The Phase I Chill in Britain

BRITAIN'S Prime Minister Edward Heath this week took a page from the textbook of Nixonomics. Faced with one of the worst inflation rates in Europe, and with a fall in the value of the pound to an alltime low, Heath ordered a 90-day freeze on wages, prices, rents and dividends. That, he said, was only the "first stage" of a new anti-inflation policy. After 90 days (or possibly 150, since the freeze can be extended for 60 days), Britain will begin a "second stage" comparable to the U.S. Phase II. For that period, Heath will seek legislation aimed at keeping increases within certain annual limits, probably

8% for wages and 5% for overall prices. That those high figures would represent a lessening of inflation shows how dizzying the wage-price spiral is in Britain.

As it was for Nixon 15 months ago, the new strategy is a dramatic about-face for Conservative Heath. Like the U.S. President, the British Prime Minister is a philosophic believer in free markets, and he had struggled to persuade Britain's Trades Union Congress and the Confederation of British Industry to agree to voluntary wage-price restraints. The attempt failed spectacularly last week when the T.U.C., under pressure from union hardliners, refused. Heath then felt obliged to legally limit wages and prices. Britain's unions, struggling to keep their members' pay ahead of price boosts, have pushed hourly wages 17% above last year's levels. Without some program of restraint, inflation was expected to hit a 14% rate next year, a pace approaching the unenviable Latin American standards.

Heath's policy runs a risk of provoking waves of protest strikes. British unionists already have been stalking off their jobs in the greatest numbers since the General Strike of 1926; working days lost in this year's first nine months topped 22 million, v. 12 million in the equivalent period last year. The combination of strikes--which have curbed exports--and inflation have made the pound once again the sickest of the major world currencies. Last June, Britain let the pound float, that is, allowed market forces to determine its price. Lately it has been not so much floating as sinking. Early this month it hit a low of

$2.32, way down from the $2.61 parity fixed last December.

Not entirely bad for Britain, the pound's fall has helped to compensate for the rise in British export prices in the past year. But, as speculators rushed out of the pound and into stronger currencies, the pound's weakness threatened to unsettle the whole network of currency-exchange rates that was stitched together in last December's Smithsonian Agreement. For the sake of stability, Britain's Common Market partners-to-be last month urged Heath to make a modest formal devaluation quickly. Rumors circulated that Heath had agreed, but only on condition that the pound be pegged as low as $2.25. That sharp cut reportedly horrified other European leaders, notably French President Georges Pompidou, who argued that it would make British goods unfairly cheap in world markets.

Heath has stabilized this situation for the moment; on the news of the wage-price freeze, the pound strengthened to $2.36. The British also have now taken the European lead in fighting inflation. Before the British freeze, Common Market finance ministers had met in order to cobble together an anti-inflationary package for Europe, but agreed chiefly to restrain budgetary and credit increases in their own countries, to cut some farm tariffs temporarily and to encourage more competition among businesses.

Heath's freeze sets an example for tougher action, and Americans will be watching it closely. If the British cannot cure their inflation, the pound most likely will continue to decline. If it falls too low other nations, particularly Italy, might make competitive devaluations. A string of devaluations would undo much of the advantage that U.S. foreign traders gained from last December's currency realignments.

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