Economists have produced a dizzying array of estimates on the ultimate costs of Brexit. Photo / Bloomberg
The British pound has long possessed a mystique that transcends its marginal role in the global economy, conjuring memories of its dominance in the imperial age. But lately the currency has devolved into a sign of Britain's diminishing fortunes in a present dominated by Brexit.
As the country slides toward the European Union's exits, the latest pressure on its currency comes in the form of the new prime minister, Boris Johnson. Johnson has insisted he is prepared to accept the expensive chaos of leaving the EU without a deal governing future relations.
Investors have taken his ascension last week as the impetus to evacuate their money ahead of a potential disaster: They have sold the pound. The currency has lost nearly 3 per cent of its value against both the American dollar — it fell to US$1.2151 on Tuesday afternoon — and the euro since Johnson took over.
The slide is expected to continue, perhaps right up until October 31, the day that Britain is scheduled to depart the European bloc.
"The markets see turbulence for the economy," said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Oslo. "They see the potential for the economy to contract abruptly."
The decline in the pound is at once a reflection of the market's recognition that Britain has been economically weakened by Brexit, and a cause for distress.
The drop effectively raises prices for a vast range of British imports, from fruit and vegetables shipped in from Spain to chemicals and industrial parts made in Germany. It increases the costs of international travel, just as Britons flock to the beaches of the Mediterranean for summer holidays.
In theory, the weaker pound should bolster British exports by making them relatively cheaper than those produced by competitors in Europe, North America and Asia.
But given that Britain imports more than it exports, the net effect is negative. Whatever advantages exporters might gain would almost surely be canceled out by barriers to trade across the English Channel if Britain really leaves Europe without a deal.
Most broadly, the decline in the pound signals that investors see less need for British currency in the future, because Brexit is already reducing the appeal of doing business in Britain.
Economists have produced a dizzying array of estimates on the ultimate costs of Brexit, and especially the disruption to trade if confusing new customs checks are established on both sides of the English Channel. A no-deal Brexit would leave the British economy 2 per cent smaller than otherwise by the end of 2021, according to a recent report from Oxford Economics, a research institution in London. The hit would be twice as bad by the calculations of the Office for Budget Responsibility, the official British forecaster.
From the auto industry to aerospace, major international companies have over decades set up plants in Britain, exploiting its proximity to the single European marketplace. The more likely a rupture across the English Channel, the less valuable Britain becomes as a base of operations.
None of this is new. Johnson has merely intensified pressures that have been at play since June 2016, when Britain shocked the globe with its referendum vote in favor of abandoning Europe. The pound plunged more than 10 per cent against the dollar the next day. Ever since, the currency's value has served as a gauge of Britain's overall economic prospects amid the bewildering wrangling over Brexit.
Inflation resulting from a weaker pound prompted households to limit spending, yielding slower economic growth. Businesses have held back on expansions. Major international companies — Nissan and Honda among them — have shifted production beyond Britain.
But if this has become a familiar trajectory, Johnson has injected a substantial element of unpredictability.
His predecessor, the highly scripted Theresa May, abhorred drama even as it consumed her tenure. May initially claimed willingness to accept the turmoil of a no-deal Brexit if the alternative was an unsatisfactory arrangement. She then spent most of three years trying to walk back that formulation through negotiation, capitulation and the finessing of previous positions.
Eventually, May forged a compromise with Europe that was almost universally panned. Those opposed to Brexit denounced Britain's departure from the European single market, which allows trade to proceed from Greece to Ireland as if the European bloc were one enormous country. Those favoring Brexit blasted May's deal as a form of vassalage that would prevent Britain from striking its own trade deals with the rest of the world.
In a series of votes, May's deal went down to defeat. Then, she departed, handing the tangled knot that is Brexit to Johnson, a former journalist whose factually deficient reports from Brussels decades ago helped turn the British public against the European Union.
The new prime minister has a penchant for finding the center of controversy and an eagerness for headline-capturing political fisticuffs. He took office vowing to end what he has portrayed as British deference in the face of vindictive European inflexibility.
He would demand a reopening of negotiations and especially the scrapping of an element of May's deal known as the Irish backstop, a complex bit of maneuvering designed to prevent the reimposition of a border between Northern Ireland — part of the United Kingdom — and the independent Republic of Ireland. The net effect was to keep Britain inside the European customs union indefinitely and retain free-flowing trade until the two sides work out a permanent arrangement that ensures no hard border.
European officials have been resolute that negotiations cannot be reopened, while the backstop must endure. That leaves Johnson headed toward a collision with Europe, or on the verge of a politically perilous flip-flop.
Johnson has alternately dismissed the risks of a no-deal Brexit and insisted that he was willing to crash out of the bloc at the end of October if need be. During a tour of the United Kingdom this week, he has toggled between pugnacity and reassurance.
On Monday in Scotland, Johnson was booed. He declared that there was "every chance we can get a deal" with Europe, but he also pronounced the Irish backstop "dead" — an apparent contradiction. The same day, Michael Gove, a member of Johnson's Cabinet who is overseeing preparations for a no-deal Brexit, said the government was "operating on the assumption" that this would be the outcome.
On Tuesday, sheep farmers in Wales excoriated the new prime minister for imperiling their livelihoods by jeopardising exports to Europe. A no-deal Brexit threatens steep tariffs on lamb exports, they said, raising the prospect of the mass slaughter of soon-to-be-unsellable animals.
Experts are divided on what is really going on. Johnson may be bluffing, seeking to force Europe to reopen talks by convincing officials that he is unafraid to crash out of the European bloc. Or perhaps he is merely seeking to position himself and his Conservative Party as the victims of European intransigence ahead of national elections that are likely to follow if Europe does not budge.
Or maybe he is intent on securing his legacy as a hero among hard-core Brexiteers, the man who finally liberates Britain from killjoy European bureaucrats. But if he pursues a no-deal exit to the end, Johnson risks a mutiny within the Conservative ranks. A few members of Parliament could join the opposition to bring down the government, and an election would follow. If Johnson pursues an unexpected compromise — perhaps extending the Brexit deadline or agreeing to version of an Irish backstop — he risks a revolt from the other side of his party.
No one knows what will happen, a phrase that has gotten a vigorous workout since the Brexit referendum. Meanwhile, the markets are absorbing the variables and coming away with a less-than-robust appetite for pounds.
The moves in the currency markets are now gradual, reflecting a continued downgrading of sentiment rather than a meaningful change to the economy. But as October 31 draws closer, bringing the cliff edge into sharp relief, the pound could plunge. Britain could well descend into recession.
"The currency markets are making their own judgment that it will be bad for the economy," said Peter Dixon, a global financial economist at Commerzbank AG in London. "The more the rhetoric gets cranked up, the more likely that sterling comes under pressure."
Written by: Peter S. Goodman
© 2019 THE NEW YORK TIMES
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