Use mobile windfall billions to bring down the high pound

Gordon Brown's promise to deliver a "stable and competitive exchange rate" is one which now he almost certainly regrets. The cries of pain from the car industry are being echoed in chemicals, pharmaceuticals, textiles, coal and in shipbuilding.

The pound has risen by more than a third since the last low point in 1996 and by 15% since May 1997. There is no such thing as a "right" exchange rate but the IMF estimates an appropriate rate is about 15% below present levels.

The strong pound has reduced inflation and the level of interest rates which would otherwise be necessary to curb inflation itself. Indeed, some argue that a strong pound is desirable. Under 25% of GDP is now manufacturing and some of that is unaffected by currency swings.

Some countries, like Switzerland, have flourished in the face of currency appreciation by specialising in price-insensitive goods and services.

Such optimism derives support from the fact that export volumes continued to rise by 5% in 1999. However sales have been achieved with unsustainably tight margins and the future is less sanguine.

The conventional wisdom is that there is nothing we can do because the real problem is a weak euro.

This is like an athlete arguing that he lost a race because the winner was too fast, not because he was too slow.

But the pound has also appreciated strongly against the Australian dollar and the South African rand (leading coal exporters), the Korean won (the top shipbuilder) and even the Swiss franc.

If the problem is indeed the euro, it raises the question of how Britain can co-exist with a currency zone which absorbs half our visible exports but has a currency which with its predecessors has devalued by 40% against sterling in the last four years. Such divergence is in the interests neither of the UK nor Euroland.

The greater the evidence of distress in manufacturing and agriculture, the more the demand for action will grow. There are contrasting approaches to the problem.

The easy option would be to change the terms of reference of the Bank of England's monetary policy committee so that interest rates achieve a devaluation rather than narrowly serving the current anti-inflation objective.

This would be a mistake, since the MPC is only just beginning to establish the credibility of the UK as a low inflation country. There is a risk that higher inflation would rapidly erode the real value of any devaluation as it has done in the past.

The more satisfactory route is to find ways to influence the exchange rate without undermining the MPC'S anti-inflation credentials. One idea is to buy euro securities and sell long-term sterling securities to stabilise the impact on the money supply.

A unique opportunity arises using the down payments from the third generation mobile phone auctions: £10bn out of an eventual £22bn. By investing the windfall in this way the government can ease aid exchange rates both directly through the purchase of foreign assets and indirectly through tight fiscal policy.

We also need to reduce our dependence on short-term interest rates to manage inflation. More active fiscal policy is part of the story. Another is curbing inflation in asset markets, notably housing.

It is absurd that manufacturing in the north should pay the price for a property boom in London. This may mean reviving the power to regulate mortgage lending depending on market conditions.

If the government carries through its commitment to join Emu after a referendum - when entry conditions are right - the Bank of England will have to manage the transition to a fixed, and appropriate, exchange rate. New techniques of inflation management will be required.

Displays of impotence over the exchange rate comfort only those who see no alternative but for British industry to be tossed around like driftwood on the waves of currency movements.

Vincent Cable is the Liberal Democrat trade and industry spokesman and a former chief economist at Shell