Sterling at €1.34 is a threat: Britain, the EU and the price of independence

At the heart of the British argument against closer ties with Europe has always been many UK citizens’ fear of losing control over the country’s affairs in general and in economics in particular.

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This article originally appeared on OMFIF’s website here

At the heart of the British argument against closer ties with Europe has always been many UK citizens’ fear of losing control over the country’s affairs in general and in economics in particular. For many in Britain, the euro project is not a basket of former independent currencies, rather a basket case. Doubts about the wisdom of so-called ‘German-backed austerity policies’ or about the ability of Greece and others to stay in the single currency have strengthened this belief in many British minds.

The ‘in-out’ referendum on Britain’s membership of the European Union which could take place in 2017, depending on the outcome of the May general election, will further focus attention on this point. Latest opinion polls indicate a majority in favour of departing.

The big question for a relatively small country like Britain is what ‘independence’ means in a globalised world. Being on your own, in monetary affairs as well as politically, can be damaging. Against its €1.04 low point in 2009, sterling has appreciated by 30% to around €1.34. This may be good news for Britons holidaying abroad, but the pound’s rise will hammer British manufacturing exports.

Switzerland, which has just abandoned its currency peg against the euro, has a current account surplus and high-value manufacturing goods, helping the Swiss absorb the shock of the latest 20% Swiss franc revaluation. Britain, on the other hand, has a large and growing current account deficit. It desperately needs to rebalance its economy away from services to manufacturing.

Although the UK’s coalition government has declared it wishes to further the ‘march of the manufacturers’, it has made little progress. Britain’s external performance will get worse. All this spells future trouble for sterling, especially if an inconclusive May election result brings political uncertainty.

Against this sobering background, Britain’s power over monetary and fiscal policy – setting interest rates, deciding quantitative easing and calibrating fiscal expansion or contraction – is well short of being an unmitigated benefit.

Germany has been doing well within the euro area because it benefits from the weak euro for its non-European exports, and even more from the stability, or lack of volatility, that emanates from membership of a large club. Germany still runs a substantial trade surplus with the rest of the euro area, but it has fallen sharply in recent years, making up less than 25% of Germany’s overall external surplus, against 40% in 2011.

If Britain wants to be serious about rebalancing the economy, it has to give its manufacturers a solid base, particularly in foreign trade. Currency hedging is expensive, the more so when volatility is high. The euro bloc encompasses most of the UK’s largest trade partners. Every transaction to another currency – whether one is buying or selling – costs money.

With so much of British industry in foreign ownership, there is an additional danger. When the foreign owners see developments they don’t like, they will first stop investing and then look elsewhere. At the German-British Chamber of Commerce and Industry we hear many worried comments from the over 1200 German-owned companies in the UK. The grumbling is getting louder.

And it’s not confined to the Germans. British business is overwhelmingly in favour of the UK staying in the EU, as a recent poll by the EEF manufacturers association showed. Britain can hardly be expected to join the euro in the foreseeable future. But as the election approaches, the issue of UK EU membership will start increasingly to occupy business people’s minds. Some might even support Labour as a potential party of government that will not brook a referendum on the matter – and could bring a weaker currency as well.

OMFIF

The Official Monetary and Financial Institutions Forum is an independent research and advisory group and a platform for confidential exchanges of views between official institutions and private sector counterparties.

The overriding aim is to enable the private and public sector to learn from each other in different ways, promoting better understanding of the world economy and higher across-the-board standards.

All developments regarding OMFIF can be followed at www.omfif.org and www.twitter.com/OMFIF.

Bob Bischof is a member of the OMFIF Advisory Board.

Author: Bob Bischof

German Robert (Bob) Bischof has lived and worked in Britain for 40 years. He is convinced that the two countries can gain much by learning from each other. Well-known for his outspoken comments on economic, political and industrial issues concerning Britain and Germany, he is a regular contributor to a range of newspapers and other publications, including the Financial Times and other national papers.

One thought on “Sterling at €1.34 is a threat: Britain, the EU and the price of independence”

  1. Interessanter Artikel, Bob!

    Ich frag mich ob UK wirklich relativ rasch zu mehr manufacturing kommen kann. Das erfordert ein relativ breites Angebot an guten (hauptsächlich) naturwisenschaftlichen Akademikern, sowie vor allem eine gute “reguläre” workforce, die über solide handwerkliche Qualifikationen verfügt (z.B. durch “vocational training” à la berufsbildende ‘duale’ Fachschulen), – sodass sich im Endeffekt Produkte ergeben können, die international wettbewerbs- und export-fähig sind.

    Viele hacken jetzt auf dem Euro herum, weil er in letzter Zeit gefallen ist.
    Dabei darf man nicht vergessen, dass er zu seinem Startzeitpunkt 15 Jahren nur ca. 0,87 USD wert war, bis er vor einigen Jahren bis auf 1,50 USD geklettert ist.
    Nun ist er halt wieder etwas von oben herunter gekommen, wobei das nicht unbedingt ein Ausdruck von Wirtschaftskraft ist, sondern teilweise zwangsweise und absichtlich von der EZB herbei geführt wurde. Er ist derzeit also teilweise ebenso manipuliert, wie der frühere 1,20-Riegel des Schweizer Frankens ggü dem Euro.

    Hoffe Euch geht’s gut.

    Mit besten Grüßen
    Michael

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