There is little that’s revolutionary in what Ambrose Evans-Pritchard says here. But is is vital that we never forget that we have been spared the Irish collapse solely because we have not been, and still are not, in the Euro
Today we see that the pound fell sharply against the Euro to €1.107 (or a euro buying 90.36p) and with the headline writers getting over-excited about it reaching parity weith the euro in the New Year. Ibviously this would make imports more expensive and maybe lessen them. It would also make our exports more competitive and perhaps boost them. This is not a macho-style showing off of muscles competition. Exchange rates are self-correcting mechanisms which react to the real world and not to some half-baked political nostrum
Christina
TELEGRAPH 19.9.09
1. The Euro: why Britain is still better off out
When the historical dust clears, Gordon Brown may find that his greatest achievement was to keep Britain out of the euro and preserve the fire-fighting powers of the Bank of England.
By Ambrose Evans-Pritchard
Had we joined monetary union in 1999, interest rates set by the European Central Bank would have been near 2 per cent during the mid-years of this decade. This would have been like pouring petrol on the housing fire. The credit bubble would have been even worse.
Once the bubble burst, the UK authorities would have been left with few instruments to cushion the downturn and manage the highest household debt burden in history. Britain would now be facing the sort of debt-deflation spiral under way in Ireland and Spain.
By keeping its freedom of action, Britain has been able to launch "quantitative easing" (printing money) the most radical monetary experiment tried in a modern industrial nation. We do not know yet how this will end. Yet what is clear is that Bank of England was able to act with stunning speed after the debacles of Northern Rock, Lehman Brothers, and AIG, slashing rates to 0.5 per cent. It is buying almost a third of all UK government gilts in order to prevent a repeat of the early 1930s when the money supply was allowed to contract.
The European Central Bank was slower to ease monetary policy, and has largely held back from QE – in part because Frankfurt views such action as unnecessary, but also because any move to buy bonds is viewed by German hawks as the start of a slippery slope towards a bail-out of the Club Med bloc.
The point for Britain is that the steady-as-you-go strategy of the ECB would have left Britain in a very serious position as the crisis unfolded, given the particular circumstances of the UK as a banking hub.
The Bank of England's emergency policies have stabilised the UK economy. The 20 per cent plunge in sterling has in this instance been a life-saver, prompting a tourist mini-boom in London. Scores of companies survived which would otherwise have gone bankrupt, saved by the boost in profit margins on exports.
2. Pound 'will fall to parity with euro'
Sterling weakened yesterday to close at just over 90p to the euro for the first time in four months, amid renewed concern over the state of the British banking system.
By Angela Monaghan
The low came as currency experts predicted the pound would fall further and reach parity with the euro within the first three months of 2010. One euro was worth as much as 90.36p, the highest level close since May 11. A year ago a euro would only buy 79p.
Confidence about the UK currency was eroded when issues surrounding Lloyds Banking Group's participation in the asset protection scheme once again put the spotlight on Britain's financial system, highlighting the problems that remain.
The pound was also significantly weaker against the dollar, closing down almost two and a half cents at $1.6291.
Currency strategists at BNP Paribas suggested sterling's weakness was not just a short-term blip because sterling would be dragged down by ongoing loose monetary conditions in the UK, relative to the eurozone.
"Sterling is likely be the underperformer among the majors, despite a favourable global financial market environment, as the UK domestic picture is set to deteriorate, with the fiscal/monetary policy mix in particular working against sterling," they said in a note.
The Bank of England has maintained a cautious tone when discussing the prospects for economic recovery in the UK. Mervyn King, the Governor, has signalled that interest rates are likely to remain at very low levels for the foreseeable future as the economy emerges from recession into a period of subdued growth. In contrast the European Central Bank (ECB) has warned against keeping rates too low for too long.
The Bank has also indicated that it is open to loosening monetary policy further by extending its quantitative easing programme (QE) beyond the current £175bn ceiling, should conditions deem it necessary.
"The Bank will have little choice, other than to maintain an extremely loose monetary policy over the coming years to compensate for the sharp tightening of fiscal policy," the BNP Paribas note said, referring to the Government's need to bring the public finances under control.
Steve Barrow, currency strategist at Standard Bank, was less negative about prospects for the pound, predicting a decline to about 95p, rather than parity. "Sterling is probably going to continue to weaken, but I am not sure it will go that low. Parity is not something I would rule out though," he said.
Mr Barrow added that the news on Lloyds had not helped the pound, but said that recent weakness in both the pound and the dollar was largely down to the fact that both countries had undertaken QE on a major scale. "The market is punishing these two currencies for quantitative easing, and room for the pound and dollar to recover is probably some way off," he said. However, he doubted that the pound's weakness had much to do with monetary policy in the eurozone, arguing that the ECB was unlikely to tighten policy this year or next.
A weaker pound pushes up the price of goods imported into the UK and makes it more expensive for Britons travelling to Europe on holiday. However, it is hoped that a weaker pound will help to lift the UK out of recession by driving up exports as British goods become more competitively priced. As yet, there has been little evidence of that as demand from the UK's key export markets remains muted.
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