A strong pound has been a slow-burning catastrophe for Britain. A weak pound will help re-balance our economy and make independent Britain a success.
Your holiday and weekly shop will be more expensive this year. Inflation is on the up, you see. The Consumer Price Index has risen by 1.8% in the year to January 2017, approaching the Bank of England’s 2% target. It may well be closer to 3% before the year is out.
Supposedly this is all bad news, because inflation is always treated as bad news. It squeezes living standards and eats into savings. Who wants prices to rise?
In the United Kingdom, blame for inflation has focused on the significant fall in the value of the pound since Britain’s vote for UK independence from the EU last June (down by around 18% against the dollar and 12% against the euro), which has made sure import prices will rise in 2017. ‘Bloody Brexit’ I hear you snarl.
So the fall in the value of the pound must be bad news, the first of many signposts pointing towards Brexit-inspired economic doom…or so the story goes.
Yet this story is missing a far bigger point: the pound’s fall is necessary for Britain’s economy to rebalance, and in this sense it is the best thing to have happened to the British economy in years.
I feel completely calm about it, and so should you. The question should not be how to get its value up again, but how to keep it down at around its new level.
I know: people like strong currencies. Who doesn’t like ‘strength’ over ‘weakness’, in currency or anything else? Yet currency shows how unhelpful language can be sometimes. We love ‘strength’. But do we like being ‘uncompetitive’? We love Roger Federer, and he’s very competitive. But he’s not the strongest.
Here’s the truth: a strong pound has been bad for Britain.
In our panic about pricier EasyJet flights, we are missing something far more fundamental. Our current account nightmare shows us for what we are: a country whose economy is heading for the rocks unless we start paying attention. Britain is running a current account deficit requiring us to borrow and sell assets amounting to 5% of GDP every year to keep the show on the road.
That borrowing and selling is not being used to finance the infrastructure which can one day help pay back these debts. It is being used, instead, to allow us to keep on spending, now.
And as we sell our assets – football clubs and airports, technology companies and power stations – we hand over, to foreign companies and governments, an ever widening stream of future income, and ever more control over our economy. This isn’t ‘strength’. It’s a disaster. Incredibly, it won’t be an election issue in 2020. Yet it should be the biggest issue of all.
A strong pound has long been central to this problem. Put simply, we have found it easy to buy things, but not very easy to sell things. We have accepted a stubborn trade deficit with the rest of the world for the best part of 150 years. For most of that time, Britain has covered this inadequacy by earning more from investments abroad than foreigners did from their investments in the UK.
Yet in recent years even this compensation has been wiped out: from being nearly £20 billion in foreign investment income surplus in 2011, we were £37 billion in deficit in 2015 – a massive negative swing of around £57 billion in just four years.
The strong pound has been an important part of the problem here: when we convert our yen and euros into strong pounds, we are not getting back as many pounds as we would like.
The consequences of our inflation-based obsession with a strong currency have been economic, social and political, and always significant.
With a strong pound, we have found it hard to sell our relatively expensive manufactured goods. British manufacturing has therefore collapsed. It delivered one third of our GDP as recently as 1970; today, the share is barely 10%. Factories have closed and jobs have vanished, hurting towns and communities which have resented globalization ever since.
London and its financial services have become ever more economically dominant, and it has helped set a politically unhealthy trend. Governments of all colours obsess over how to appease the job-providing, revenue-generating City of London. Yet the City’s interests are not always the same as the national interest, and even the mighty City can’t make up for Britain’s trade deficit in goods. Putting the City first has regularly meant putting provincial Britain a distant second. How did Brexit happen? Let’s think about that…
Our economy is remarkably unbalanced. Everyone knows it. Government after government enters office promising to ‘re-balance’ our economy by sector and geography, to solve the problems of regional inequality, and to bring work to places stripped of their industries, and with it their pride. Yet they keep on failing. The only surprise is that no one has identified our overvalued currency as the biggest obstacle to this noble ambition.
A weaker pound is a crucial step towards healing our political ills and re-balancing our economy.
It can help correct our foreign investment income deficit.
It can make our exports more competitive and encourage us to source more of our inputs from home.
If British manufacturing could become more competitive, our government could start being more attentive to the country beyond the M25, and we could reduce our exposure to financial crises. If we could generate a healthier export balance we could stop relying on consumer spending to power our economic growth, and we could preserve more of our assets for future generations.
President Trump has railed against countries which deliberately devalue their currencies. He doesn’t do this because he thinks those countries are ‘losing’. It seems oddly British to moan about becoming accidentally more competitive. Instead, let’s cheer our good fortune, and try to keep the pound ‘weaker’.
Roland Valentine Stewart is a Staff Writer for The Quad. He read History at the University of Cambridge.
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