Column / Brexit Briefing
Sterling crisis reflects May’s dilemma
By Benjamin Fox
It’s a hectic time to be a currency trader, especially if you're betting against sterling.
The turmoil on the markets - the pound hitting a 30 year low against the US dollar, while plunging towards parity with the euro - kicked off during last week's Conservative party conference.
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Normally a currency crisis prompts decisive reaction from government; but from this, despite the pound losing 20 percent of its value against the dollar, and 15 percent against the euro since June, there is a silver lining.
The FTSE share index actually hit a record high this week, as multinationals doing business in dollars reaping the dividends of a weak pound and enjoying a large boost in their share price.
The value of most pension funds are linked to that of the stock market, so many Britons are temporarily better off, although a holiday to the Algarve or Spanish island to escape the bleak mid-winter seems suddenly a lot more expensive.
That still means that the buoyant stock market index is itself the product of post-Brexit fragility, rather than strapping economic strength. There’s also no question that confusion from the direction of the government’s Brexit talks has spooked the markets.
Brexit or Betrayal
Theresa May’s ministers know that in political terms the referendum result points only in the direction of a ‘hard Brexit’. In order to satisfy the will of the 52 percent, immigration control must take priority over single market membership. To them anything smacks of betrayal.
However, pursuing this can only intensify market turmoil, leading to more panic from financial services firms, many of whom are clear that they will move, at the very least, a small portion of their business to the eurozone if the UK loses the ‘passporting’ rights that allow firms to offer their services across the EU from headquarters in London.
So ministers are persisting with the strategy of hedging their bets, insisting the sterling crash is nothing to worry about, simply part of a little Brexit-related uncertainty.
"We go into this period of turbulence fundamentally strong," Chancellor Philip Hammond said this week.
'A brave new world'
But beyond the confident facade, the government is fragile. Brexit secretary David Davis, and International Trade minister Liam Fox, also a leading Leave campaigner, know the dilemma of immigration control vs single market is probably irreconcilable.
Maintaining the pretence that the two wishes can be satisfied is causing confusion and division.
Plans announced at a conference by Home Secretary Amber Rudd, that businesses would have to disclose how many foreign workers they employed was almost immediately abandoned following a backlash from the business community and other ministers, but not before Fraser Nelson, editor of the right-wing Spectator magazine, suggested that ‘Remainers’ like Rudd are damaging Britain’s reputation as a liberal country.
The status of EU nationals in the UK will be unchanged "absolutely, 100 percent", according to Brexit minister David Davis. Other ministers say that is dependent on reciprocal treatment of UK citizens by other EU governments.
For their part, representatives of the financial sector are clinging to the relative security of the proposed Repeal Bill announced by Theresa May last week.
Certainty needed in an uncertain time
Despite its name, the Repeal bill effectively means no change until the UK changes its own laws. "Any change will be at our own pace", said Emma Nicholson, a former Conservative and Liberal Democrat MEP, told a meeting of financiers last week in a bid to reassure them.
Yet this still leaves uncertainty, EU law doesn’t begin and end with directives and regulations. Implementing measures and technical standards are just as important and businesses still have no answers from government on how these will be affected.
"It’s a brave new world, but you need to be brave to live in it", whispered an aide at the Conservative party conference in Birmingham last week.
In the six month phoney war before Article 50 is finally triggered in March, the May government’s stance of hedging its bets is understandable.
But the sterling sell-off shows businesses see which way the wind is blowing, Britain will probably leave the single market.
Yet there is still no map, or path, towards a new destination, and the longer ministers try to face both ways, the greater the confusion.
At some point, Theresa May must demonstrate her bravery.