Pound weakness and Brexit
“Britain is far behind”
As soon as the new British finance minister presented his program, the currency plummeted. On the “Zero Hour” podcast, Holger Schmieding, chief economist at Berenberg Bank, talks about a government in financial distress and Germany’s post-recession prospects.
Zero Hour: After UK Chancellor Kwasi Kwarteng unveiled his tax cut and energy aid programme, there was a massive backlash. The pound tumbled against other major currencies. Have the markets overreacted?
Holger Schmieding: Basically, the markets are right. The British now have a much larger budget deficit than expected. About three weeks ago, Prime Minister Liz Truss announced that she would support homes and businesses far more than she previously announced. Now, in addition to that surprise, she also wants to reduce taxes. So significantly more public spending and lower taxes. That was probably too much for the markets.
The UK government argues that it is about avoiding a recession and that is the way it wants to go.
Of course, measures that limit the rise in energy prices for households and businesses in particular will cushion the downturn. They cushion inflationary pressures. That really helps. Tax cuts, on the other hand, only have a long-term effect. It will take a long time for companies to respond with more investment. Especially in a recession in which Britain, like Germany, is probably already stuck.
Now the British government has backed into a corner with this programme. A weak pound can become a problem for the economy.
The weak pound is not a very big problem. Of course, this makes imports a little more expensive, but the economy can export a little cheaper. But of course there is a risk if all this continues and if this means that interest rates may have to go even higher. This may result in investors pulling out of Britain.
So the UK government’s attempt to stave off recession is basically doomed, as you say. What can be expected for the country in the medium term?
Actually, it doesn’t really matter much what’s going on right now. Much more important is Brexit and its consequences. Since the Brexit referendum in June 2016, we have seen companies in the UK and around the world invest significantly less in the country than before. The UK has lagged far behind the eurozone as an investment location after being generally more attractive until 2016. The country is currently not a good place to produce there or offer services there that are then exported to Europe.
The current program is also seen as an attempt to get out of the Brexit dilemma. Is it suitable for this?
I consider it inappropriate. The program will bring something, the deregulation will bring something. But that is secondary to the damage caused by uncertainty about Britain’s future relationship with the EU. And until now, Liz Truss has apparently lacked an idea of what would really move the country forward. Of course, as British Conservatives, they also find it difficult to admit that Brexit is not going as smoothly as promised.
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