Tuesday, 11 October 2016

The pound is now the official opposition

The continuing collapse of sterling – currently at $1.23 compared with $1.48 on the day of the referendum, including a flash crash last Friday – is the most tangible economic consequence so far of the vote to leave. In any other political climate the collapse of the pound on this scale would be a political crisis, and had it happened under a Labour government more than that, with screaming headlines in every newspaper. In the strange climate of post-referendum politics it is if not ignored then treated as just one of those things.

In the hermetically sealed world of Brexiters this is hailed as good news on various dubious grounds. It is good for exports, they say, but of course by contrast it is bad for import costs and the UK imports far more than it exports; or that the pound was over-valued before. If we take them at their word, it is surely surprising that they did not campaign in the referendum on the promise of the great news that the pound would plummet by 17% in 100 days. Of course they did no such thing, instead treating predictions of a currency collapse as yet more ‘Project Fear’ from ‘experts’.

Their joy is likely to continue, since all predictions are for further falls, with some anticipating dollar parity within months. There are of course similar falls against the Euro, with some airport exchange desks offering the pound at parity, and it is almost inevitable that this will become the official exchange rate fairly soon. This immediately impacts upon British tourists and pensioners living abroad, and in due course will lead to increasing inflation as it feeds through to import – and especially oil – prices.

Currencies fluctuate for all sort of reasons, of course. But this one has nothing to do with correcting a previous ‘over-valuation’ (in any case, the idea of currencies having some kind of ‘correct’ valuation is nonsense). It is straightforwardly a response to Brexit. The pound fell very sharply after the vote, somewhat recovered as traders assumed that there would be a soft Brexit, and then started to fall sharply again when Theresa May indicated that a hard Brexit was in prospect. With each statement coming from the government over recent days that seems to re-confirm that, the pound has fallen. If the government were to announce a soft Brexit policy the pound would rise.

The falling pound is therefore understandable both economically and politically. Economically, it is a forward estimate of the damage that will be done to the UK economy by exiting the single market, not just in terms of the effect on British businesses but, relatedly, in terms of the flow of investment capital which funds the UK’s current account deficit which was by international standards already huge (3.7% of GDP in January) before Brexit and is now soaring (currently 6% of GDP). That’s not the fiscal deficit (the gap between government income and expenditure) that has dominated political discussion in recent years, but the much less discussed, and arguably much more important, gap between national inflows and outflows of money through trade, money transfers and investments. This makes the UK economy unusually dependent upon what BoE Governor Mark Carney called “the kindness of strangers”. But of course there is no kindness in international finance, just the remorseless logic of the bottom line.

Politically, as HSBC’s chief foreign exchange strategist David Bloom said this week, this means that “the currency is now the de facto official opposition to the government’s policies”. This comment reflects not just the fact that the pound’s value is tracking Brexit policy hints and announcements, but also that the de jure official opposition – the Labour Party – is not acting effectively, to say the least.

Labour has no clear Brexit position, did not even discuss it at their part conference, and seems split at least three ways between those who want a soft Brexit (single market including free movement), a softish Brexit (single market with some unspecified restriction on free movement), and its leader Jeremy Corbyn’s position which seems to be (though he has never articulated it with any clarity) in favour of free movement but not the single market – a position which does not really have a name on the soft-hard Brexit spectrum. There is some emerging sign of a cross-party parliamentary opposition to hard Brexit but at present it is indeed fair to say that the government’s main opposition lies in the FX markets and amongst business associations like the CBI – certainly not with Labour which is an unprecedented abdication of political responsibility and competence.

Although the idea of the value of the pound being some kind of index of national political virility is absurd, it is in the present context a kind of proxy measure for the way that the UK is currently seen around the world as having taken leave of its senses: proposing to cut itself out of the world trade system and to re-attach itself on terms which cannot be anything but worse, and this on an unknown timescale; and having done so against the advice of all its major allies, including its key foreign policy partner for 70 years the US; and in the process slackening the NATO-US-EU axis which lies at the core of the global order, imperfect as that may be, at a time when it faces grave threats from a resurgent Russian nationalism. And all of this because about 3% of the UK population comes from the EU under free movement of people who will in future come instead under the aegis of some kind of work permit scheme.

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