Sunday, August 04, 2019
This sterling slide has logic on its side
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

The new government is less than a fortnight old but already we have seen a flurry of announcements and, it seems, cash pouring out of the Treasury as if there is no tomorrow. So, on your behalf, I have been trying to make some sense of this, by reading Boris Johnson’s speeches and pronouncements since he became prime minister. Somebody had to.

He has, as you would expect, a nice rhetorical flourish. Whether that is all he has, we will find out in coming months. So, he suggests, “we will look back on this period as the beginning of a new golden age for our United Kingdom”.

He is willing, he says, to “go the extra thousand miles” to engage with the EU and insists “there is scope to do a new deal” before October 31, defying “the doomsters, the gloomsters”. The chances of a no-deal Brexit, he has repeated, are “a million to one”.

When it comes to splashing the cash, there is so far a little less than meets the eye. Talk of new hospitals and extra money for the National Health Service is not new money but an allocation, perhaps sped up a little, of the 70th birthday present for the NHS announced by Theresa May last year and due to come through over the next few years.

The government’s flagship domestic announcement is 20,000 extra police officers over three years, which will roughly reverse the cuts since 2010, will have extra money attached. Whether there is a political future for this kind of cut-and-spend strategy remains to be seen.

There will be £2bn more for northern infrastructure projects, spread out over a period, and £2.1bn more for no-deal preparations, though at least half of this will be spent after October 31, and some of it may have been announced before. More than £100m will be spent on no-deal advertising; a public and business information campaign.

I have not spotted anything much on tax-cutting plans, which featured a lot in the leadership contest, though perhaps that has to wait for the autumn budget. That itself has become a source of intense Westminster and Whitehall speculation, with suggestions that the budget could come before October 31, potentially opening the way for a defeat of the government and a general election. We shall see.
What you really want to know is whether there is anything that amounts to a coherent Brexit strategy in what we have heard so far.

Currency traders are a practical lot. Many of them, perhaps a majority, probably supported Brexit. But they can recognise bluster when they see it, though they might have a ruder term for it, and they know that that is what they been hearing from the new government. Johnson has erected a giant sell signal over the pound and they have been happy to oblige.

This is the third phase of sterling’s Brexit adjustment. The first came with the referendum itself which, as noted here recently, was the sharpest fall for any major currency in the post Bretton Woods era, which now stretches back for nearly half a century.

The second was in October 2016, and May’s “Brexit means Brexit” phase, when she ruled out future membership of the single market and customs union.

The third phase, which took the pound down to $1.21 and €1.09 last week, was sparked by an article by Michael Gove, the new chancellor of the Duchy of Lancaster, who is in charge of no-deal preparations and who said no deal was now the government’s working assumption. Only when Johnson tried to dial down on the no-deal rhetoric was its fall halted.

Whether this third phase persists, or whether there will be pause until a fourth phase in the autumn, when a no-deal Brexit itself drives the pound below parity with the euro and close to it with the dollar remains to be seen.

We should be clear about why this has been happening. The markets, in pushing the pound lower, are judging that Britain’s economic prospects will be worse as a result of Brexit. And, as a more considerable prime minister Margaret Thatcher once said: “You can’t buck the market.”

Under Johnson we have moved further away from a Brexit deal with the EU, a withdrawal agreement followed by a transition period. For the past three years, detailed negotiations between the two sides came up with a solution which, while far from perfect, was workable.

Now that solution, the withdrawal agreement, is declared dead by the government, and Johnson has demanded that the Irish backstop be removed as a condition for talks on a new deal in the very limited time available.

Ministers, it seems, are required to describe the backstop as undemocratic, even though it is backed by the majority in Northern Ireland, who would also have preferred to stay in the EU, and an overwhelming majority of businesses in the province. The Johnson approach, which has echoes of Donald Trump – Mexico must pay to build the wall is not so much that of a bull in a China shop as a Pamplona run. It is the art of the no-deal.

In the space of a few months we have moved from the prospect of a close relationship with the EU post-Brexit to a mood of mutual distrust and antagonism. There will be plenty of people who are gullible enough to blame the EU for this, but that does not really wash. Any flexibility it might have shown in the political declaration accompanying the withdrawal agreement, to get Brexit over the line, has been thrown back in its face.

Indeed, when the new prime minister talks of post-Brexit deregulation, and moving the UK further away from EU rules, the more that Brussels will regard the backstop as necessary to protect the integrity of the single market. Those people who have worked diligently on alternative arrangements for the Irish border, if they have confidence in them, should have no problem with the backstop, because it would not come into force.

It is striking that so little has been learned over the past three years. The assumption has always been that the EU, rather than sticking together, and backing Ireland, will cave. It has not worked so far, and there is no reason why it should.

There is also, however many strategic geniuses are advising Johnson, a fundamental misunderstanding about a no-deal Brexit. It is not all about avoiding temporary shortages of drugs, keeping the planes flying, maintaining clean water and ensuring the supermarket shelves are not too empty in the run-up to Christmas. It is not all about paying Welsh hill farmers for the lambs they cannot sell in France.

It is about the fact that they and those engaged in many other activities, become no longer viable, so the hill farmers stop breeding lambs and some of the car factories move elsewhere. It is about the fact that a no-deal Brexit, as Whitehall’s own analyses show, is easily the worst form of Brexit. It is also about the fact that, contrary to what the new foreign secretary says, it puts us into the worst possible position to negotiate a new trade deal with the EU.

And, if the strategy is all about getting a Johnson government elected with a larger majority, on the evidence so far there would still be no workable plan for Brexit, while leaving open the possibility of a Labour government under Jeremy Corbyn. Not a good prospect, as the currency markets know only too well.