Things Falling

A very busy but also very interesting day at the office in the Niels Bohr Institute ended this evening with a thunderstorm, complete with spectacular lightning and torrential rain. I got wet on the walk back to my small home, but I managed to get inside before the worst of it started. I seem to remember a similar thing happened last time I was in Copenhagen. Maybe it’s the time of year.

Anyway, torrential rain isn’t the only thing that’s been falling today. The Pound dropped sharply against the Euro, so it is currently around €1.1069, not far from its lowest point in the last year. That’s not directly relevant to my visit to Denmark, which isn’t in the Eurozone, but the Pound has tumbled against the Danish Kroner too. In fact it’s been falling steadily over the past three months:

At 8.234 Kroner to the Pound, this the worst exchange rate I can remember in all the approximately 30 years I’ve been travelling to Copennhagen. The rate has usually been about 10:1 or even higher. Copenhagen has always seemed a rather expensive place, but converting prices into Pounds at the current exchange rate makes your eyes water. Fortunately I’m getting my local expenses paid by the NBI so the increased cost won’t really affect me, but it’s definitely noticeable. Such is the shambolic state of our government that I wouldn’t bet against the pound reaching parity with the Euro before too long.

Of course one is not allowed to suggest that the falling pound and sluggish economic growth might be something to do with BrExit because that would be `talking the country down’. The worrying thing, though, is that we haven’t left the European Union yet. Just wait until March 2019 when we leave the European Union, together with the Single Market and Customs Union without any trade agreement. Where will the pound be then, I wonder?

15 Responses to “Things Falling”

  1. Anton Garrett Says:

    What’s bad for Brits abroad is good for British exports. And overall that’s more important to Britain, as the German experience inside the EU confirms: Germany’s economy is absolutely booming due mainly to its exports being artificially cheap because its exchange rate is dragged down by the weaker economies inside the EU.

    A weaker pound would rejig the British economy from being over-reliant on revenue from the City and make it more manufacturer-based like Germany. Good thing too!

    • telescoper Says:

      What you say is true of exports of goods entirely originating in the UK. However, a weak pound increases the cost of raw materials and components so the effect in the long run is more complicated, particularly if exporters need to contend with tariffs and customs checks…

      At the moment – and for the foreseeable future – the UK is a net importer, and the most obvious effect of a low pound is to push up prices. For less affluent families (whose real incomes have been falling for some time) this is the immediate effect. That, and the fact that their holidays are getting more expensive!

      And a weak pound doesn’t in itself `rejig the economy’. Building up manufacturing requires investment, which is falling in key manufacturing sectors. I note that the leading pro-Brexit economist, Patrick Minford (of Cardiff University) thinks that leaving the EU will `mostly eliminate’ UK manufacturing.

      P.S. It’s not only Germany’s economy that is booming: there is strong growth across the EU (in and out of the Eurozone); the UK has fallen to the bottom of the table, behind France and Greece.

      • Anton Garrett Says:

        A weaker pound attracts inward investment.

        The thing about discussions about economics is that there genuinely are always arguments on both sides, and quantification – which is the only way to settle it – is essentially impossible (although plenty of people are hubristic enough to think otherwise, on all sides).

      • telescoper Says:

        In theory, but in practice investment is falling sharply.

      • Anton Garrett Says:

        From Europe, I presume – but it’s not the world. Once out of the EU we can remove the tariffs it requires us to impose on certain imports. The “single market” is actually a protection zone that denies its citizens cheaper goods.

      • telescoper Says:

        Actually the EU has numerous free trade agreements, all of which we’ll lose when we leave. And if we leave the EU without a FTA (which I think will be the case) we’ll have to trade on WTO rules, which means imposing tariffs where currently there are none.

        85% of our current trade is with the EU or with countries that have an FTA with it.

      • Anton Garrett Says:

        I believe the WTO rules put an upper limit on tariffs. The default is free trade, ie zero tariffs, and if we currently have an agreement of this sort with a particular non-EU country through our EU membership then it will continue afterwards unless we or they alter the default.

      • telescoper Says:

        I don’t think that’s the case. We will lose all current FTAs as these are with the EU, which will not include the UK. We will have to negotiate a new agreement with each country for each of these.

      • Anton Garrett Says:

        Certainly we have to negotiate separately, but the default is free trade.

      • telescoper Says:

        It’s hard to find any WTO countries that have no tariffs at all, so I’m not sure what you mean by `default’…

        It’s also worth mentioning that we won’t be members of the WTO when we leave the EU anyway. We’ll have to apply to join.

      • Anton Garrett Says:

        Default means that two people can exchange goods and money according to private barter without governments saying No you can’t or We want a slice. That’s free trade by definition.

        The UK is in the WTO in its own right: go to

        https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm

        and click on the letter U to verify this.

      • telescoper Says:

        My mistake. I didn’t realise EU member states were also separately WTO members in addition to EU membership. Thanks for correcting me. The UK is not listed among the WTO data for tariff, etc, presumably because all EU states have common external tariffs. That means that in the absence of any other deal, we leave with the tariffs as they currently stand but, of course, no quota agreements.

    • Germany’s economy is booming because it has much higher productivity than the UK. What are we going to do about that? Workplace relations in Germany are much better than in the UK, and we can argue about why that is. But why is not important, addressing the deep rooted structural issues is. Without doing that, no rejigging towards manufacturing will have any effect.

  2. telescoper Says:

    The Kroner-Euro exchange rate is not exactly fixed, but controlled via the Exchange Rate Mechanism (ER2) which permits fluctuations up to 15%. However there is strong convergence between Denmark and the Eurozone so Denmark made an agreement to keep the fluctuations at a much smaller level (2.25%). The remarkable stability of the Kroner against the Euro is demonstrated here:

    http://www.nationalbanken.dk/en/monetarypolicy/fixed_exchange_rate_and_ERM2/Pages/Default.aspx

    The option of joining the Euro is there, as the stability conditions are fulfilled, but I don’t sense any political will here to do so.

    Of course fixing the Kroner-Euro rate still allows both to fluctuate differently against the Pound.

    Stable exchange rates benefit businesses in the long run. A low £ may well bring short-term benefits for exporters, but what makes life difficult commercially is instability.

    • Anton Garrett Says:

      Stable exchange rates benefit businesses in the short run, when prices can be quoted with confidence, contracts signed and fulfilled. The long term nobody knows. But the most that Britain could do even if it wished to take the strain via interest rates, which didn’t work in the early 1990s, is peg the pound against one currency; in which case it would continue to float against others.

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