Commentary / World

Weak currencies: Be careful what you wish for

A persistently soft and devalued currency is not a healthy thing for a nation

by David Howell

It felt frankly humiliating the other day, as well as very painful in the pocket, to find, at the cash machine in the Piazza del Duomo in Florence, that my beloved pound sterling (said to be the world’s oldest currency still in use) would not even buy a whole euro.

I know economists are fond of telling us about the advantages of a weaker currency. Exports, they say, will soar and more foreign tourists crowd in and nationals stay at home (perhaps I should have been doing that), and in the very immediate term they are right since this is just what has been happening to the United Kingdom as the pound sags to new low points.

So should I just have been ready to “grin and bear it,” in awareness of all these advantages for the greater good?

I am not so sure. We should be very wary of this argument except in the shortest of short periods. Of course, it is true that currencies can be pushed falsely and damagingly high and curbing is needed. That is what Japan has been trying to do for some while. But a big and lasting drop, such as the pound sterling has experienced many times since World War II, is quite different.

For a start exports may be cheaper but imports become much more expensive, and in the British case the import content of exports happens to be substantial. One would expect this since Britain is primarily a big trading nation. Higher import costs feed through directly into higher production costs and more inflation generally. So the gain of cheaper exports soon evaporates.

In the last century, in the 1960s and 1970s, long before the birth of the euro, the German Deutschmark traded at formidably high levels. Did this hurt German exports? Not a bit of it. Driven by the “Wirstschaftswunder” (economic miracle), German exports soared across the world.

The economic and financial experts have another argument which is supposed to be particularly suitable to Britain’s position — namely that a weak pound makes all the nation’s assets very attractive to foreign investors. They can gobble up fine houses and estates, as well as successful businesses and services at knock-down prices. Since Britain depends on attracting foreign capital to balance its very large trade deficit (mostly with the European Union) this seems at first glance to make some sort of sense.

But just how much of a nation’s asset base is it wise to place under foreign ownership? Where are the limits? Nobody seems to be sure of the answer. The Chinese own sections of Britain’s key utilities, such as water and the railways. The French own big parts of the electricity generating system. The Spanish own the biggest airport. The Germans, French and Japanese own the car industry. And Japan owns the leading British financial newspaper, with a Russian individual owning another. Banks are extensively foreign-owned. And then of course there are the football clubs, with foreign ownership of several of the leading ones, such as Chelsea and Arsenal and Manchester City.

Where does it stop and what happens if it goes into reverse? Is it a question of a controlling interest, and how much is that? Of course it varies. As each foreign acquisition proposal comes along the limits are tested, but so far, it seems, never reached.

In the end, and when all these expert arguments have been balanced up there has to be a reliance on plain experience and psychology. And experience tells us plainly that a persistently weak and devalued currency is not a healthy thing for a nation. It inflates, it redistributes, it undermines confidence — that most precious of economic assets — and it demoralizes. And it dislocates all the complex supply and value chains that now dominate international trade. Far from attracting new investors, it puts them off as they see the fingers of existing investors burned. International depositors become reluctant to place money with British banks, which in turn restricts the banks from lending to new businesses. And, of course, foreign lenders start wanting higher interest rates for their loans.

The trouble is that international exchange rates are symptoms, not causes. They cannot be manipulated except at the margins and only very temporarily. Even the Chinese giant had trouble trying to do that. And even the darkest dictatorship, like North Korea, finds that attempts to fix an official rate merely result in people turning to other currencies, notably the dollar. When in 2009 the North Korean won tried to revalue and meet up with international markets it dropped by 96 percent against the dollar, and the director of finance and planning was executed for his efforts.

Is the current sterling weakness — and its mirror, the euro’s strength — all to do with Brexit? Only slightly. The truth is that pound depreciation has been going on for decades. As a child,on my first visit to Switzerland, never a member of the EU, a pound bought 12 Swiss francs — probably a false rate anyway since in those days there were strict exchange controls and tiny allowances for travelers.

Now, 65 years later, it buys 1.3 Swiss Francs. There are issues far deeper than Brexit to be solved here. Work out why the Swiss franc has been so strong over all these years, looking far beyond immediate trade or monetary policy issues, and you will begin to have the answers to Britain’s weak pound. Forty years of EU membership has helped not at all. Maybe the cold shower of Brexit will.

In the meantime I shall not be visiting any more cash machines — in the Piazza del Duomo or anywhere else in the current eurozone.

David Howell is a Conservative politician, journalist and economic consultant. He is chairman of the House of Lords International Relations Committee.