And this slump is not stimulating growth—meaning Brexiteers don’t have a leg to stand onby George Magnus / August 29, 2017 / Leave a comment
A year ago, Sterling was still worth €1.15. On holiday in Italy these last two weeks, I was aware that my pounds were buying fewer and fewer Euros by the day, and my latest credit card statement shows transactions including handling fees, such that the effective rate I was paying was about €1.05. At one airport on Saturday, I saw the currency exchange rate lit up on a screen at 1:1. A number of currency analysts have lowered their predictions, for what they’re worth, to suggest that the market rate will be parity by the end of the year, meaning that commercial transactions will take place where £1 is worth less than €1. Sterling may be holding its own against a weak US dollar that few analysts expected at the start of the year, but it’s been trashed against the Euro. And still, the Brexit protagonists say this is good news. Is it?
In textbook economics, a weaker exchange rate should boost a country’s competitiveness, making exports cheaper to foreign buyers, and imports more expensive to local consumers and businesses. This should lead to an improvement in the balance of trade and payments, and help to stimulate economic growth. This is what the handful of Brexit-supporting economists insist is truth. Yet the facts speak otherwise.
We should not make the rookie error of conflating the depreciation of Sterling currently with the slump in the value of the currency when the UK came out of the Exchange Rate Mechanism in 1992. Remember that at that time, Sterling had been struggling to remain glued to the Deutschemark, necessitating tight economic policies, especially double digit interest rates. Once the UK government abandoned the idea of the peg (a fixed rate against the Deutschemark), economic liberation truly arrived, with interest rates more than halving over the following two years to just over 5 per cent. This was not so much a currency devaluation as a financial and economic regime change, and the UK benefitted significantly. This is not happening today.