Vericool Finance

Trust the Germans to set the cat among the pigeons. The last time a senior German official publicly criticised Britain’s economic policy, in 1992, the spat eventually sent the pound crashing out of the European exchange rate mechanism.

This recent attack by German finance minister Peer Steinbrück’s remarks about Gordon Brown’s conversion to “crass Keynesianism” threatened to send it through the floor.

The outburst was a gift for headline writers: “Don’t mention the economy,” sniggered the Daily Mail. But is was also seized upon by the Tories as further weight for their argument that Brown’s decision to borrow heavily, in an attempt to prevent recession from turning into a slump, is a potentially ruinous gamble.

The markets have given their verdict on the Government’s recklessness with a vote of no confidence in our currency. It was a pivotal psychological moment when sterling’s value fell to near-parity with the euro.

Investors, bluntly, are fleeing the prospect of a bankruptcy scenario. The Government is expected to borrow at least £70bn this year to add to the £640bn it already owes. Throw in the hundreds of billions it has made available to banks, and suddenly the prospect of a £1trn national debt does not seem so distant.

Sterling devaluations are a touchy issue for Labour: they crippled every government from Ramsey MacDonald to Jim Callaghan. But the pound had to fall: it was over-inflated for years by speculative cash. This devaluation could prove as good for Britain’s economy as our ejection from the ERM in 1992.

There’s not much sign of an upside yet. The much-vaunted benefit to exporters hasn’t materialised, and the weak pound is damaging both our national self-esteem and our buying power overseas. But that doesn’t mean that Steinbrück is right to dismiss Brown’s stimulus policy as crass.

Ultimately this debate boils down to who is right: the mega stimulators – Gordon Brown and Barack Obama – or the steady-as-she-goes brigade. History may offer the best guide. What did the Weimar equivalent of Peer Steinbrück do? He stuck to sound money and fiscal rectitude – with eventually fire consequences. FDR, by contrast, opened the spigots.

As the world faces another terrifying nosedive, history supports the theory of economic intervention.