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Is the pound’s crash a sign of a return to the economic turmoil of the 1980s?

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The recent collapse of pound sterlingwhich on Monday fell to a historic low against the dollar, does it mean that the United Kingdom is it as bad as it was in the 1970s or 1980s, when the British currency reached its previous lows?

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The current economic context has similarities with that of those decades, when the United Kingdom was nicknamed “the sick of Europe”but the current ills of the British economy are different, and the situation is not exclusive to this country.

During the 1970s, a period of energy shock like the current one, the British Labor government chose to support the economy with public spending, which caused the currency to fall, inflation to rise and public finances to deteriorate.

London then had to turn to the International Monetary Fund (IMF).

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Now, too, inflation is shooting up to almost 10% -although still far from the 20% of 1975-, interest rates are rising, recession is knocking at the door and public accounts are deteriorating due to the massive aid program for energy bills launched by the new Conservative government Liz Truss.

Markets were caught off guard by the mix of costly government aid and sweeping tax cuts announced on Friday by the finance minister, Kwasi Kwarteng.

This combination is considered reckless and risky, especially since its financing remains unclear, and it had a shocking effect on the markets.

Minimal reforms

In the 1980s, the conservative prime minister’s austerity policy Margaret Thatcher and his significant tax cuts were accompanied by drastic reductions in public spending and deregulation.

But although the tax cuts announced by the Truss government “are similar in scale” to those in the early years of Thatcher, “the reforms are much smaller”, he points out Paul Dalesspecialist in the United Kingdom of Capital Economics.

“Compared with privatization, the reduction of union power and the acceptance of the single market in the 1980s, the priority investment areas and the changes in the criteria of social benefits are of little importance”it states.

After years of lean cows, between the competitive shock that the entry into the European Economic Community (EEC) in 1973 and the reforms of the Thatcher era, “the British market had become much more competitive” and the economy was reactivated, he tells AFP Jane Foleyanalyst of rabbank.

Now instead “the Brexitthe next recession and the very high inflation are leaving a bitter taste in the mouth of investors”he adds.

Despite everything, the limitation of the energy bill will have a calming effect on inflation in the short term. And unlike in the 1970s, unemployment is at an all-time low and even the UK is experiencing labor shortages as a result of the pandemic and Brexit.

Furthermore, the British situation is not isolated from that of other European countries, which are also facing an energy crisis, deteriorating public finances and rising interest rates.

In the United KingdomBrexit complicated things but for example “Italy just elected someone with alleged political roots in fascism, and Germany is facing blackouts this winter and a serious recession”so that “there is a lot of competition today for the title of ‘sick man of Europe’”says Jonathan Portes, an economist at King’s College.

The pound sterling is certainly considered a barometer of the British economy, but its recent fall is due, as in 1985, to a great extent to the strength of the dollar, the safe-haven currency par excellence in times of turbulence such as these, and which crushes to other currencies, especially the euro.

The British currency recovered in 1985 after the governments of the United States, France, Germany, the United Kingdom and Japan signed the Plaza Accords to depreciate the dollar.

For now, political leaders do not seem to be considering similar measures, notes George Saravelos of Deutsche Bank.

Source: Gestion

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