Dec 12 2008
The Pound is down but not out
The Pound is down to a record low against the Euro for the fifth day in a row. The Pound now buys just less than 1.12 Euros on the FX Markets, although most High Street currency exchangers are offering rates not far from parity. It is only a matter of time before the Pound is worth less than a Euro.
The weak Pound is bad news for consumers and businesses which use imported goods, contrary to what that previous Pound-devaluing disaster of a Labour PM Harold Wilson said, the Pound in our pockets really isn’t worth what it was. Going abroad is dearer, as are many products. Take the popular Nintendo WiiFit, which was around £70 in September and is now roughly £130. But then a Pound once bought over 200 Japanese Yen, 215 at its peak, but is now buying just 134 Yen. Exporters will do well - assuming they don’t need too many imported parts - but this too will push up domestic prices. Inflation could well soon be back on the agenda once the current deflationary pull of declining energy prices ends.
The weak Pound has lead some to talk about Euro membership. I say the opposite, thank goodness we aren’t in the Euro!
Currencies move for a reason, that reason being the changing economic strength of one country compared to another. Movements are a safety valve and the currencies find their own true equilibrium balance as changing economic conditions affect different countries differently. We are being affected hardest by the recession so our currency falls, cushioning the crash by boosting exports and reducing imports - thereby saving jobs! If we couldn’t revalue the Pound, the economic changes would be all the harder. Conversely during a boom the currency strengthens, boosting imports that help contain inflation. We can also set interest rates to suit us, rather than a European average that is in fact like nobody (remember the average family has 2.2 children, unlike any family I know, and European averages are the same)!
Setting an exchange rate in concrete forever, like with joining the Euro, removes all of that flexibility. It’s madness, plain and simple.
