Wednesday, 12 October 2016

Against Stupidity

When the euro was forged it was a case of political will against economic reality. In terms of basic economics, it did not make sense to have different countries, at different phases of economic cycles, all constrained by one currency and one central interest rate from the European Central Bank.

After all when the pound was shadowing the precursor to the euro, the European exchange rate mechanism, the money markets dealt it such a blow that the Chancellor had to bow to the inevitable and quit. In the run up to that, interest rates went up to punitive levels in an attempt at a political fix.

With the euro, agreements were put in place to ensure restrictions on levels of borrowing by member states. This stability pact was designed to overcome economic dislocations and keep the euro strong. Unfortunately, having rules, and abiding by rules, were two different things, and as a result, the economies of Greece, Italy, Spain and Portugal are in a mess, forced into austerity measures to try and find an economic fix to the failure of the stability pact.

So far, measures have worked. The market, however volatile, is in the game of confidence, and just enough confidence is provided whenever there is a wobble in those countries, especially Greece, to keep the euro on track. There are enough countries in the euro to make some kind of rescue package to retrieve the situation.

The result of Brexit was to see the pound fall off a cliff, not only against the euro, but also against the dollar. The recent announcement by Theresa May of a “hard Brexit” has caused it to plummet even further.

It is once more political will against economic reality. But Britain is on its own; there are no other countries to help retrieve the situation. At present, thanks to hedging on currencies, and the low cost of fuel, the full impact of sterling’s decline has not reached the consumer or the businessman, but given time it will. But by then, it may be too late. Once article 50 is invoked, there is no going back, and as the time for approach and a hard Brexit, although one without many details, emerges, the markets will again see a further punitive slide in the value of sterling.

At the moment, the focus is tightly on immigration. Pandering to resentment, Theresa May is set against the City fat cats, and pushes the value of services to the UK down the agenda. While a weak pound may be good for export of goods, the bulk of the UK’s income comes from services, and those depend on access to markets. A hard Brexit may well close those markets down, and if that happens, everyone will suffer.

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