We will only get a real sterling crisis if we crash out of the EU – and that’s unlikely because MPs will probably stop the new prime minister dead in his tracks. But if we do, we’ll all be poorer.
The jitters on currency markets following Boris Johnson’s arrival in Downing Street are so far not terribly serious. The pound is down only 3% against the euro in the past week and is trading roughly where it has been in the three years since the referendum.
Sterling has plunged twice in the past four years. The first time was at the end of 2015 when investors started to realise that the referendum wasn’t going to be a walk in the park for David Cameron. The second time was after the referendum result itself. Taken together, the pound is 20-25% down versus the euro.
If we crash out, there will be another big fall. A no-deal Brexit will disrupt our trade not just with the EU but also with other markets. (Read our no deal dossier here).
Delinquent government?
As if that’s not bad enough, investors may conclude we have a delinquent government. Johnson seems determined to spend money we don’t have to win popularity with voters and bail out the economy. He’ll also soon have to pick a new governor of the Bank of England to replace Mark Carney who leaves the post in January. He may choose a Brexiter who cares more about supporting government policy than fighting inflation.
Because we import more than we export, we have a big current account deficit – 5.6% of GDP in the first quarter of 2016. We have to rely on foreigners to plug the gap by lending us money or investing in the UK. But the Brexiters are destroying the UK as an attractive investment proposition.
In such a scenario, the pound would tank. While it’s hard to predict how big a fall could be in store, it would be surprising if sterling didn’t drop at least another 10%. That would take the entire drop since late 2015 to a third, in rough numbers.
Poorer and less powerful
Why should we care? Won’t the currency act as a safety valve allowing our companies to export their goods and services despite the disruption to trade that a crash-out Brexit would cause – and so protecting people’s jobs?
This is sort of true. But in the process we will become poorer and less powerful.
Brits who travel abroad on holiday already see the impact. Everything just costs so much more.
Even those who stay at home will pay the price through higher inflation. Everything we import – from oil to food to clothes to mobile phones and high-tech kit for our defence industry – will cost more.
By contrast, everything in the UK will look cheaper to foreigners. Our workforce will be cheap. And our assets – such as property and companies – will be cheap too.
Once the pound has fallen far enough, bargain hunters from abroad will come in to scoop them up. We’ll be so desperate for cash, we’ll struggle to say “no” even if it means selling the family silver to the Chinese or Russians.
Vote Leave and make the UK cheap as chips? That wasn’t exactly the slogan in 2016.
It would be far better to stay in the EU. We’d then have a strong pound, cheaper foreign holidays and less inflation. We’d also have more power on the global stage.