Conservatives used to view a strong pound as a sign of virility. Now Tory Brexiters are all too ready to celebrate as our currency sinks. They say it makes us more competitive. See, for example, this tweet last month by Fraser Nelson, The Spectator’s editor.
The plunging pound – which today reached a 31-year low against the dollar – is certainly taking the edge off what might otherwise have been post-Brexit blues. Sterling is down 14% versus the dollar and 13% versus the euro since the referendum. This is putting a spring in the steps of our exporters and the stock market.
But don’t the Brexiters realise this means the UK is no longer the world’s fifth largest economy?
Theresa May, Boris Johnson and David Davis beat their chests proudly at the Tory party conference, proclaiming how the rest of the EU needs to deal with us because we’re so big. Their speech-writers don’t seem to have twigged that the Brexit vote has knocked us off our perch.
At the current exchange rate, we’ve dropped below France and are now the world’s sixth largest economy. That doesn’t just undermine our clout in the coming trade talks with the EU; insofar as global influence reflects the size of an economy, it will reduce our power more generally.
Don’t the Brexiters also realise that the plunging pound has cut our purchasing power and that inflation is coming? It’s not just those taking foreign holidays who will feel the pinch. Rising prices will hurt those on low incomes that the prime minister says she wants to help.
What’s more, the Bank of England – which is currently encouraging a weaker pound with its loose monetary policy – may at some point need to reverse course or lose its anti-inflationary credibility. Margaret Thatcher’s Tories used to point out how difficult it was to remove inflation once it had taken root. But the current crop seems to have forgotten this.
Conservatives also used to say that devaluation was not the best way to boost productivity and wealth. The gain in competitiveness is quickly frittered away by inflation. Businesses should be focusing on innovation, marketing and good management. Or, as Liam Fox might say, a plunging pound encourages industrialists to get fat and lazy and spend time on the golf course.
Hugo Dixon is co-founder of CommonGround as well as editor-in-chief of InFacts. You can sign up as a supporter here.
Fox, Johnson and Davis don’t appear to care overmuch about the appalling economic damage they are inflicting, just so long as they can take the country back to their imaginary vision of the early 1970s. I don’t know whether to laugh or cry that the country’s future is in the hands of such blatantly dishonest and corrupt people.
Early 1970s??? More like the early 1950s, I fear…..
If we are not even to be a member of EFTA after Brexit as the harsh Brexiteers would like, that takes us back not to 1972 but to 1959.
http://www.efta.int/about-efta/history
Typo in your comment Neil – for 1970s read 1870s. You’re welcome
Hugo Dixon should be ashamed of himself for having written this load of nonsense. GDP is not measured in real time but is measured discretely. You can’t just take last year’s GDP figure, convert it into USD using the current exchange rate, and re-rank us underneath France, for reasons that would be obvious to anyone with even a basic, GCSE level comprehension of economics. One of these reasons is that GDP is endogenous with respect to, among other things, the exchange rate. We recently saw a 3% narrowing in the current account deficit – which occurred as a result of the depreciation and will bolster GDP.
Yet more evidence of economic illiteracy comes with the throw-away remark about inflation. Well Mr. Dixon, what is the chief danger the eurozone faces right now? Deflation. Tell me, is the UK’s inflation rate above or below the 2% target deemed healthy by the BOE? The implication here that because of the depreciation we will suddenly jump from dangerously low inflation to dangerously high inflation in relatively quick time is absurd… but if that were to be the danger, the BOE’s recent action has exacerbated the threat.
Currency devalues against the euro and the dollar are to be expected i guess. As people with a low confidence in what the uk will be after the brexit will of course wish to move their money.
Im just curious though with the Deutsche bank liquidity looming, a run on italian banks all but inevitable, not to mention the greek and Portuguese fiasco, how safe is the euro going to be. As for the dollar, with the potential of saudi Arabia dumping large numbers of government bonds due to the suing of them over 911, how safe will the dollar be?
And look on the broght side, with exports becoming cheaper to ship out we might see a balance of deficits in trade and even perhaps new markets flourish?
Exporting being cheaper is all well and good but when imports become more expensive and inflation increases it will quickly reverse any gains from exports and even increase the deficit balance.
The problem with that hope is – we are already importing far more than we export, and the cost of those imports will rise, so British industry will be like the Red Queen in Alice – “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”