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How many people have noticed the sterling crisis? - Graham Bishop asks in his article contributing to the discussion about the troubled British currency in times of a harsh financial crises and facing the 10-year-success-story of the Euro. The paper is a contribution to the report on “10 years of the Euro: New Perspectives for Britain” published today.
The last 18 months will have produced a devaluation that is one of the largest in the past 100 years, Graham Bishop argues. The crash is a dramatic statement by the foreigners, yet almost completely unheard in British political circles.
The UK’s public finances have deteriorated dramatically with the structural deficit likely to be 40% higher over the 5 years to 2010. The sustainability, let alone the credibility, of British fiscal policy is now being seriously questioned, Graham Bishop argues. The UK seems close to a vicious spiral in its public finances, given the high leverage of the public deficit to even a modest downturn in activity. This risk matters enormously to the citizens of the UK.
Our short-term interest rates are now well below those of our rival and are expected to remain so all this year, Graham Bishop says. Longer term rates seem to pay scant attention to the scale of new debt that will be issued as our budget deficit, proportionately, runs at more than triple that of Germany – the reference point for the eurozone.
A continuing large current account deficit requires foreigners to keep net buying of sterling financial assets running at £40 billion annually. If they do not do this, then effectively UK consumers will be selling sterling day in and day out.
However, by far the most critical holders of sterling assets are our own financial institutions that manage our retirement savings. They hold around £3,000 billion of assets and already were placing a rising portion of their new investments outside sterling. So the sterling decline in 2008 saved their bacon.
Under these circumstances, the creation of an anchor for sterling may require the certainty that such a disaster can never happen again, Graham Bishop says. That would point to the abolition of sterling and its replacement by a currency that has already established a solid track record – the euro.
However, the UK would have to convince the political leaders of the rest of Europe that their “planned” fiscal policy was indeed credible as it moved away from awe-inspiring, but confidence-shattering, deficits and towards the prudence of the rest of the eurozone.
Examining the European Commission’s October 2008 forecasts for 2009 suggests that the UK would still meet the public debt criterion of the Maastricht Treaty– but probably not in 2010. Importantly, the authors left the political leaders some flexibility, Graham Bishop argues. That would be the point where the EU’s political leaders would have an awkward decision to contemplate.
The Graham Bishop article – short and full version - is attached below
See also the full report: 10 Years of the Euro - New Perspectives for Britain