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London (AFP) – The decline of the pound, which fell to an all-time low once morest the dollar on Monday, testifies to a United Kingdom as badly off as in the 1970s or 1980s, when the British currency had hit its previous lows ?
If the current economic context has similarities with those years, when the United Kingdom was nicknamed “the sick man of Europe”, the ills of today are different, and the situation across the Channel is not is not isolated.
During the 1970s, a period of energy shock like today, the Labor government chose to support the economy with public spending, which caused the pound to fall, inflation to rise, and public finances to deteriorate. . London had to appeal to the International Monetary Fund.
Also today, inflation is soaring to nearly 10% – still far from the peak of more than 20% in 1975 -, borrowing rates are climbing, the recession is looming and public accounts are deteriorating since the coronavirus pandemic. Covid-19 and with the massive aid program for energy bills launched by the new Conservative government of Liz Truss.
What caught markets off guard, however, was the combination of costly support and sweeping tax cuts, announced Friday by Chancellor of the Exchequer (Finance Minister) Kwasi Kwarteng.
A cocktail considered reckless and risky, especially since its financing remains unclear, and which had a revulsive effect on the markets. The pound plunged, borrowing rates soared.
“Much less reform”
In addition, during the 1980s, the austerity policy administered as a shock treatment by the conservative Prime Minister Margaret Thatcher and her major tax cuts were accompanied by drastic reductions in public spending and deregulation.
However, if the tax cuts announced by the Truss government “are of a similar magnitude” to those of the first Thatcher years, “the reforms are much less”, underlines Paul Dales, specialist in the United Kingdom for Capital Economics.
“Compared to privatization, the reduction of union power and the acceptance of the single market in the 1980s, the priority investment zones and amendments to the criteria for social benefits weigh little,” explains Mr Dales. Even though the Treasury hinted that further structural reforms would be announced in a new budget statement in November.
At the cost of lean years, between the shock of competition from entry into the European Economic Community (EEC) in 1973 and then the reforms of the Thatcher era, “the British market had become much more competitive” and the economy had started once more, argues Jane Foley, of Rabobank, interviewed by AFP.
On the contrary, “Brexit, the recession (which is looming, editor’s note) and very high inflation are currently leaving a bitter taste in the mouth for investors”, concludes Ms. Foley.
The cap on energy bills will, however, have a calming effect on short-term inflation. Also, unlike the 1970s, unemployment is at an all-time low and the UK is even understaffed as a result of the pandemic and Brexit.
Moreover, the British situation is not totally isolated. Other European countries are also facing an energy crisis, with deteriorated public finances and soaring interest rates.
Brexit complicates the game for the UK, but ‘Italy has just elected someone with claimed political roots in fascism, and Germany faces blackouts this winter and a severe recession’ , so “there is a lot of competition today for the title of + sick man of Europe +”, remarks Jonathan Portes, economist at King’s College, interviewed by AFP.
The pound is certainly considered a barometer of the British economy, but its recent fall is, as in 1985, largely due to the strength of the dollar, the safe haven currency par excellence in times of turbulence such as the present, and which crushes the others currencies, especially the euro.
The British currency had revived in 1985 following concerted action by governments in the United States, France, Germany, the United Kingdom and Japan, which had signed the Plaza agreements to depreciate the dollar.
For now, political leaders do not appear to be considering similar measures, notes George Saravelos of Deutsche Bank.
© 2022 AFP
