Leading Article: The cost of devaluation

THE PRESSURE on John Smith to support what would amount to an immediate and unilateral devaluation of sterling is growing within the Labour Party and will continue to do so, at least until the annual conference in October. The Labour leader would be wise to resist the siren calls made in Blackpool by the leaders of two of the biggest affiliated unions when they expressed their organisations' desire for an end to the current consensus. A number of predictable MPs, including John Prescott, Bryan Gould and David Blunkett, have now joined the chorus of discontent.

The Transport and General Workers Union and the GMB general union made it clear that they intend to use their block votes at the Labour conference in an attempt to force a change of policy on the Shadow Cabinet. This, incidentally, raises doubts about the sincerity of union leaders who, only weeks ago, were expressing the pious opinion that it was wrong for unions to try to impose their policies on the parliamentary leadership, and that the block vote was an anachronism. The reality is that union leaders are by their nature power-brokers. As long as they retain constitutional power within the Labour Party, they will exercise it ruthlessly to advance the policies they espouse.

As it is, the unease within Labour's ranks is natural, indeed inevitable. The job of an Opposition is to oppose, if only to test the policies of the Government. The fact that Britain is locked into the ERM, with the support of the Labour Party, has made it difficult for the Opposition to capitalise on the widespread economic pain and sense of frustration in the country. This has led to some ill-considered and opportunistic ideas being floated. For example, the shadow Chancellor, Gordon Brown, should have known better than to advocate a reflationary fiscal package on the Japanese model. Japan has a large budget surplus. This country, in contrast, has a considerable deficit.

Those in the Labour Party and beyond who favour a devaluation of sterling, within or without the ERM, are really saying that they want more inflation - as would many hard- pressed home owners. Devaluation seems a painless option. But it sends up the cost of imports and prompts workers to demand higher wages to compensate for their lost purchasing power. (Union leaders who today are demanding job creation through devaluation would, if given their heads, tomorrow be following wage policies designed to boost inflation.) This, in turn, would lead to higher interest rates to offset the increased risk of holding sterling - not the most effective way of stimulating the economy. It is sobering to think that, had Labour won the general election, sterling might already have been devalued, in which case interest rates would have been some 2 per cent higher.

In the run-up to his first party conference as leader, Mr Smith should seize every opportunity to expose his critics' arguments for what they really are - and to stress that he would not consider himself bound by unpalatable decisions reached at Blackpool. The Labour leader should, however, open some options. Specifically, he should be arguing more firmly for a general revaluation of the mark, by perhaps 15 per cent, so as to allow the Germans to cut their own interest rates. There is, here, the basis of a credible position for the Opposition to adopt.