There could be a sustained decline in Sterling of 10 to 20 per centby George Magnus / June 9, 2016 / Leave a comment
Read more by George Magnus: Michael Gove misunderstands
With two weeks to go until the EU referendum and opinion polls bouncing around either side of a very close outcome, a new focus is forming—at least in global financial markets—on Sterling. Soon, it may become a more ubiquitous totem as people become anxious about the outcome of the referendum itself, and start to see its impact on the currency as a weathervane for what lies ahead for the economy.
Angst about Sterling is hardly surprising. Most economists, and the credible UK and global institutions that have opined on the economics of Brexit, think that a vote to leave will result in a meaningful—and perhaps sustained—decline in Sterling, perhaps of the order of 10-20 per cent. Why would this happen, and how much would it matter if it did?
To counter the concern that “Remainers” have about a slump in Sterling, “Leavers” refer, completely out of context, to the European Exchange Rate Mechanism (ERM) debacle in 1992—commonly known as Black Wednesday.
After that episode, the effective trade-weighted value of Sterling fell by 20 per cent between 1992-96. The economic impact of this devaluation proved to be quite benign—it helped the economy to emerge from the 1991-92 global recession while interest rates fell sharply. Between 1996-98, Sterling recouped its previous losses and more. It bears mentioning that the 1990s were the start of a two-decade period of buoyant global growth and world trade. Emerging markets, not least China, were starting to have a major impact on the global economy, and the information and communication technology revolution featured prominently, as did higher productivity growth.
The next few years, and even 2016, are set to be very different. There are many reasons for this, and I and others have examined them in Prospect before. But here are five reasons why Sterling might be particularly vulnerable now and in the coming…