all worlds will result. It will consist of all the usual consequences of bad economic policies, compounded with political divisions and powerlessness. None of this is necessary. It can all be avoided. All that is needed is a great deal more clarity about where our real economic priorities ought to lie. Not with the City and high interest rates. Not with the Bank of England, and its obsession with inflation. Not with monetarist deflation. Instead we need Keynes, an accommodating monetary strategy, a low enough exchange rate to allow British industry to take on the world, and expansion on the back both of rising exports and the recapture the home market. Is it really impossible to persuade Labour’s leadership that this is overwhelmingly in their government’s and the country’s interest?