Monetary union is clipping the wings of regions outside the dynamic South

Paul Ormerod
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LORD Heseltine’s recent report into economic growth has attracted a great deal of comment – almost all of which suggests that he longs for the old Regional Development Agencies and the state-planned decades of the 60s and 70s. But the report does, at least, outline a list of possible policy actions to deal with a serious problem.

What is to be done about the regions of the UK? The first thing to note is that there are very marked differences within each of the individual regions. Northern towns like Hexham, Harrogate and Wilmslow are every bit as prosperous as the Home Counties. So discussing the problem of the regions is an over-simplification. But there is still a problem. Incomes per head are considerably higher in London and the South East than in any other region taken as a whole, and average unemployment rates are lower. And if anything, these gaps are widening.

The suffering of Britain’s regions stems from the fact that they are trapped in a monetary union – the sterling area – with two very dynamic and productive areas: London and the South East. We are not accustomed to thinking of it in this way, but the underlying problems of Greece and Spain are the same as those of Yorkshire and Wales. They are uncompetitive in their respective monetary unions.

Britain’s regions do not face the acute problems of Eurozone countries for two reasons. First, they have lacked the autonomy to take decisions which have bankrupted some Southern European states. Second, until now, the prosperous South of Britain has been happy to hand over large sums of money to keep the regions afloat.

Ultimately, our regions are running large balance of payments deficits with London and the South East. They are not sufficiently competitive to produce enough goods and services that our consumers want to buy. In a monetary union, a balance of payments deficit translates into lower growth and higher unemployment, something that standard trade theory – one of the best bits of economics – shows.

The coalition’s policy of varying regional pay is therefore a good thing. Paradoxically, Britain’s regions are poor because they pay themselves too much. They cannot devalue their currency against London to make themselves competitive, so they need to price themselves back into the market.

But they also need more trade, and this means better links and more connections with London and the South East. Modern network theory has been used to provide exciting new perspectives on the structure and patterns of world trade. The same principles apply within a country. More infrastructure connections would give the regions a chance to transform themselves. They could become prosperous areas again, as they were in the nineteenth century.

Paul Ormerod is an economist at Volterra Partners, author of Positive Linking: How Networks Can Revolutionise the World.