In World Economy News 12/10/2016
Brexit Secretary David Davis broke with government convention to say that he could see advantages to the British pound falling to a three-decade low, arguing the decline would help exporters.
Taking questions from lawmakers on how the government will manage the departure from the European Union, Davis initially refused to be drawn on the currency. At one stage he urged opposition Labour Party lawmaker Emma Reynolds to read Michael Lewis’s “Flash Boys” if she wanted to understand why the pound was falling — a reference to the Oct. 7 blip that saw a sudden, brief plummet in its value.
But when Tory Philip Hollobone suggested that the fall was “a massive boost to international competitiveness,” Davis agreed.
“The simple truth is that those talking about the competitiveness of their own industries are not paying attention to the level of the pound,” Davis said late on Monday. “While it has some downsides, it certainly has a very large number of upsides, too.”
Former Bank of England Governor Mervyn King later echoed that view, telling Sky News the decline in the pound was a “welcome change.”
Sterling has been this year’s worst performer among 32 major currencies tracked by Bloomberg. It has fallen 17 percent since the vote to leave the EU and 4.7 percent since Davis and Prime Minister Theresa May signaled on Oct. 2 that they might not prioritize membership of the single market.
The pound resumed its decline on Tuesday after a report in The Times newspaper that the Treasury could lose as much as 66 billion pounds a year, with economic output shrinking by some 7.5 percent after 15 years, if the U.K. quits the EU without any successor arrangement. Sterling was down 0.6 percent as of 8:19 a.m. in London.
There are two sides to the falling currency, which tends to boost exports and tourism. Companies making money abroad, like Burberry, can benefit. But the latest lurch has stirred concern it could hurt businesses and push up inflation by making imports costlier, while also raising questions about the U.K.’s ability to fund its record current account deficit.
Davis’s comments mark a break from usual government practice of not commenting on the currency markets. Chancellor of the Exchequer Philip Hammond last week refused to address whether the pound’s decline was a positive or negative for the economy, saying it was for markets to set its value.
Unwise Comments?
Davis partially acknowledged this later: “It’s an unwise minister who passes comments on what the right value of the pound is,” he said, accusing Labour of having “talked the pound down again and again.”
He also argued that it was not in the interest of EU members to be punitive.
“The damage done by a supposed punishment strategy would be primarily to the industries and the farmers on the continent who export to this country,” he said. “I do not see how there is a logic in exercising a punishment strategy against one of your strongest and most loyal allies.”
Davis pledged to “deliver an exit in the most orderly and smooth way as possible” and sought to keep lawmakers at arm’s length. He explained the process wouldn’t be helped by a Parliament vote on triggering Article 50 of the Lisbon Treaty or by the flagging details of Britain’s negotiating position.
Parliament Role
On the question of a vote on Article 50, the government appears to be on firm ground. Crispin Blunt, Tory chairman of the Foreign Affairs committee, said the approval of Parliament served no purpose as it already “gave the decision to the people explicitly.”
But there is pushback on keeping the bargaining stance a secret. Stephen Phillips, a Tory who backed leaving the EU, said the government had no mandate for the sort of Brexit it seemed to be aiming for, with a focus on clamping down on immigration.
“I didn’t vote ‘Leave’ to see one tyranny which failed to consult this House — in the form of the European Commission — replaced by another,” Phillips told the chamber.
Andrew Tyrie, a Tory who chairs Parliament’s Treasury Committee, told Davis that the U.K.’s interests would be best served by “an early and full and detailed explanation from the government of what its negotiating position is before it embarks on those discussions.”
Otherwise, Tyrie warned, voters will learn about Britain’s goals and demands when another country leaks it. There’s no danger of that happening yet. Denmark’s Lars Lokke Rasmussen was none the wiser after May travelled to Copenhagen to see him.
“It appears as if there’s quite a lot of work that needs to be done in the U.K. before there’s a clear view of what the British want,” he said in an interview Monday.
Source: Bloomberg
