Pound crash makes Brexit real

When the history books are written, Friday October 7, 2016 will be seen as the day the real battle of Brexit began.

From the first declaration of hostilities – June 23 when the UK voted to leave the European Union – until that Friday in October, there was a kind of phoney war in existence between Britain and Europe.

True, sterling had been on a steady, but gentle, downward path, and there was much muttering about the damage the UK economy would suffer if it lost access to the EU single market.

But there was not much that you could actually call warfare. Most of the big investment banks that have been forecasting dire consequences were easing their forecasts upwards, as was the perennially pessimistic IMF.

Britons, under the firm tiller hand of Theresa May, were beginning to think they might just get away with sneaking out of the EU with nobody much noticing.

But on October 7 came the first real action, from François Hollande, president of France. In a speech reported by the Financial Times, he was quoted as saying “there must be a threat” to the UK’s economy from its democratic decision to quit the EU. No guessing as to where that threat would come from: Paris, Brussels and Berlin being the main springboards for the assault on London.

When Mr Hollande’s words were reported in Asian markets just waking up to the forex trading day, they precipitated the “flash crash” that wiped a further 6 per cent off sterling. It will be a long, long time before the pound makes up that ground.

So now the UK faces two probabilities that were only possibilities before: a full-blown sterling crisis and being barred from the single market.

The pound’s plight is not all bad news. Lower sterling means British exports are cheaper and London property prices are more attractive to foreign investors. But longer-term weak sterling means importing inflation for a country that runs a chronic trade deficit.

The potential loss of the single market is more worrying, which is why the UK government is considering paying Brussels billions even after it leaves the EU to maintain the privileged access it currently enjoys.

On the British side, there is the beginning of a siege mentality. Suggestions that British companies will have to declare the names of foreign employees, threats of sanction against companies that campaign to remain in the EU and reports of division between the Bank of England, the Treasury and the prime minister all point to an escalation of hostility between the “economic” Brexiters (who just wanted out of the EU) and the EU xenophobes (who just hated Johnny Foreigner).

I hope it does not swing the latter’s way. When Liam Fox, international trade secretary and regarded as a hardline Brexiter, was in Dubai recently he was at pains to stress that Britain was not going to withdraw from Europe or the globalised world. He seemed to mean it.

If the xenophobe mentality takes over completely, it will demean Britain in the world and signal a retreat from international trade. If that happens, we will all be poorer – and it will not matter who started it.


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